Where Are The Earnings, USANA?

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I'll be the first to admit that I don't exactly like the current supplement industry in the United States. By default, I guess this must mean that I'm not a big fan of USANA Health Sciences (Nasdaq: USNA). But let's get past that negativity and on to USANA Health's third-quarter results, which were announced yesterday.

Sales grew 15.8% in the quarter to $95.2 million, driven primarily by a 14% growth in the number of sales associates at the company. Earnings were stuck at $10 million for the quarter, showing no year-over-year growth. Stripping out stock-option expensing for an apples-to-apples comparison gives an EPS increase of 17.6% over last year. Due to a reduction in the company's share count, earnings per share were up, as shown below.

	Diluted Earnings Per Share	Y-O-Y Growth
Q3 '06	$0.55	7.8%
Q2 '06	$0.55	14.6%
Q1 '06	$0.50	11.2%
Q4 '05	$0.54	17.4%

The culprit for the stagnant earnings, despite the nice increase in sales, was a decrease in USANA's operating margins, from 17.8% last year to 16.5% this year. The company isn't exactly showing the type of scale that one would like to see accompanying increasing sales. The main cause for the diminishing margins was a 21% rise in SG&A expenses, to $18 million for the quarter. This is probably primarily due to the extra hiring of sales associates and the impact of expensing stock options.

Trading at roughly 21 times its trailing-12-month earnings of $2.19 a share, and with fourth-quarter earnings expected to remain stagnant at $0.56-$0.58 a share, there are better values in the supplement industry -- for example, Martek (Nasdaq: MATK) or NBTY (NYSE: NTY).

USANA is in a growing (albeit low-margin) industry during an all-time high for the popularity of "health" and other types of supplements. How much longer will the good times will last for supplement companies? It's anyone's guess, so USANA needs to start growing earnings faster and exhibiting some economies of scale. Otherwise, it may be in for some troubling times if the nutritional-products industry ever slows down.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .