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What's Behind USANA Health Sciences' Q3 Earnings Beat

By Keith Speights - Oct 23, 2019 at 4:00PM

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Sales and earnings fell for the global cellular nutrition company in Q3, but it still managed to beat Wall Street expectations.

USANA Health Sciences ( USNA 0.38% ) delivered mainly bad news when the global cellular nutrition company announced its Q2 results in July. Revenue and earnings fell with a challenging environment in China.

But investors were treated to some good news with USANA's third-quarter results, which were announced before the market opened on Wednesday. Here are the highlights from the company's Q3 update.

USANA logo

Image source: USANA Health Sciences.

By the numbers

USANA reported revenue in the third quarter of $260.6 million, down 12.2% year over year. Despite the decline, though, the company topped the consensus analysts' Q3 revenue estimate of $259.4 million.

The company announced net income in the third quarter of $24.2 million, or $1.09 per share, based on generally accepted accounting principles (GAAP). This reflected deterioration from the prior-year period GAAP earnings of $31 million, or $1.24 per share. However, USANA handily beat the average analysts' earnings estimate of $1.01 per share.

USANA ended the third quarter with cash and cash equivalents totaling $182.7 million. The company had $214.3 million on hand as of Dec. 29, 2018.

Behind the numbers

The biggest issue that negatively impacted USANA's Q3 performance was its shrinking customer base. The company's active customer count fell to 558,000 from 615,000 in the prior-year period. This included a 17.3% drop in the number of customers in Greater China, a 2.6% decline in Southeast Asia Pacific, and a 6.1% decline in the Americas and Europe. The only bright spot was a 28.2% increase in the number of active customers in North Asia.

Currency fluctuations presented another headwind. Because of the strength of the U.S. dollar, USANA's sales were lower than they would have otherwise been by around $6 million in the third quarter.

One positive, though, was the impact of incentives and promotions. CEO Kevin Guest said that USANA's promotions helped increase revenue in Q3 by around $16 million.

Also, USANA's bottom line was better than expected. A key reason was the company's improved operating margin compared to earlier this year. CFO Doug Hekking said that the promotion-related sales helped boost margins but added that USANA's "efforts to align our cost structure with sales performance also contributed to improved sequential results."

The company's earnings per share received help from share buybacks. USANA repurchased around 1.4 million shares during the third quarter.

Looking ahead

USANA narrowed its full-year 2019 guidance to between $1.03 billion and $1.045 billion from its previous guidance of between $1.02 billion and $1.06 billion. The company also projected that its full-year 2019 earnings per share (EPS) will be between $3.90 and $4.05, compared to its previous outlook of between $3.70 and $4.10.

Guest acknowledged that USANA still has "work to do in the Southeast Asia Pacific and Americas/Europe regions toward regaining sales momentum." He said that the company will continue using incentives to boost sales and customer growth but won't do so as much as in the previous quarter.

He also mentioned that the Chinese government began a follow-up in September to the industry review conducted earlier this year. Guest said that USANA expected this review and is cooperating with government officials. He noted that the company hasn't "experienced the negative media environment or restrictions on meetings that accompanies the government's previous review."

Investing in stocks with heavy exposure to China can be challenging. USANA could turn things around, but as the company's CEO readily admits, there's a lot of work remaining to be done.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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