Monday, August 18, 2014

Nuskin - an MLM with wonky accounts

Regular readers will know that I am not an unbridled fan of multi-level marketing schemes MLMs - but I don't think they are all evil either.

They do provide a service that is valuable - they provide community support for whatever product they are selling.

But they have a tendency to sell the business opportunity rather than the product. And they have a tendency to decentralized law avoidance - for instance selling snake-oil cures in breach of FDA regulations.

I wrote a post once about good-and-bad MLMs - where I went through Avon and Pampered Chef as mostly good MLMs and Nuskin as a business built on decentralized law avoidance.

Herbalife was a fair way up the Pampered Chef end of the scale.

Nuskin sells mostly vastly overpriced vitamin pills. This is a picture of some:



Nuskin is in the process of blowing up.

Nuskin's main product is overpriced and is sold under the ridiculous label of "lifepak nano" as if they contain nano-technology. The pills promise "enhanced molecular delivery" without an explanation of what that might be. The pills are maybe 50, maybe 100 times overpriced. And they have a bunch of claims for them. Look at the original post for the whole comical list but they do (falsely) promise the fountain of youth. Here is one claim:
Advanced anti-aging formula helps protect the body with key nutrients such as NanoCoQ10™ and nano carotenoids*
The asterisk - which I am sure the distributors ignore - is to say that the claim is not evaluated by the food and drug administration.

But lets get into the true snake-oil here.
NanoCoQ10 utilizes cutting-edge nanotechnology to deliver highly bioavailable coenzyme Q10 for potent cardiovascular and cognitive benefits.
There was no asterisk where I took that quote from!

It is gobbledygook - but suffice to say that Coenzyme_Q10 is synthesized in pretty well all tissues in the body. There is some evidence that it reduces some headaches - so I guess there are cognitive benefits - if poorly explained.

Anyway - I am not writing about the business model - which on my observation differs substantially from Herbalife - I am writing about the accounts. And those are disastrous.

Here is the balance sheet:


June 30, 2014
December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents
$
219,501
$
525,153
Current investments
14,227
21,974
Accounts receivable
41,712
68,652
Inventories, net
389,650
339,669
Prepaid expenses and other
180,957
162,886
846,047
1,118,334
Property and equipment, net
429,332
396,042
Goodwill
112,446
112,446
Other intangible assets, net
79,258
83,168
Other assets
136,531
111,072
Total assets
$
1,603,614
$
1,821,062
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
35,836
$
82,684
Accrued expenses
383,012
626,284
Current portion of debt
99,828
67,824
518,676
776,792
Long-term debt
111,621
113,852
Other liabilities
81,559
71,799
Total liabilities
711,856
962,443
Commitments and contingencies (Note 9)
Stockholders' equity:
Class A common stock – 500 million shares authorized, $.001 par value, 90.6 million  shares issued
91
91
Additional paid-in capital
410,440
397,383
Treasury stock, at cost – 31.3 million and 31.6 million shares, respectively
(844,615)
(826,904)
Accumulated other comprehensive loss
(42,284)
(46,228)
Retained earnings
1,368,126
1,334,277
891,758
858,619
Total liabilities and stockholders' equity
$
1,603,614
$
1,821,062



And here is the P&L:


Three Months Ended
Six Months Ended
June 30, 2014
June 30, 2013
June 30, 2014
June 30, 2013
Revenue
$
650,027
$
671,328
$
1,321,088
$
1,212,633
Cost of sales
156,010
111,273
262,654
201,318
Gross profit
494,017
560,055
1,058,434
1,011,315
Operating expenses:
Selling expenses
283,575
297,170
596,676
530,264
General and administrative expenses
155,705
148,302
305,824
283,809
Total operating expenses
439,280
445,472
902,500
814,073
Operating income
54,737
114,583
155,934
197,242
Other income (expense), net
(21,119)
(1,187)
(38,627)
(1,075)
Income before provision for income taxes
33,618
113,396
117,307
196,167
Provision for income taxes
14,111
38,961
42,946
67,450
Net income
$
19,507
$
74,435
$
74,361
$
128,717


Now I want you to notice $389 million in inventory versus six months cost of goods sold of 263 million. It has about 270 days of inventory. By contrast Herbalife has about 50 days of inventory.

It looks like Herbalife is professionally run and Nuskin is not.

But I think it might be worse. Nuskin has $389 million of inventory and the inventory is mostly vitamin pills. Can you imagine what $389 million in vitamin pills sitting in warehouses at production cost looks like? It is kind of strange thinking just how much that is...

--

But the asset padding at Nuskin continues. It has less than half the sales of Herbalife but has $429 million of property plant and equipment. Herbalife has $363 million and that is after Herbalife has built some large impressive plants.

By comparison Nuskin seems profligate with plant - but hey - I have never seen one of their factories. Maybe they are gold-plated.

--

But the whole thing becomes worse on the cash flow line. Herbalife is massively cash generative - almost comically cash generative.

