Nu Skin's Multi-Level Marketing Thrives In Asia

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Nu Skin Enterprises ( NUS ) multi-level marketing,skin care products, anti-aging products, weight-loss products

Wish fulfillment is a wonderful thing.

Imagine if you can offer people the chance to rejuvenate their appearance with specialty anti-aging products. Imagine if you can also offer them hope of losing weight by shedding fat, but retaining muscle. And what if, along with all that, you can also offer them the chance to become independent moneymaking entrepreneurs?

These are roughly the promises of Nu Skin Enterprises, a Provo, Utah-based direct seller of skin care, nutritional and weight management products. Founded in 1984, Nu Skin now has operations in 53 countries. After reporting a surprisingly good first quarter, Nu Skin raised revenue and earnings projections for 2013.

Earnings should come in at the $4.18 to $4.30 range, CFO Ritch Wood told analysts in May. He expects 2013 revenue to total just over $2.5 billion.

Most if it will come from Asia, which has long been a prime market for direct sellers of consumer products. Last year, Asia, led by Japan and China, brought in 78% of revenue. The dreams of age and weight control, along with entrepreneurial opportunity have played especially well there.

Avid Buyers

"Japanese consumers are avid buyers of anti-aging products," explained Sidoti analyst Frank Camma. Greater China, including Hong Kong and Taiwan, has now surpassed Japan as Nu Skin's top market. Sales there have gone from $250 million to what is expected to be nearly $1 billion in just three years, noted D.A. Davidson analyst Timothy Ramey. The mainland China business, he added, is "growing like a weed."

"We've enjoyed a great growth cycle in Asia," Nu Skin CEO Truman Hunt told IBD. "There's a very strong entrepreneurial spirit there. People are hungry for opportunity."

Nu Skin provides that opportunity in the form of sales kits. Anyone who can peddle these kits to friends, neighbors and other customers to the tune of $2,000 a month becomes what Nu Skin calls a sales leader, of which 54,000 exist throughout the world.

A sales leader who buys and resells Nu Skin anti-aging kits to a dozen neighbors, some of whom then set up their own sales operations, collects a commission.

Sales leaders can eventually collect commissions on as many as six tiers of resellers in the networks they create, Hunt explains.

It's called multilevel marketing. And from time to time such systems have been challenged by critics claiming they are essentially pyramid schemes.

This was the charge leveled recently by hedge fund manager William Ackman, who had shorted shares ofHerbalife ( HLF ).

Other multilevel marketers, including Nu Skin, saw share prices collapse late last year as investors fretted over rumors of potential investigations.

The pyramid claim boils down to this: If everybody is earning commissions reselling products to other people who in turn peddle the product, don't those at the top skim off the bulk of profits while those at the bottom eventually run out of resellers?

Nu Skin answers that its operation is not a pyramid scheme. Most of its customers don't buy product to resell it. "Only 15% of those who sign up even express an interest to develop a Nu Skin business," said CEO Hunt.

Users, not resellers, are the core of the business, he added: "More than 70% of the revenue we generate is generated by purchasers who are not participating in Nu Skin sales networks."

Meanwhile, Nu Skin benefits from the direct contact between seller and customer. "Skin care and weight loss are two things that work very well with consultative sales. It does help to have someone walk you through the system," said D.A. Davidson analyst Ramey.

Like other marketers of cosmetic and nutritional products, Nu Skin claims that its products are scientifically formulated to bring unique benefits.

Analysts generally applaud the quality of Nu Skin products. But some express skepticism that they're not that much different from those of rivals.

"They would probably say their products are more unique than I would say," noted Ramey.

Marketing and distribution play a bigger role than product differentiation, contends Wedbush Securities analyst Rommel Dionisio. "These are categories where the marketing is important. Marketing is the primary focus," he noted.

In China, multilevel marketing is prohibited, and Nu Skin has a single tier of employed distributors.

In other areas, sellers are not employees, so Nu Skin saves on benefit costs.

Again, except for China, where it has retail outlets, Nu Skin operates without the capital costs of running brick and mortar retail stores.

All this contributes to enviable margins and cash flow. Operating margins settled at 15% beneath lavish gross margins of 83.6% in the first quarter. With well under 15% of its sales in America, the company generates lots of cash overseas. It is a U.S.-based company that repatriates its overseas earnings and pays significant tax.

Where The Money Goes

The decision to bring earnings home involves more than a simple patriotic sense of corporate responsibility. Nu Skin has used the cash to return earnings to investors through dividends and share repurchases. Last year, Nu Skin repurchased $200 million worth of its own shares, or roughly 7% of its float. The dividend has grown yearly. It was recently hiked by 50% to $1.20.

Asked if further dividend hikes were likely, Hunt replied: "That's a reasonable expectation."

Currency is an enduring risk for Nu Skin. If the yen, for example, fell from 100 to 110 to the dollar, that would clip 1% to 1.5% off corporate revenue, Hunt estimates.

Nu Skin also remains vulnerable to pressure from regulators, should they choose to challenge its health claims or question its business model.

Hunt was asked if Nu Skin has issues with U.S. regulators.

"There's nothing of a material nature," he replied.

This should let Nu Skin concentrate on its growth markets, especially China. Despite its rapid expansion there, Nu Skin still lags well behind rival direct seller Amway in market share.

That leaves plenty of room for more growth. Said Hunt of Nu Skin's prospects in China: "It's difficult not to be very optimistic."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: HLF , NUS

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