Assessing The Terra Firma Of Nu Skin's China Concern - Role 1
Nu Skin's stock for the past times few years has been driven past times its draw organisation inward China. That draw organisation grew from a really little base of operations to a (claimed) billion dollars of sales really rapidly. The stock followed - in addition to the companionship inward exuberance bought dorsum stock at high prices with those prices supported past times the Chinese business.
Nu Skin funded that buyback amongst debt.
This twelvemonth the Chinese draw organisation was position into recruiting stasis because of regulatory action. The companionship claimed the determination to halt recruiting was voluntary - soundless it was clearly made nether some regulatory duress.
Whilst the draw organisation has restarted sales are non what they used to be. The companionship has been less than clear near the position out of sales leaders in addition to sales made inward china.
Moreover the companionship has been hugely cash consumptive - burning through roughly $240 meg of cash inward the commencement half as per the accounts. That cash burn downward is explained equally a business office of activities inward Cathay - the payments of commissions for past times sales in addition to - to a greater extent than lately - the build-up of excess inventory.
This cash burn downward has been roughshod plenty that the companionship breached its debt covenants for which it needed in addition to received very short term extensions.
It is probable the companionship volition demand to renegotiate their debt covenants.
The hit of potential outcomes is enormous. If Cathay sales create non restart in addition to the cash burn downward continues in addition to hence renegotiation of the debt seems unlikely in addition to the stock volition move out to zero.
If the Cathay draw organisation restarts in addition to grows beyond master sales the stock is really inexpensive in addition to should move out higher upward its past times altitude of $140 per share.
Influenza A virus subtype H5N1 hit of null to say $170 a portion for a portion trading at $44 is broad plenty to live worth a lot of analysis. Get the merchandise correct in addition to you lot could create a lot of money. Get the merchandise incorrect and...
Disclosure: I am predisposed to believe that multi-level-marketing schemes similar Avon, Herbalife or Nu Skin are probable to live adept cash generative businesses. I have got done much looking at Herbalife in addition to got really long. I create non holler back a negative interpretation of Herbalife is sustainable. Herbalife's draw organisation is legal, sustainable in addition to volition generate vastly to a greater extent than cash inward v years. Nu Skin does non lend itself to such definitive opinions. History is littered amongst MLMs that no longer be - in addition to a few similar Avon, Nu Skin, Herbalife, Amway in addition to Mary Kay which have got lasted decades.
Trying to sympathise Nu Skin's Cathay business
There are 2 posts inward this serial amongst the role is to run out what is genuinely happening inward China.
This post parses the statements of management in addition to the fiscal statements to consider if nosotros tin teach a clear picture.
The follow upward post employs investigators on the soil inward Cathay to catch Nu Skin facilities in addition to pick out photographs in addition to videos.
Neither of these gives a consummate painting present in addition to the 2nd post is unfortunately indecisive.
Whatever: I lay out what I have got establish inward excruciating detail.
At the cease I heighten some interpretations of what I have got establish varying from the reasonable to the seemingly crazy. None of these tin live dismissed on the evidence I have got found.
In early on Jan at that topographic point were articles inward the Peoples' Daily [the official newspaper] which criticized Nu Skin's selling practices. The company's initial response was to dismiss the importance of those articles:
There was an admission inward the initial response: whilst they denied the tenor of the Peoples' Daily article they stated [highlighted] that whatever fellow member of the sales forcefulness that did non operate inward accordance amongst local constabulary in addition to powerfulness live dependent to dependent land perhaps implying they powerfulness have got had some problems amongst sales forcefulness compliance amongst their rules. It is a little admission to which the companionship added later.
As far equally I tin enjoin the initial reply was never filed amongst the SEC.
The follow upward alphabetic lineament released a span of days afterwards was list cost of near $200. At $200 per pack $50 meg inward sales of this would live a quarter of a meg packs. The shortfall is some other quarter of a meg packs. They sure expected to sell (and for that affair supposedly did sell) a vast position out of packs of $200 capsules.
