Following excellent year-end financial performance, DS Healthcare Group (DSKX) posted a dazzling first quarter (ended March 31) that stood out prominently in its peer group, particularly when compared to two established industry leaders - Avon Products Inc. (AVP) and Estee Lauder (EL). Net revenue was over $3.9 million versus $1.9 million last year, a gain of 100%. As the company makes its mark in territories outside the US, international sales rose 172% to $1.0 million. Sales and marketing costs were a modest 16.5% of gross revenue, down nicely from 36% in the comparable quarter last year. Despite a necessary boost in general and administrative costs to support high sales volume, and income tax expense, the net loss increased only 4%, from $440,337 in 1Q2012 to $457,993, or ($0.04) per share, in line with last year. Long-term debt was de minimus at 1% of total equity.
By contrast, Avon Beauty sales sunk 5% in its March quarter and Estee managed a paltry gain of 0.18%. DS Healthcare beat out these much bigger competitors in its full year 2012 as well, where its revenue percentage increase was significantly higher than Estee's sales growth of 10% or Avon's revenue dip of 5% for the same period.
For 2012, it appeared that DS Healthcare was better at managing its marketing dollars: these expenses were only 33% of net revenue, much more effectual than Avon and Estee which posted similar figures of 55% and 65%, respectively. I reiterate what I forecast in my introduction article on DS Healthcare that growth is being managed well with marketing costs keeping below 45% of sales.
As in past years, DS Healthcare's revenues in both the quarter and the year were concentrated around sales of progressive hair enhancing and restoration products such as caffeine-enriched Revita shampoo and Spectral DNC, generously infused with vitamin B-2 complex to feed depleted hair follicles. Both of these accounted for 34% of total sales for the year, and product line extensions Revita Cor and Spectral DNC-L both added another 15% to sales in 2012. Six distributors continued to crank out around 40% of total revenues in 2012. The company wisely consolidated offices and warehouses during the year that saved money.
DS Healthcare now has 42 employees across five divisions comprising hair, skin and health retail lines, including its Mexican distributor acquired last year that accounted for nearly $500,000 in sales, and Nutra Origin, an upscale online health products store with a comprehensive selection of omega-3 oil supplements, homeopathic items for clinical conditions like blood sugar control, joint health, aging, fatigue, menopause, pain and sleep, and an extensive high-potency multivitamin line.
New products are being added - one is a line extension of Spectral DNC that includes DS Healthcare's own alternative to the harsh and greasy minoxidil 2%, made popular by Johnson & Johnson (JNJ). Called nanoxidil, this thinning hair preventative aims to promote growth in the front of the scalp, the hairline, an area coveted by balding men. The concentration is 5% delivered in a nanosome formulation that affords penetration without irritation.
I expect women will become avid users of nanoxidil. With a worldwide hair restoration market at $3 billion, female hair loss gets less attention but is nevertheless a significant problem that comes with hormonal factors associated with aging and, affecting any age group, everyday stress.
The company just announced another exciting new product which is special shampoo formulation for blonde and highlighted hair, a line extension of Revita with its particular brand of hair nourishing and restoring properties including hair growth stimulants that have made DS Healthcare's existing products so popular.
A note on the recent closing of competitor Obagi Medical Products' acquisition, a bidding war of sorts took place, and Valeant Pharmaceuticals Int'l. (VRX) won over Merz Pharma Group, which stepped in at a late hour with a higher number, raising its price to $24 per share, or 3.65x last year's revenue. Not a bad premium for a company that grew sales by only 5.7% last year. The final take-out value for Obagi was $439 million. For a pharmaceutical firm whose most upmarket skin product ingredient is tretinoin, or Retin-A, it should be interesting to see where Valeant takes this. I doubt the Obagi line, which cannot compete with the quality of features of DS Healthcare's offerings, will achieve further market penetration.
To illustrate DS Healthcare's undervalued position, consider applying Obagi's revenue multiple at the time of acquisition to DS Healthcare's full 2012 sales. Shares would currently trade at $3.40. An even more dramatic comparison is made by looking at the company's first quarter revenue (typically its slowest growth period) and annualizing for the year - $15.8 million, or a potential 41% increase - where the figure becomes $4.75 per share, a 156% premium from the stock's recent close of $1.85.
Investors interested in DS Healthcare should be aware of a specific risk that is not unusual for emerging retailers in a crowded market - growth management. DS Healthcare has so far shown good restraint with expenses while delivering an exceptional top line, better than bigger competitors. I believe a large part of this risk is justifiably mitigated by the company's past and present performance and will afford investors a nice return for buying stock at these low prices.
Additional disclosure: I did receive some product samples (shampoo) from the company after I wrote my previous article. Which was great.