Public Direct Sellers: Q1 Momentum Continues

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The six publicly traded direct selling companies we follow, whose stocks are listed in the U.S., Herbalife (HLF), Medifast (MED), Nu Skin (NUS), Tupperware (TUP), USANA (USNA) and London-based Avon Products (AVP), began 2018 in much the same fashion as how they exited 2017. On balance, trends continue favorable.

In aggregate, on an equal weighted basis, the group average organic sales growth for the six companies in Q1 of 2018 was 11 percent, the second straight quarter of double digit growth. But below the surface there are divergent trends. Nutrition and skin care-based companies like Medifast (OPTAVIA), Nu Skin, USANA and Herbalife Nutrition have shown more favorable trends lately, while Avon and Tupperware have shown slowing trends in recent quarters.

Organic growth rates at MED are for OPTAVIA, the company’s Direct Selling division.

Companies outside the U.S., Oriflame and Natura, have also been performing well with organic sales growth in the mid- to high-single digits recently. Both companies, which are more Cosmetics, Fragrances and Toiletries (CFT) focused but with some exposure to skin care and wellness, are undertaking substantial initiatives to move to digital platforms. More orders are coming in from mobile devices via company-developed apps, and distributor productivity is increasing as more of them are moving to digital platforms.

Organic Sales Growth Past 5 Quarters (YOY Percent Change)

Company reports, Lane Research estimates. Group Average is equal weighted. Organic growth rates at MED are for OPTAVIA, the company’s Direct Selling division.

Source: Company reports, Lane Research estimates. Group Average is equal weighted. Organic growth rates at MED are for OPTAVIA, the company’s Direct Selling division.

OPTAVIA

With a new name and what we sense is a new sense of purpose, Medifast’s OPTAVIA led the way with what we estimate was sales growth in excess of 50 percent in Q1 year over year. OPTAVIA is now over 90 percent of Medifast’s total revenue and it’s continuing to increase. OPTAVIA-branded product sales were 58 percent of the total company’s consumable units in Q1, up from 17 percent a year ago. Active Health Coaches increased by nearly 30 percent to 16,700 in Q1, marking the third consecutive quarter of double-digit growth for that metric, which had been mired in the 12-13,000 range for many years. In our view, we feel the acceleration coincided directly with the name change of the company from Take Shape For Life in July 2017. That will prove to be a seminal event in the company’s history, in our view, signaling 100 percent management focus and support of the brand, providing it with the resources it needs to grow.

Nu Skin

Also posting double-digit organic growth was Nu Skin on the heels of its highly successful launch of the ageLOC LumiSpa skin care system in most markets except China, where it was launched in Q2. Concurrent with the LumiSpa launch is the introduction of several products at lower price points more suited to social sharing, such as Powerlips ultra-long-lasting lip fluid at $25 and the AP 24 Whitening Toothpaste at $20. These offerings will be lower priced, higher velocity items ideally suited for influencer marketing over social media. Interestingly, LumiSpa itself, while retailing at a much higher $199, is still much lower than other recently introduced skin care systems, such as the ageLOC Me system, where the starter kit retails at $480. So while social media influencers can build their network with the lower ticket, higher velocity products Nu Skin offers like the $199 LumiSpa potentially brings it into the mix as a social selling option.

USANA

USANA sustained its steadily re-accelerating growth trends in Q1 with organic sales up 8 percent after bottoming 4 quarters ago at 2 percent. The recent improving growth trends can be attributed to the success of the launch of Celavive, USANA’s new skin care brand introduced at last year’s convention, as well as the return to firmer footing in China, the company’s largest market where recent promotions have gained good traction. With momentum already building in China, the launch of Celavive there in Q4 of this year coupled with the rollout of the company’s new We-Chat social selling platform bodes well for continued sustained top line momentum for USANA coming out of 2018.

Herbalife Nutrition

While organic sales growth at Herbalife Nutrition was only modest in Q1, up 1 percent, all of its top line metrics beat expectations on a somewhat difficult comparison when the company raised prices in China at the end of Q1 2017, which borrowed from Q2. So while volume points at Herbalife, the company’s closest approximation for global product demand excluding currency fluctuations and pricing changes, were relative flat in Q1, expectations were for a mid-single digit decline. While China was soft as expected, every other major region exceeded expectations, indicating a broad firming in the business after 2017 that saw volume points decline 4 percent. Perhaps most notable was that North America returned to modest positive volume growth in Q1 after 4 quarters of volume point declines as the U.S. business focused on the May 2017 deadline for compliance with the July 2016 FTC ruling. This is a quarter sooner than we forecast. It seems that Herbalife is back on the offense after several years of having to play defense.

Conversely, Tupperware and Avon continued recent soft trends, each with organic sales growth declining 4 percent in Q1.

Tupperware

For Tupperware, the outlook for each major region either deteriorated or stayed the same as of the Q1 release. In the regions that deteriorated, management attributed the softness to company-specific near-term issues in Europe and in South America. It sounds like issues in both regions should resolve themselves in relatively short order. While growth in Indonesia and India continues to be soft, the outlook for Asia didn’t change. We note that those markets are smaller than they used to be and the comparisons get much easier beginning in Q2. Meanwhile, most of the other emerging markets are performing well for Tupperware, particularly China, CIS, Mexico, South Africa and Malaysia/Singapore. Therefore, we are fairly confident the 1 percent organic sales growth in Q1 for Tupperware’s emerging markets, which accounted for 70 percent of total company sales, will begin to move back to what we would view as a more normal upper single digits trend line sooner rather than later.

Avon Products

Avon’s 4 percent organic growth decline was a deceleration from the 2 percent decline in Q4 of 2017. Each major region showed greater sequential decline from Q4 trends, except Asia, which was the same. Momentum has stalled and it is broad-based. It appears the honeymoon for new CEO Jan Zijderveld is coming to a close. Investors will be closely watching for Avon’s latest turnaround plan under this new management team, which is expected in the fall after a thorough review of the business. Until then expectations should remain low.
The underlying fundamental strength for publicly traded direct selling companies as a whole did not go unnoticed by the stock market in Q1, with our Lane Research Direct Selling Index up 14 percent in an overall market that was down modestly. Even this was understated since Medifast (OPTAVIA) was not in our index in Q1 because it had started the year at under $1 billion in market capitalization. That will change. After appreciating 34 percent in Q1 and another 55 percent since, Medifast’s market capitalization is now $1.7 billion. We will add the stock to our index retroactive to April 1, 2018.

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