1 Reason to Expect Big Things from USANA Health Sciences

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized. Is the current inventory situation at USANA Health Sciences (NYSE: USNA  ) out of line? To figure that out, start by comparing the company's inventory growth to sales growth. How is USANA Health Sciences doing by this quick checkup? At first glance, pretty well. Trailing-12-month revenue increased 9.2%, and inventory decreased 8.0%. Comparing the latest quarter to the prior-year quarter, the story looks decent. Revenue grew 15.1%, and inventory dropped 8.0%. Over the sequential quarterly period, the trend looks healthy. Revenue grew 2.7%, and inventory dropped 1.5%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

What's going on with the inventory at USANA Health Sciences? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, work-in-progress inventory was the fastest-growing segment, up 6.3%. On a sequential-quarter basis, work-in-progress inventory was also the fastest-growing segment, up 15.8%. USANA Health Sciences seems to be handling inventory well enough, but the individual segments don't provide a clear signal. USANA Health Sciences may display positive inventory divergence, suggesting that management sees increased demand on the horizon.

Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.

I run these quick inventory checks every quarter. To stay on top of inventory and other tell-tale metrics at your favorite companies, add them to your free watchlist, and we'll deliver our latest coverage right to your inbox.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2012, at 8:24 AM, usanawatchdog wrote:

    Never mind the fact that 99% of their distributors cannot sell enough product to make a profit.

    Never mind the fact USANA allows Chinese Nationals to join the USANA's MLM in Hong Kong which violates China's direct selling laws as they have banned any multilevel marketing schemes. By circumventing China's laws, USANA has been able to continue increasing their sales, masking the true reality that USANA's other markets have saturated, meaning that they cannot recruit more people than drop out each year and are saturated...

    Never mind the fact that every participating distributor is forced to purchase USANA's products if they want to hold onto any volume points generated by their downline associates who are also purchasing products for the same reason. As stated in USANA's SEC filings, associates must purchase a minimum amount of product every 4 weeks (13 times a year). About 90% of USANA's net revenue comes from these mandatory purchases made by their associates. Virtually none of these mandatory purchases made are resold to retail customers.

    Motley Fool, you completely ignore the real picture here...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2113897, ~/Articles/ArticleHandler.aspx, 10/26/2014 3:15:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement