By Michelle Jones
Whenever a company makes a preannouncement of its earnings, it's almost never a good thing, and this is certainly the case with Nu Skin Enterprises, Inc. (NYSE:NUS). Shares of the multi-level marketing firm took a nosedive yesterday, falling as much as 23.92% to $35.43 per share during afternoon trading. Analysts are also lining up to downgrade the stock and quickly slashing their price targets.
Nu Skin will disappoint on earnings
On Tuesday after closing bell, Nu Skin released its preliminary third-quarter earnings results and updated full-year guidance for growth. Management now expects flat currency-neutral sales in the third quarter, although previously they had said sales should rise 7% year over year and that the fourth quarter should bring growth of 7% to 10%.
Nu Skin preannounced third-quarter sales of between $570 million and $572 million, missing guidance and consensus estimates. Excluding the more than $60 million currency headwind, management said sales were around $630 million, again coming up short of guidance and estimates. The company will release its full finalized earnings report on Nov. 5 after the markets close.
Nu Skin blames China
Unsurprisingly, Nu Skin blames China for its problems, echoing comments made by Yum! Brands, Inc. (NYSE:YUM) when it disappointed Wall Street with its earnings report. China is Nu Skin's biggest market, making up 37% of its sales, according to Stifel analysts.
This could be why fellow MLM Herbalife's Ltd. (NYSE:HLF) shares also slumped yesterday, falling as much as 7.89% to $53.68 per share because like Nu Skin, Herbalife also has significant exposure to China. Herbalife has not made any comments to this effect, but Wall Street loves to jump to conclusions on companies based on what's happening to their competitors.
Nu Skin, however, recently launched a series of new products. The AgeLoc Youth line spurred 20% growth and 40% growth in constant currency, but China was such a drag on sales that it more than offset gains from AgeLoc, according to Canaccord Genuity analysts.
Stifel downgrades Nu Skin to Sell
Stifel analysts Mark Astrachan and Claire Chamberlin thinks Nu Skin's negative preannouncement shows that the company's momentum is "becoming increasingly unfavorable," especially in Greater China. Management had previously said that the macroeconomic problems in China were not affecting the company, but clearly that has changed now.
The Stifel team thinks the negative preannouncement goes beyond the macro problems that are going on in China and suggests that business there never really improved at Nu Skin resumed business there late in the second half of last year following a probe by the Chinese government. They also said that even though Nu Skin has now lapped the 50% sales decline in last year's third quarter, the continued lack of improvement in sales in the country suggests that the company is losing share of the Chinese market and also "relevance" there.
Further, they see end demand for Nu Skin's products as continuing a downward trend as demonstrated by the two-year sales compound annual growth rate. As a result, they downgraded Nu Skin from Hold to Sell and set a $35 per share price target on the company.
Nu Skin price target trimmed at other firms
Canaccord Genuity analysts Scott Van Winkle and Mark Sigal are less bearish on the negative preannouncement. They have maintained their Hold rating but slightly trimmed their target from $48 to $45 per share.
Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:[DB]) Securities analysts Bill Schmitz Jr. and Faiza Alwy were even less bearish on Nu Skin after the report. They maintained their Buy rating but trimmed their price target from $60 to $55 per share. In spite of the problems in China, they think Nu Skin shares are "too cheap" as they are trading at 6.5 times fiscal 2016 EBITDA.
Questions about essential oils
Sterne Agee CRT analyst April Scee remains Neutral-rated on Nu Skin and raised more questions than other analysts about the company's problems. While most seem to accept and agree that China is the MLM firm's biggest problem, she questions whether it could be company-specific issues or essential oil sales, either in addition to or (indirectly) instead of the China problems.
Management did make a comment that seemed to link China's macro problems with softer oil sales in their press release. Scee believes the issue of oils and China might support her "fear that China's Special Incentive acted as de factor rebate, which (if true) suggests excess consumer inventory."
Nu Skin just launched the oils among top Sales Leaders in June, and on the last conference call, management said they had seen "encouraging results." Following that, they rolled out the products more broadly over August and September.
Scee noted that the essential oils are a departure from the company's typical products, so she's not very concerned about weakness in them. She sees the bigger problem as being whether Nu Skin has been able to re-energize Sales Leaders with the new product and future new items.