Indeed on the numbers they sold roughly a quarter of a meg $200 packs of Tru Face Essence Ultra. If they sold that to 200 M customers they clearly have got a lot of customers inward China. Moreover if each "sales leader" sold fifteen packs (quite a lot of expensive cosmetics I would think) they have got something similar 13500 sales leaders. It is a long way downward from the threescore M sales leaders they claimed inward Cathay - but it soundless implies a really vibrant Chinese business.
Moreover at that topographic point was no weakness inward whatever production except Tru Face Essence. Those sales leaders must - past times implication have got sold a lot of other product.
The Wedbush Conference Presentation
On 23 September 2014 Nu Skin presented at Wedbush's "California Dreamin Consumer Conference" inward New York. This was the commencement fourth dimension they had given us specific numbers equally to the novel sign-ups for the distribution forcefulness inward China. It was really bleak. Here is a instantly quote from when the CFO (Ritch Wood) was asked how they were going inward China.
Also it agency that you lot tin range the size of the draw organisation only past times scoping the offices. Avon - a large in addition to reputable MLM - has 6.4 meg reps in addition to does roughly 10 billion inward sales. The average rep sells $1500 worth a year. To create a billion inward sales at this intensity you lot would demand something similar 660 M sellers (only a minority of whom would sell plenty production to qualify equally "sales rep"). And you lot demand to introduce to in addition to develop all these people. Unless the offices are crawling amongst people or unless the average sales someone is doing slap-up than $100 M in addition to hence the draw organisation is non doing a billion inward sales.
The CFO continued:
They went from xxx M inward June final twelvemonth to threescore M past times twelvemonth end. However when they stopped it made it "really made it hard for our novel salespeople, those who are create new, who didn't have got important build-out consumer soil to live able to stick amongst the business".
They gave those people who dropped out an chance to come upward dorsum at the erstwhile sales people degree but exclusively if they could teach $2000 worth of sales per month. They got exclusively 1500 takers.
Now $1500 of sales per calendar month times $2000 people is $36 meg annually. This is a drop-in-the-ocean relative to the erstwhile sales run-rate of over a billion dollars annually.
They held their commencement expo of the twelvemonth (the exclusively substantial sales coming together they have got held). They got 13000 novel customers. Even if you lot sold $1000 worth of cosmetics to each of these people (an insanely large amount of cosmetics for a customer) it wouldn't create 2 per centum of the erstwhile sales run-rate.
They powerfulness have got meant 13000 novel "distributors" fifty-fifty though they said "customers" inward which illustration $1000 inward inventory is non insane - but $5000 worth would live a really large amount. Inventory loading per distributor is good below that position out inward the relatively affluent United States. 13000 customers or fifty-fifty distributors does non teach us to a greater extent than or less a billion dollar annual sales rate.
On these comments it looks rather similar the draw organisation has collapsed inward China. Utterly collapsed. However if a really large position out of final year's sales people stayed on in addition to hence the draw organisation may have got stopped growing but is otherwise fine. We genuinely demand to know the total position out of sales leaders inward Cathay - non the inflows. Thirteen M powerfulness audio similar a lot of novel customers - but inward the past times at that topographic point were threescore M sales leaders doing a billion inward sales. If the average client purchased $500 worth of cosmetics at that topographic point were 2 meg customers. On that scale 13,000 novel customers is flatly a meaninglessly little number.
What nosotros demand to create the assessment is the information that they are non giving us: sales in addition to sales leader numbers inward China. Whatever nosotros know the position out of novel customers is low. But nosotros create non know the memory charge per unit of measurement for erstwhile customers.
Just how bad is the cash flow?
It is worth quoting from the Wedbush conference telephone telephone give-and-take to illustrate how bad the cash catamenia has become. This is a instantly quote:
This is really surprising. The companionship grew sales at an annual charge per unit of measurement of 24 per centum inward the commencement quarter in addition to did non immature adult woman earnings. It missed sales past times exclusively $50 meg inward the 2nd quarter in addition to it was massively cash consumptive. The exclusively immature adult woman on revenue they had inward the 2nd quarter was $50 meg inward the Tru Face Essence Ultra LTO - in addition to yet they burnt cash at a massive rate.
