Nu Skin Enterprises (
) multi-level marketing,skin care products, anti-aging 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
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
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.
"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
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
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 (
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
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
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
Again, except for China, where it has retail outlets, Nu Skin
operates without the capital costs of running brick and mortar
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
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
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
That leaves plenty of room for more growth. Said Hunt of Nu
Skin's prospects in China: "It's difficult not to be very