The stocks of the six publicly traded direct selling companies we follow that are listed in the U.S., Herbalife Nutrition (HLF), Medifast (MED), Nu Skin (NUS), Tupperware (TUP), USANA (USNA) and London-based Avon Products (AVP), on balance continued their strong run in the Q2.
Through the first six months of the year, our proprietary Lane Research index for Direct Selling companies is up +23 percent, sharply outpacing the S&P 500 (+2 percent) and Consumer Staples stocks (-9 percent). Our index even outpaced the more economically sensitive Consumer Cyclical stocks by a factor greater than 2x. This leadership has continued so far in the Q3 as well.
Interestingly, our work shows that the key driver to the stock outperformance for Direct Sellers has been a multiple expansion on the group, we think driven by a) the covering of an outsized short position in bellwether Herbalife Nutrition, which has likely carried over to the other names, and b) better than expected business trends. Meanwhile the multiples for the S&P 500 have actually declined, most likely as earnings estimates have finally caught up with stock price moves made a year ago and into January of 2018.
Fundamental Trends Improved In The Q2 And On Balance Remain Favorable
In aggregate, on an equal weighted basis, the group average organic sales growth for the six companies in Q2 of 2018 was +18 percent, a further acceleration from +11 percent in the Q1 and the third straight quarter of double-digit growth. Each of the six companies in the index showed sequential improvement in the Q2 from Q1 trends, with even stronger double-digit growth rates posted at Medifast (OPTAVIA) and Nu Skin, a jump to double-digit growth from the single digits at USANA and Herbalife Nutrition, while Avon and Tupperware, which have been soft lately, reported lesser declines.
OPTAVIA parent Medifast handily beat Q2 estimates and management raised its full year 2018 outlook substantially, well ahead of our estimate increase following a visit to what was a very upbeat annual OPTAVIA convention in St. Louis from July 19th to the 22nd. The key new product initiative announced at the convention, in our view, was Purposeful Hydration, a system designed to keep clients properly hydrated throughout the day, which we believe should be largely incremental to its business. Over the past 5 quarters, OPTAVIA organic sales growth has gone from +2 percent in the 2017 Q1 to +11 percent in the Q2, +18 percent in the Q3 and +32 percent in the Q4, with growth so far in 2018 of +52 percent and +70 percent in the Q1 and Q2 respectively. Clearly the recently rebranded OPTAVIA business has gained significant momentum, which is made more notable in that it has yet to expand internationally pending the entry of Hong Kong and Singapore in the 2019 Q1. We continue to believe OPTAVIA is in the early days of its next wave of growth.
Once again Nu Skin handily beat on the top line in the Q2, but EPS were constrained by non-cash, non-operating factors. The company appears to have built substantial underlying momentum as LumiSpa and social sharing initiatives have gained good traction coming out of the 2017 Q4. Sales of $704 million were up +28 percent, well above our $654 million forecast and management’s previous $630-$650 million expectations, driven by the third straight quarter of strong double-digit growth in both organic sales and sales leaders; clearly the company has gained good momentum following the introduction of the AgeLOC LumiSpa in the 2017 Q4. Management raised its full year 2018 sales outlook but maintained the upper end of its EPS range. However, with a difficult comparison coupled with the recent spike in the dollar, Q4 reported results could appear somewhat muted year over year.
USANA’s Q2 EPS substantially beat expectations with better sales and operating margins driving the upside. This marks the 4th straight quarter of accelerating growth trends, led by growth in organic sales and sales leadership, which was able to be leveraged through substantial operating margin expansion. Q2 sales of $302 million were up +17 percent, ahead of our $287 million estimate as organic sales growth of +12 percent was well ahead of our +6.5 percent forecast. Additionally, the size and quality of the Q2 upside, and increased full year outlook, accelerated from Q1 trends as well. The full year raise was more than the Q2 beat, indicating the company expects the momentum built so far this year to carry into the second half.
Herbalife Nutrition reported Q2 results that were well ahead of expectations and management raised its full year outlook as well. The EPS raise was slightly muted by recent adverse currency moves, but the underlying business has firmed considerably. Volume points grew +12 percent, well ahead of our +5 percent estimate and mgt’s range of +4 percent to +8 percent. Biggest upside versus our estimates was China +27 percent vs our flattish forecast and biggest downside was So & Cent America, -1 percent vs our +5 percent, but not unexpected given macro difficulties in Brazil with the truckers strike there. The growth in volume points in North America (+18 percent) and China (+27 percent) were particularly impressive given recent challenges in those two markets, indicating that those two important markets are getting back on track.
Conversely, Tupperware and Avon continued recent soft trends, each with organic sales declines in Q2, though of a lesser degree than in Q1.
“Through the first six months of the year, our proprietary Lane Research index for Direct Selling companies is up +23 percent, sharply outpacing the S&P 500 (+2%) and Consumer Staples stocks (-9%).”
— Douglas M. Lane
Tupperware Brands reported Q2 ongoing EPS in line with previous expectations but adjusting for an unusually low tax rate was actually below. Organic sales growth of -4 percent was modestly below our recently reduced -3.5 percent forecast and mgt’s original range of -2 percent to 0 percent. Momentum clearly continues soft. Best performing units were China, Fuller Mexico, Tupperware Mexico and Tupperware South Africa, which have been performing well lately. Softer markets include Brazil, where the trucker strike and the decline in the real had a large adverse impact, as well as continued softness in India, Indonesia, France and Tupperware Australia & New Zealand. Management reduced its outlook for full year 2018 organic sales and EPS given the continued soft underlying business trends and recent adverse currency moves. The company also announced sweeping management changes following the recent CEO succession.
Avon’s Q2 sales declined -3.2 percent slightly better than our recently reduced -3.6 percent forecast. Loss per share was ($0.03), below our recently reduced ($0.01) and consensus $0.00. Momentum indicators were mixed in the Q2.
Active Reps were down -4 percent, slightly below our forecast for -3 percent but even sequentially with -4 percent in the Q1. Organic Sales growth of -3 percent was better than our most recent -4 percent forecast and improved sequentially from -4 percent in the Q1. Units Sold were down -5 percent, in line with our forecast and a deceleration from the -3 percent in the Q1. In our view, what investors are most focused in on is the forward strategy that will be articulated by the new CEO and his team at the investor day being held in New York in September.
Douglas M. Lane, CFA, is a securities analyst with more than 20 years of experience covering companies that employ a direct to consumer business model. He leads a boutique equity research firm, Lane Research, focusing on those companies. He can be reached at firstname.lastname@example.org.
Disclosures: Financial Interests
The analyst, Douglas M. Lane, and members of his household own equity and/or equity derivative securities in Herbalife Ltd., which had previously been publicly disclosed in a Direct Selling News article originally published in January 2013.
Other than mentioned above, neither I, Douglas M. Lane, nor a member of my household, owns any security(ies) which is/are the subject of this article. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. I do not know or have reason to know at the time of this publication of any other material conflict of interest.