Why Nu Skin Enterprises, Inc. Stock Soared Friday

The developer and distributor of personal care products has started to repair its crumbling Chinese sales force. That was good enough for a quick 20% gain.

Anders Bylund
Anders Bylund
Aug 7, 2015 at 2:09PM
Consumer Goods

Image source: Nu Skin Enterprises.

What: Shares of Nu Skin Enterprises (NYSE:NUS) jumped as much as 27% higher Friday morning. The developer and distributor of Nu Skin and Pharmanex personal care products reported second-quarter results Thursday night, surprising analysts on both the top and bottom lines. At 1:30 p.m., the stock was up 20%.

So what: Nu Skin's sales fell 13% year over year to $560 million, but analysts expected worse and would have settled for $551 million. On the bottom line, earnings more than doubled from $0.32 to $0.75 per diluted share. Excluding one-time items such as a $50 million inventory writedown and a $25 million Venezuelan currency charge from the 2014 figures, which had no equivalents in the 2015 period, the $0.75 figure would be a drop from $1.13 per share instead. Either way, analysts were looking for $0.72 per share.

Now what: The company's network sales model is working wonders in mainland China, where Nu Skin increased its number of sales leaders by 19% compared to the first quarter. That's a relief for investors, who have recently seen results swooning in that crucial market.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

This boost essentially smooths over a dramatic loss of Chinese sales leaders in the past year. Twenty-one percent of Nu Skin's active sales force works in China today, down from 24% in the year-ago period. However, 42% of the company's sales leaders are pounding the pavement in the same market. All told, Chinese revenues fell 24% year over year to $387.5 million, but management interprets the recent trend as an improving market position ahead of planned product launches in the second half of 2015.

Based on these trends plus continued currency exchange headwinds, Nu Skin updated its full-year sales guidance in line with current analyst views, but set earnings targets slightly below the Street.

If that sounds like flimsy support for a 20% overnight share price surge, consider that Nu Skin headed into this report in a scary downward trend line. Starting from nearly $63 highs set as recently as early April, the stock had fallen nearly 38% in a matter of four months. For those with a slightly longer investing horizon, Nu Skin traded at $137 at the start of 2014, until its Chinese operations came under regulatory scrutiny and share prices plunged.

Anything better than another horrible fumble was enough to cheer Nu Skin's investors this time. That's exactly what they got -- no more, and no less.