On balance, it appears that the direct selling business model continues to hold up well despite the continued difficult global macroeconomic conditions. In a period where nominal GDP growth is stuck in the low- to mid-single digits in the U.S. and in the mid- to high-single digits globally, many of the larger, publicly traded direct sellers are continuing to post strong organic sales growth.
In looking at seven of the largest public direct sellers, Avon (AVP), Herbalife (HLF), Natura, Nu Skin (NUS), Oriflame (OFLMY), Tupperware (TUP) and USANA (USNA), we see that organic sales growth so far in 2012 is up double digits for four of the seven names, with each of those four names showing sales growth acceleration from already above average rates in 2011. (See Exhibit 1) We calculate that in aggregate these seven companies account for nearly one-fourth of all global direct selling sales representatives worldwide, so we think it should be a pretty good approximation for the business as a whole.
Exhibit 1: ORGANIC SALES GROWTH
Source: company reports and the author’s estimates.
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So what can we learn from the numbers so far in 2012? While there are, of course, company-specific factors impacting performance, such as the new product cycle at Nu Skin and a new route to market strategy for Herbalife, here are a few observations regarding some commonalities:
- Emerging markets, particularly in Asia and Latin America, are providing a substantial tailwind for our direct sellers. It’s no coincidence that Nu Skin (57% of sales in Asia ex-Japan), Herbalife (35% in Asia), USANA (62% in Asia) and Natura (100% in Latin America) are the performance leaders among the group of seven names we are looking at.
- Developed markets, particularly Europe, are providing substantial drags. It is no coincidence that Oriflame (81% of sales in Europe, Middle East & Africa), Tupperware (30%) and Avon (26%) are among the slower ones given their exposure to the region. By contrast, three of the four leaders, Nu Skin, Natura and USANA, have minimal if any exposure to Europe.
- Geographic diversity helps reduce risk. Notably, year to date organic sales for many exposed to Europe, while slowing, are still not negative. For example, while developed markets for Tupperware declined -4% so far this year, that was more than offset by double-digit growth in developing markets, which now account for 62% of Tupperware’s consolidated sales. Avon was able to maintain flat organic growth so far this year, despite EMEA being down -2% and North America being down -6%, because of its large presence in Latin America, which grew +4% and accounts for nearly 50% of sales.
Yet despite largely favorable fundamentals, some stocks of the top publicly traded companies are not doing as well. Why is that? (See Exhibit 2)
Exhibit 2: 2012 Year to date stock price performance
Source: Bloomberg. All data in US$ except NATURA in BRZ (through 11/29/12).
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For Oriflame and Avon, the fundamental performance has lagged. Oriflame, with its outsized exposure to Europe, is fighting severe macroeconomic headwinds. Avon continues to suffer from company specific issues, which hopefully will be corrected by the recent change in its senior management.
But unfortunately, the share prices for the other stocks have not been driven by fundamentals recently. How else can you explain the decline in value for both of the companies showing the strongest organic top line growth rates among the seven names we are looking at? In the past, companies like Nu Skin and Herbalife that are experiencing 20%+ organic sales growth would be trading on 12-month forward P/E ratios of 20x-30x, or even better. But today, they are trading at 12x and 10x respectively.
When Wall Street banks drove the process of publishing research on stocks, the analysts had to balance two key constituencies: sales & trading and investment banking. One would keep the other in check. Now, as outside research firms proliferate and the influence of Wall Street research wanes, those checks are gone. Anyone can say almost anything, and with the recent volatile market conditions people react first to negative commentary and ask questions later, regardless of its merits.
So how skittish are investors about direct selling stocks? It appears to be so pronounced that when a respected fund manager who actually does have credibility for his fundamental research and insights, particularly with regards to selling stocks short, simply asks a few relatively pedestrian questions on an Herbalife earnings conference call back in May, the stocks of Herbalife and Nu Skin subsequently drop nearly -40% and -25% respectively in a mere two weeks. Herbalife has been around since 1980 and Nu Skin since 1984. Did the combined 60 years of operating experience really vaporize with those questions? Hard to believe. Seems to me patient investors looking for a return to more normal P/E ratios for those stocks could have at least a double or triple on their hands if their strong fundamental performances persist.
Douglas Lane, former Managing Director of Equity Research for Jefferies & Company, has been named as The Wall Street Journal’s “Best on the Street” five times and is a four-time Starmine Analyst Award winner. Lane is currently a board member of 3000BC, a direct selling beauty company.