NYSE:USNA USANA Health Sciences

Sector financial performance:

This company, which primarily manufactures nutritional supplements and distributes their products as a form of direct selling, has been grouped into nutritional supplement – direct selling sector in natural food industry.

Our company data indicate that, in this direct selling nutritional supplements sector, the growth in sales basically has less to do with the products themselves than it is in store-based selling as the market and consumers get mature. The competition is intensive and companies are competing with each other mainly in sales force (re-sellers), which is the key determinant in performance of sales in this sector. The key to attract more re-sellers is certainly related to brands’ realization and incentives/commissions. However, to a larger extent, it is the acceptance of local consumers to direct selling to determine performance of direct selling and availability of sale force/unemployment rate.

This is particularly true in matured markets such as Western Europe, North America, South America, and Japan, where the total numbers of active sales force are limited in current favourable employment market and the demand for nutritional supplement products has been decreasing as more alternative products and concepts are available.  As our data indicate, the sales have been shrinking in those markets for years (especially in 2017) and the only way for some certain company to gain sales growth is to provide more favourable incentives than competitors. Immature markets and consumers seem to have potential to become the driver for direct selling of nutritional supplements. However, internal uncertainties in Eastern Europe and small market in Southeast Asia all create unfavourable environment for this sector. China has been contributing to growth significantly. However, the newly tightened policy of direct selling in China has made things changed and some companies have to look to channels other than sales force direct selling, such as e-commerce, to sell their products, which is completely different stories. Some of companies, who utilize agencies in Hong Kong to delivery products to their direct sales in china, seem working well even though the margins are not likely to be as high as before. In addition, this business operating gets involved with risks of more complicated policies.

High gross margin is major characteristic of this sector. The typical gross margin for company in this sector is around 79% with 42% commission as percentage of sales and 25% SG&A as percentage of sales. Therefore, they usually have operating margins of 12%. All companies have experienced decline in cash flow in 2017 due to slowing down sales/deleveraging of incentive spending in US market but positive growth in cash flow in 2018 thanks to rebounding sales.

According our analysis, a typical ratio of enterprise price/adjusted EBI is about 33 with very wide span between 10 and 65 with interest/EBI ratio of 1%. 

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Company performance:

It seems the sales of this company’s nutritional supplements have been strong and grown quickly in Asia area, especially in great China area, which accounts for more than 50% of its total sales. Sales from America and Europe have kept weak and declining.

For the first nine months of fiscal 2018 compared with 2017(ended 20180930)

Organic net sales increased 12% primarily attributable to an increase of 17% in China area and increase in other Asian areas offset by a decrease of 2.5% in America and Europe.

For fiscal 2017 compared with 2016

Organic net sales increased 4.7% primarily attributable to an increase of 10% in China area partially offsetting by a decrease of 6% in America and Europe.

Organic net sales increased 5.4% in the first six months of fiscal 2017 compared with the same period of time of fiscal 2016, primarily attributable to an increase of 6% in China area partially offsetting by a decrease of 2% in America and Europe.

Organic net sales increased 14% in fiscal 2016 compared with 2015, primarily attributable to the increase of 10% in China area and an increase of 3% in Southeast Asia.

Organic net sales increased 23% in fiscal 2015 compared with 2014, primarily attributable to the increase of 15% in China area, an increase of 3% in Southeast Asia, and an increase of 2.4% in America and Europe.

This company has managed to keep its gross margins as percentage of sales around 82-83% with increasing volume incentive costs (direct selling) as percentage of sales, which reached 47% in fiscal 2017 while fell back to 44% in 2018 due to very strong demand. Accordingly, its operating margin went down from 15% of 2014 to 13% of 2017 and then rebounded back to 15% in 2018, which caused slight fluctuation in its profits and cash flow in the past three years.

Stock price

This stock currently has an enterprise price/EBI ratio of 25 ($120/share), which we think, is relatively slightly overvalued considering uncertainty in US market.

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