Why Nu Skin Is Headed for Success

What makes Nu Skin a safe investment?

Apr 14, 2014 at 11:19AM

Personal-care company Nu Skin Enterprises (NYSE:NUS) remained one of investors' favorite buys in the consumer-goods industry over the last year. However, whether or not the company will continue rewarding its shareholders in the future remains to be seen. Let's see where Nu Skin is headed and what the future holds for the company. 

Fourth-quarter earnings
Nu Skin's recent quarterly results were nothing short of amazing. Earnings stood at an impressive $2.02 per share, up 108% from the same period last year. Revenue skyrocketed 82% to $1.06 billion. Both revenue and earnings per share topped Reuters' expectations of $1.07 billion and $1.99 per share, respectively.

The operating margin jumped to 17.9% from 15.4%, while the gross margin expanded 80 basis points to 84.4%. New product launches and promotional costs raised selling expenses by 410 basis points to 48.2%. However, general and administrative expenses dropped 580 basis points to 18.3%.

Regional performance
During the quarter, Nu Skin performed quite well in Greater China, North Asia, and the South Asia/Pacific region. Revenue for Greater China grew 68% and increased 57% and 16% for the South Asia/Pacific region and North Asia, respectively. Foreign currency fluctuations had a positive impact on revenue in Greater China by 6% but negatively affected sales in North Asia and the South Asia/Pacific region by 8% and 11%, respectively.

Revenue in the Americas jumped 59% even after a negative impact of 8% from foreign exchange volatility. Revenue in Europe increased by 21%; foreign currency fluctuations had a positive impact of 5%.

What's cooking at Nu Skin?
Nu Skin was previously fined $524,000 in China after certain sales representatives sold products that weren't registered for direct sales. The company was also penalized $16,000 for products with insufficient documentary support. Six employees were fined $241,000 for using unauthorized means to promote the company's products.

Now, Nu Skin has agreed to pay the fines to the Chinese government. The move is considered an encouraging sign by many analysts. Consequently, the company will be able to resume its day-to-day business activities in the region. As Stifel Nicolaus' Mark Astrachan points out, this "could indicate a path toward resuming normal activities in the market." 

Many investors doubted that the company would be able to emerge from this issue. Others speculated that the company would have to pay a huge amount to settle the case. As soon as the news was released, Nu Skin's shares gained more than 18%. Nu Skin said that it wasn't aware of the Chinese regulations and will try its best to train its employees in accordance with the local regulations.

The company recently raised its quarterly dividend by 15% to $0.345 per share. For the current quarter, Nu Skin anticipates earnings of $0.90 to $0.94 per share on revenue of $650 million to $670 million. Analysts at Thomson Reuters expect EPS of $1.20 on revenue of $732 million.

Industry peers
During its most recent quarter, Herbalife (NYSE:HLF) beat analysts' expectations on both EPS and revenue. Earnings came in at $1.28 per share; analysts expected $1.25 per share. Sales jumped 20% to $1.3 billion. One of the highlights during the quarter was an astonishing 120% sales increase in the Chinese market.

In recent times, China has become strict regarding direct-selling activities in the country. In an effort to successfully meet Chinese regulations, the company has deployed 200,000 sales representatives to the region using a unique marketing program. The company remains optimistic about its growth potential in China, which is why it raised its first-quarter earnings outlook to $1.25-$1.29 per share.

Avon Products (NYSE:AVP) reported disappointing results for its latest quarter. The company registered a loss of $0.16 per share, double the loss of $0.08 a share incurred in the year-ago quarter. Revenue dropped 10% to approximately $2.7 billion, driven by a 10% drop in units sold. The number of active representatives decreased by 5%. Avon recently incurred a cost of $125 million due to the initial failure of its SAP software in Canada. Considering this, the company has decided to postpone the rollout of SAP to other countries.

Final thoughts
Nu Skin has delivered a 52-week return of more than 77% to investors, which shows why the company has remained one of the top buys in the industry. The fourth quarter was no exception, as revenue along with earnings improved. With the company performing well, management didn't hesitate to increase the dividend, which currently yields about 1.6%.

Moreover, the company's ability to settle the issue with the Chinese government will further boost sales in the region. Considering all of this, I believe Nu Skin is a great investment choice right now.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool has the following options: long January 2016 $57 calls on Herbalife. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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