China probe hangover, functional foods failure depress Usana's earnings

By Hank Schultz contact

- Last updated on GMT

Related tags: Multi-level marketing, Usana

China probe hangover, functional foods failure depress Usana's earnings
An internal investigation into business practices in China has taken some of the air out of the balloon of Usana Health Sciences, as the company’s stock price declined after an earnings report that was lower than analysts’ estimates. And a launch of a new functional foods line seems to have missed the mark.

Usana, a network marketing company based in Salt Lake City that markets dietary supplements, functional foods and personal care items, has for a number of years now made the lion’s share of it revenue in Hong Kong and mainland China.  The company began an internal investigation into its Chinese subsidiary, which is known as BabyCare Ltd.  The probe included looking into reimbursement practices.  Network marketing is heavily regulated in China, in part as a reaction to some pyramid scheme scandals that plagued the market shortly after its liberalization in the 1980s.

News of probe starting to have cooling effect

The probe, which was announced in mid February, did not affect the first quarter sales numbers posted in early May, when Usana posted a 6.2% increase, which was propelled almost entirely by results in the Asia Pacific region. But as news of the probe has made its way through the Mainland China market, it is now starting to drag on sales numbers in this all-important market for the company.

“We had a tough year-over-year comparable as we're comparing against the highest sales quarter in the company's history. But the fact remains that we typically see more of a lift in our second quarter sales, so we didn't see the full extent of that this quarter,​CEO Kevin Guest told analysts during an earnings call yesterday.  The call was posted in transcript form on the site seekingalpha.com​.

As has been the case for a number of quarters now, sales fell in North America and Europe.  In the past, however, strong sales growth in China has masked this trend, but Usana was forced to run some promotions in China to prop up sales and associate acquisition numbers.

Functional foods miss

In addition to the decline in sales in the US, Guest said sales slid in Canada and Mexico as well.  He attributed this to the poor reception of the MySmart foods line in the market. This is a line of meal replacement shakes that the company had sought to customize for its many markets around the world with different palates by having flavors packaged separately.  This additional step seems to have been enough to put customers off, because the shakes are not seen as being as convenient as competitive products.

“Our new MySmart foods products have not been as well received our customers as we originally anticipated. Frankly, we developed and commercialized products that are incredibly healthy but do not resonate with our customers,​Guest said. “One of the key things that we learned was the convenience is a key diver to our consumers and the complexity of separate flavor mixing and three steps in the process . . . was a big deterrent.

Earnings details

For the second quarter of 2017, net sales were $257.1 million compared with $258.5 million in the prior-year period. On a constant currency basis, net sales increased by 2.3% for the second quarter of 2017. A stronger US dollar negatively impacted net sales by $7.4 million for the quarter with $5.7 million of this amount attributable to mainland China. The total number of active customers increased by 1.8% year-over-year.

Net earnings for the second quarter were $23.3 million compared with $25.8 million during the prior-year period, a decrease of 9.7 percent. Earnings per diluted share for the second quarter were $0.93 compared with $1.03 in the prior year period, a decrease of 9.7%.

Analysts had expected both overall revenue and profits to be higher than what the company reported.  Stock traders reacted by sending the company stock price into a slide, from a value at market close on Tuesday of $64.85 to about $56 a share today.  Usana’s stock was trading at more than $80 a share in August, 2015.

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