Sales of erstwhile production continued at the expected charge per unit of measurement - which suggests the back-book does non generate much cash.
Unless at that topographic point are some really peculiar in addition to really lagged bonus structures inward Cathay it is really hard to explicate how a cosmetic companionship tin have got a $450 meg adverse shift inward working capital. Certainly it is seemingly inconsistent amongst their bullishness near turn a profit (and subsequent beat) inward the commencement quarter or their mere $50 meg immature adult woman on revenue inward the 2nd quarter.
We were left confused equally at that topographic point is an apparent mismatch betwixt statements inward the commencement 2 quarters (China is good), statements inward the Wedbush conference telephone telephone (China is sure as shooting non equally adept equally it was) in addition to cash catamenia (which is diabolically poor).
We have got attempted to variety this out past times visits to their sites inward China. This is especially valid equally the companionship has stated that to a greater extent than oftentimes than non speaking they are "still exclusively allowing meetings within [their] offices." The position out of people nosotros consider at the offices should in addition to hence live reflective of the province of the business.
Till side past times side time.
John
Nu Skin funded that buyback amongst debt.
This twelvemonth the Chinese draw organisation was position into recruiting stasis because of regulatory action. The companionship claimed the determination to halt recruiting was voluntary - soundless it was clearly made nether some regulatory duress.
Whilst the draw organisation has restarted sales are non what they used to be. The companionship has been less than clear near the position out of sales leaders in addition to sales made inward china.
Moreover the companionship has been hugely cash consumptive - burning through roughly $240 meg of cash inward the commencement half as per the accounts. That cash burn downward is explained equally a business office of activities inward Cathay - the payments of commissions for past times sales in addition to - to a greater extent than lately - the build-up of excess inventory.
This cash burn downward has been roughshod plenty that the companionship breached its debt covenants for which it needed in addition to received very short term extensions.
It is probable the companionship volition demand to renegotiate their debt covenants.
The hit of potential outcomes is enormous. If Cathay sales create non restart in addition to the cash burn downward continues in addition to hence renegotiation of the debt seems unlikely in addition to the stock volition move out to zero.
If the Cathay draw organisation restarts in addition to grows beyond master sales the stock is really inexpensive in addition to should move out higher upward its past times altitude of $140 per share.
Influenza A virus subtype H5N1 hit of null to say $170 a portion for a portion trading at $44 is broad plenty to live worth a lot of analysis. Get the merchandise correct in addition to you lot could create a lot of money. Get the merchandise incorrect and...
Disclosure: I am predisposed to believe that multi-level-marketing schemes similar Avon, Herbalife or Nu Skin are probable to live adept cash generative businesses. I have got done much looking at Herbalife in addition to got really long. I create non holler back a negative interpretation of Herbalife is sustainable. Herbalife's draw organisation is legal, sustainable in addition to volition generate vastly to a greater extent than cash inward v years. Nu Skin does non lend itself to such definitive opinions. History is littered amongst MLMs that no longer be - in addition to a few similar Avon, Nu Skin, Herbalife, Amway in addition to Mary Kay which have got lasted decades.
Trying to sympathise Nu Skin's Cathay business
There are 2 posts inward this serial amongst the role is to run out what is genuinely happening inward China.
This post parses the statements of management in addition to the fiscal statements to consider if nosotros tin teach a clear picture.
The follow upward post employs investigators on the soil inward Cathay to catch Nu Skin facilities in addition to pick out photographs in addition to videos.
Neither of these gives a consummate painting present in addition to the 2nd post is unfortunately indecisive.
Whatever: I lay out what I have got establish inward excruciating detail.
At the cease I heighten some interpretations of what I have got establish varying from the reasonable to the seemingly crazy. None of these tin live dismissed on the evidence I have got found.
