Why Nu Skin and Sally Beauty Are Better Buys Than Avon in Beauty Retail

Projections call for the global beauty retail market to increase at a good pace, but investors need to make the right picks to make the most of this growth.

May 7, 2014 at 7:00AM

Market research firm Lucintel expects the global beauty market to reach a value of around $265 billion by 2017. It also expects the industry to grow at a compounded annual growth rate, or CAGR, of 3.4% from 2012 to 2017. In addition, it expects the personal care products industry to reach $670 billion by 2017.

In light of these positive industry cues, let's take a look at how Nu Skin Enterprises (NYSE:NUS) has performed in comparison with Avon Products (NYSE:AVP) and Sally Beauty Holdings (NYSE:SBH).

The strong performance continues
Nu Skin's dream run continued during its fourth quarter of fiscal 2013. For the first time, the company's quarterly revenue breached the $1 billion mark, and Nu Skin finished the fiscal year with over $3 billion in sales. This represented an annual growth of 49% from the prior fiscal year.

On the heels of strong top-line growth, the company returned a good amount of cash to its shareholders by paying $71 million in dividends and repurchasing $141 million worth of common stock in 2013. Apart from this, Nu Skin's stock appreciated close to 300% in 2013. Looking ahead, its robust performance seems likely to continue.

The catalysts
Nu Skin's growth has been fueled by the introduction of a new product to the ageLOC anti-aging lineup -- the TR90 weight management and body-shaping system. Nu Skin launched this product in many regions of the world on a limited time offer, or LTO, basis. It has generated $560 million in sales, which makes this the largest product launch in the company's history.

China has been a major growth driver for Nu Skin. In Greater China, the company registered a whopping 248% year-over-year growth during the fourth quarter of fiscal 2013. However, the momentum waned when the company received media attention for allegedly running a pyramid scheme. Pyramid schemes are illegal in China, and Nu Skin is on the radar of regulatory authorities in the country.

However, Nu Skin has managed to escape a harsher judgment from Chinese authorities as it received a minimal penalty of $540,000. The company has said that it will resume corporate-hosted business meetings and it will start accepting applications for new salespeople next month. Consequently, this timely relief should enable the company to achieve its projected global growth rate of 20% to 24% for the first quarter of fiscal 2014.

Avon in trouble
Unlike Nu Skin, Avon hasn't seen great results in China. It registered a 50% year-over-year decline in revenue from China in its fourth quarter of fiscal 2013 . To make matters worse, Avon is witnessing issues around the world and it is trying to turn itself around, but it has offered no timeline to investors for this.

In sharp contrast to the terrific revenue growth of Nu Skin, the multi-level marketing, or MLM, model hasn't been working in favor of Avon ever since it adopted this model in 2005. This is exemplified by the revenue growth chart below:

NUS Revenue (TTM) Chart

NUS Revenue (TTM) data by YCharts

Avon clearly lags its peers by a huge distance. Its downfall has come on the back of decreases in its number of sales associates, which has led to lower sales. During the fourth quarter, its active representative total declined 5% year-over-year. This resulted in a 10 % decline in units and as a result, Avon's earnings per share declined from $0.36 last year to $0.34.

Avon is looking to strengthen its personal care, fashion, and home segments, which have performed better in relative terms. Personal- and beauty-care products offer huge global opportunities, as noted earlier, and Avon is trying to turn itself around by increasing its share in these segments. The third-quarter launch of Encanto and the fourth-quarter launch of Instinct in the body line and fragrance segments, respectively, have provided some relief to the company.

Also, Avon has inked a deal with Korres , a premium all-natural product line, in order to bolster its revenue from the Americas. In addition, it is also exiting non-performing regions to increase its profitability. Avon has also finally decided to abandon the implementation of its service model transformation, or SMT, initiative as it proved counterproductive during its pilot phase in Canada.

However, it might take some time before Avon manages to turn itself around completely.

Sally's traditional model is doing well
Sally doesn't rely on controversial MLM schemes for growth. It relies on the conventional distribution and retail of its products through a network of more than 4,000 stores. As a result, Sally posted solid fourth-quarter results for fiscal 2014. Sally's business has performed well in the past few quarters, and growth in the beauty-systems segment is driving its results.

On a consolidated basis, Sally's same-store sales, or comps, increased 2.2% year-over-year in the fourth quarter, the best figure the company has achieved in several quarters. In addition, Sally saw solid sales growth across its segments, marked by traffic improvements in its beauty-supply segment and strong execution in its beauty-systems business. However, in comparison with its peers, Sally is overly reliant on the domestic market for its success.

Nu Skin seems to be the pick of the lot for aggressive investors with higher risk-taking capacities. On the other hand, Avon should be avoided until and unless its turnaround bears fruit. Finally, for the conservative investor, Sally could be a good pick since it relies on a time-tested business model and avoids the controversies associated with a MLM model.

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Neeta Seth has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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