Parsing the statements of Nu Skin's management
Several years agone Nu Skin gave its Chinese management a $30 meg cash incentive to create a billion dollars of annual sales inward a calendar year. To quote the Q1 2011 conference call:Our 30th corporate anniversary volition live inward the twelvemonth 2014. And because our pay-out to our sales forcefulness inward Cathay has been slightly below our global averages, nosotros genuinely position an incentive inward house to pay-out $30 meg inward conjunction amongst our 30th anniversary, if sales leaders inward the Greater Cathay part attain the $1 billion sales grade past times the cease of the twelvemonth 2014. That’s how bullish they are. And essentially, our draw organisation at that topographic point is precisely inward adept momentum correct now.Nu Skin claimed a billion dollars inward Cathay sales past times the 4th quarter of 2013 - in addition to the cash incentive was presumably paid.
In early on Jan at that topographic point were articles inward the Peoples' Daily [the official newspaper] which criticized Nu Skin's selling practices. The company's initial response was to dismiss the importance of those articles:
"The article that appeared inward today's People's Daily contains inaccuracies in addition to exaggerations that are non representative of Nu Skin's draw organisation inward China. The reporters did non endeavour to verify whatever information amongst Nu Skin. We create non believe that the article was the resultant of whatever especial authorities inquiry.
"We are dedicated to operating inward total compliance amongst applicable regulations equally interpreted in addition to enforced past times the authorities of China. Nu Skin has an 11-year history of doing draw organisation inward Cathay nether these regulations. Our draw organisation activities are regularly monitored past times the authorities inward this quickly growing marketplace. As is our practice, nosotros volition communicate openly amongst regulators to address questions arising from this article.
"Nu Skin has government-approved instantly selling licenses to operate inward a bulk of provinces inward China. The most recent authorities licensure inward July farther expanded our instantly selling footprint to include xix of the country's 32 provinces.
"We actively educate our sales forcefulness to follow all regulations also equally companionship policies in addition to procedures, in addition to whatever fellow member of our sales forcefulness non operating inward accordance amongst local constabulary or amongst our companionship policies is dependent to discipline."
There was an admission inward the initial response: whilst they denied the tenor of the Peoples' Daily article they stated [highlighted] that whatever fellow member of the sales forcefulness that did non operate inward accordance amongst local constabulary in addition to powerfulness live dependent to dependent land perhaps implying they powerfulness have got had some problems amongst sales forcefulness compliance amongst their rules. It is a little admission to which the companionship added later.
As far equally I tin enjoin the initial reply was never filed amongst the SEC.
The follow upward alphabetic lineament released a span of days afterwards was list cost of near $200. At $200 per pack $50 meg inward sales of this would live a quarter of a meg packs. The shortfall is some other quarter of a meg packs. They sure expected to sell (and for that affair supposedly did sell) a vast position out of packs of $200 capsules.
Indeed on the numbers they sold roughly a quarter of a meg $200 packs of Tru Face Essence Ultra. If they sold that to 200 M customers they clearly have got a lot of customers inward China. Moreover if each "sales leader" sold fifteen packs (quite a lot of expensive cosmetics I would think) they have got something similar 13500 sales leaders. It is a long way downward from the threescore M sales leaders they claimed inward Cathay - but it soundless implies a really vibrant Chinese business.
Moreover at that topographic point was no weakness inward whatever production except Tru Face Essence. Those sales leaders must - past times implication have got sold a lot of other product.
The Wedbush Conference Presentation
On 23 September 2014 Nu Skin presented at Wedbush's "California Dreamin Consumer Conference" inward New York. This was the commencement fourth dimension they had given us specific numbers equally to the novel sign-ups for the distribution forcefulness inward China. It was really bleak. Here is a instantly quote from when the CFO (Ritch Wood) was asked how they were going inward China.
It's a slap-up query in addition to I'll repeat it hence the webcast – those on the webcast volition live able to hear. But really, how are nosotros recruiting people dorsum inward Cathay in addition to are nosotros looking to recruit some of those who were sales reps. So our sales rep count went from 30,000 inward Greater Cathay to 60,000 from June xxx of final twelvemonth to the cease of the year. We had important increase equally nosotros launched our weight-loss production in addition to a whole bunch of create novel people came into the business.
As nosotros stopped the activities inward January, inward other words, they couldn't concord whatever draw organisation meetings in addition to they couldn't convey inward whatever novel salespeople, it genuinely made it hard for our novel salespeople, those who are create new, who didn't have got important build-out consumer soil to live able to stick amongst the business. In May nosotros allowed those who had fallen out an chance to rejoin inward i calendar month in addition to basically pick out over the same spot. However, they had to come upward dorsum inward at the total qualified sales employee level, which is near $2,000 inward sales volume per month, which was a pretty high hurdle.
We didn't have got a lot of salespeople genuinely pick out that invitation. There were near 1,500, I believe, that came dorsum to that program. So the residue of those who have got fallen out, nosotros sure as shooting move out dorsum in addition to attempt in addition to invite them to come upward back. They have got to move out through the four-month qualification process.The implications of this are that most of the novel sales reps inward Cathay (which is most of the sales leaders inward China) fell out when they stopped promotional meetings. And in addition to hence exclusively 1500 of them came back. They "didn't have got a lot of salespeople genuinely pick out that invitation".
I would say we're quite restrictive soundless on what we're doing to recruit novel people. We're soundless exclusively allowing meetings within our offices, to a greater extent than oftentimes than non speaking.The fact that they are exclusively allowing sales meetings within their offices is a really of import disclosure. Firstly it agency that they cannot mayhap live spreading over all of Cathay - but exclusively within reasonable carry distance of where they have got an business office (which is admittedly a lot of locations).
Also it agency that you lot tin range the size of the draw organisation only past times scoping the offices. Avon - a large in addition to reputable MLM - has 6.4 meg reps in addition to does roughly 10 billion inward sales. The average rep sells $1500 worth a year. To create a billion inward sales at this intensity you lot would demand something similar 660 M sellers (only a minority of whom would sell plenty production to qualify equally "sales rep"). And you lot demand to introduce to in addition to develop all these people. Unless the offices are crawling amongst people or unless the average sales someone is doing slap-up than $100 M in addition to hence the draw organisation is non doing a billion inward sales.
The CFO continued:
We're doing a lot of training. We had an expo. It was the commencement expo we've held this year. We ordinarily have got an expo where nosotros opened upward our sales offices in addition to people tin convey novel people in addition to innovate them to the company, in addition to nosotros create that every 3 months. And those have got been really helpful in addition to successful.
We cancelled the i inward February, nosotros cancelled the i inward May , but nosotros did concord the i inward August, the 1st in addition to 2nd of August, in addition to that was really effective. We had a lot of people, near 13,000 novel customers who came inward during those 2 days. That's the amazing thing near China. There's a lot of chance for a large influx of people, but we're soundless quite restrictive. We haven't provided genuinely whatever important novel incentives to drive their recruiting. It'll live a tedious create from hither in addition to genuinely attempt in addition to create that base of operations strong, create sure people are good trained equally they come upward inward hence that we'll have got a corporation base of operations to create off of equally nosotros move out forward.Alas Nu Skin has soundless non given us a position out for how many sales leaders they have got inward China. It is a hard position out in addition to Nu Skin knows it. They are precisely unwilling to portion it.
They went from xxx M inward June final twelvemonth to threescore M past times twelvemonth end. However when they stopped it made it "really made it hard for our novel salespeople, those who are create new, who didn't have got important build-out consumer soil to live able to stick amongst the business".
They gave those people who dropped out an chance to come upward dorsum at the erstwhile sales people degree but exclusively if they could teach $2000 worth of sales per month. They got exclusively 1500 takers.
Now $1500 of sales per calendar month times $2000 people is $36 meg annually. This is a drop-in-the-ocean relative to the erstwhile sales run-rate of over a billion dollars annually.
They held their commencement expo of the twelvemonth (the exclusively substantial sales coming together they have got held). They got 13000 novel customers. Even if you lot sold $1000 worth of cosmetics to each of these people (an insanely large amount of cosmetics for a customer) it wouldn't create 2 per centum of the erstwhile sales run-rate.
They powerfulness have got meant 13000 novel "distributors" fifty-fifty though they said "customers" inward which illustration $1000 inward inventory is non insane - but $5000 worth would live a really large amount. Inventory loading per distributor is good below that position out inward the relatively affluent United States. 13000 customers or fifty-fifty distributors does non teach us to a greater extent than or less a billion dollar annual sales rate.
On these comments it looks rather similar the draw organisation has collapsed inward China. Utterly collapsed. However if a really large position out of final year's sales people stayed on in addition to hence the draw organisation may have got stopped growing but is otherwise fine. We genuinely demand to know the total position out of sales leaders inward Cathay - non the inflows. Thirteen M powerfulness audio similar a lot of novel customers - but inward the past times at that topographic point were threescore M sales leaders doing a billion inward sales. If the average client purchased $500 worth of cosmetics at that topographic point were 2 meg customers. On that scale 13,000 novel customers is flatly a meaninglessly little number.
What nosotros demand to create the assessment is the information that they are non giving us: sales in addition to sales leader numbers inward China. Whatever nosotros know the position out of novel customers is low. But nosotros create non know the memory charge per unit of measurement for erstwhile customers.
Just how bad is the cash flow?
It is worth quoting from the Wedbush conference telephone telephone give-and-take to illustrate how bad the cash catamenia has become. This is a instantly quote:
So in the commencement vi months of the year, at that topographic point was near a $450 meg shift inward working working capital alphabetic lineament which caused our cash from operations to move out negative, in addition to that express our powerfulness to purchase dorsum shares in addition to pay dividend. We received an exception. We went dorsum in addition to amended that covenant for this y ear hence that we're able to pay dividend. But if nosotros genuinely desire to live inward the market, which nosotros similar doing. We're a cash catamenia business, nosotros holler back that's a slap-up utilization of cash, it requires us to refinance our debt. We're inward the physical care for of working on that today. Our commitment, equally nosotros talked on our final turn a profit telephone telephone would live that nosotros should live create to denote that past times the fourth dimension nosotros released our 3Q numbers at the cease of October.Bluntly I have got never seen a draw organisation of this size have got a $450 meg shift inward working capital. That is the variety of shift that happens inward a draw organisation similar Tesco which has enormous sales in addition to payables.
This is really surprising. The companionship grew sales at an annual charge per unit of measurement of 24 per centum inward the commencement quarter in addition to did non immature adult woman earnings. It missed sales past times exclusively $50 meg inward the 2nd quarter in addition to it was massively cash consumptive. The exclusively immature adult woman on revenue they had inward the 2nd quarter was $50 meg inward the Tru Face Essence Ultra LTO - in addition to yet they burnt cash at a massive rate.
Sales of erstwhile production continued at the expected charge per unit of measurement - which suggests the back-book does non generate much cash.
Unless at that topographic point are some really peculiar in addition to really lagged bonus structures inward Cathay it is really hard to explicate how a cosmetic companionship tin have got a $450 meg adverse shift inward working capital. Certainly it is seemingly inconsistent amongst their bullishness near turn a profit (and subsequent beat) inward the commencement quarter or their mere $50 meg immature adult woman on revenue inward the 2nd quarter.
We were left confused equally at that topographic point is an apparent mismatch betwixt statements inward the commencement 2 quarters (China is good), statements inward the Wedbush conference telephone telephone (China is sure as shooting non equally adept equally it was) in addition to cash catamenia (which is diabolically poor).
We have got attempted to variety this out past times visits to their sites inward China. This is especially valid equally the companionship has stated that to a greater extent than oftentimes than non speaking they are "still exclusively allowing meetings within [their] offices." The position out of people nosotros consider at the offices should in addition to hence live reflective of the province of the business.
Till side past times side time.
John
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