Nuskin is not.

Here is Nuskin's cash flow statement.

Six Months Ended
June 30,
2014
2013
Cash flows from operating activities:
Net income
$
74,361
$
128,717
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
24,965
15,527
Foreign currency (gains)/losses
48,264
863
Stock-based compensation
13,726
11,411
Deferred taxes
3,871
(2,901)
Changes in operating assets and liabilities:
Accounts receivable
27,121
(24,647)
Inventories, net
(54,218)
(45,228)
Prepaid expenses and other
(31,157)
(25,515)
Other assets
(14,797)
(10,987)
Accounts payable
(46,503)
3,593
Accrued expenses
(233,532)
132,787
Other liabilities
3,034
5,237
Net cash provided by (used in) operating activities
(184,865)
188,857
Cash flows from investing activities:
Purchases of property and equipment
(57,136)
(82,515)
Proceeds of investment sales
22,011
9,701
Purchases of investments
(13,655)
(5,077)
Net cash used in investing activities
(48,780)
(77,891)

You might notice that 186 million of cash was used in operating activities and a further 49 million was used in investing activities.

The cash balance dropped from $525 to $220 million. And there is a bunch of long term debt as well. It has more cash than long term debt - so survival is at least possible. But they better turn around awfully fast.

With Nuskin we have to analyse in terms of survival which is far from guaranteed just on the accounts.

It is that bad.

--

Now as readers know I am a bit of a Herbalife fan. When I visit Herbalife distributors I see people providing a real service. The real service is emotional and physical support during dieting. Some sell Herbalife and run fitness clubs. Sometimes it looks more like a café. Some sell Herbalife out of "spiritual healing massage centres". Where I live in Australia it is often the personal trainers who sell Herbalife on the side - and comment (favourably I guess) on the new svelte bodies in their charge.

But in all cases there is a support network for dieting behind successful sellers. The product is not just the shake - it is the support network that goes with it - and the support network fits into the culture from where it is from. In Queens they reflect low-wage Hispanic workers. In more middle class areas of Miami the clubs are larger and better appointed. In Sydney they are fitness obsessed and at the beach and with upper-middle class customers.

And it shows. Herbalife generates more cash every year. The cash flow statement tells the story. This is for six months:


  
Six Months Ended
  June 30,
2014
June 30,
2013
  (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
  
Net income
  $194,160  $262,035  
Adjustments to reconcile net income to net cash provided by operating activities:
  
Depreciation and amortization
  44,776  42,310  
Excess tax benefits from share-based payment arrangements
  (6,693(15
Share-based compensation expenses
  23,398  15,253  
Non-cash interest expense
  19,021  1,295  
Deferred income taxes
  (7,838(7,939
Inventory write-downs
  12,373  10,448  
Unrealized foreign exchange transaction loss (gain)
  2,532  (44
Foreign exchange loss relating to Venezuela
  86,108  15,116  
Other
  3,717  (674
Changes in operating assets and liabilities:
  
Receivables
  (1,163(312
Inventories
  (2,409(14,094
Prepaid expenses and other current assets
  (50,669(13,150
Other assets
  (4,642(534
Accounts payable
  13,038  4,586  
Royalty overrides
  (12,113(2,051
Accrued expenses and accrued compensation
  16,661  43,761  
Advance sales deposits
  20,915  4,481  
Income taxes
  (8,158(12,546
Deferred compensation plan liability
  4,569  3,527  
  




NET CASH PROVIDED BY OPERATING ACTIVITIES
  347,583  351,453  
  




CASH FLOWS FROM INVESTING ACTIVITIES
  
Purchases of property, plant and equipment
  (105,482(56,048
Proceeds from sale of property, plant and equipment
  11  33  
Investments in Venezuelan bonds
  (7,588—  
  




NET CASH USED IN INVESTING ACTIVITIES
  (113,059(56,015)

Note 348 million produced in operating cash flows, 113 million consumed in investing (but that includes the construction of the above-mentioned large and impressive factory). I suspect investing cash drain falls and Herbalife becomes even more cash generative.

The net free cash after six months is 234 million or 470 million annualized. I suspect it will be higher because the investing cash use should drop.

This does not look expensive versus market cap (or even market cap plus net debt).

Its a real business, providing real and valuable service to at least ten million people - and it is highly cash generative.

But hey - that was where I started. Not all MLMs are equal. And not all outcomes are equal either.

Billy Bob shorted the wrong MLM.




John

Disclosure: Long Herbalife, short a little Nuskin. I regret not having the Nuskin short on earlier. The balance sheet was always a little stretched - the inventory build in 2013 was insane - and the business model did not make sense - but the denouement is more rapid than I thought possible.

At least one person I talk to got that entirely right including timing both the long Herbalife and short Nuskin legs.

6 comments:

texascanonball ? said...

so the blogger john is short nus, then i understand the tone..yawn

Anonymous said...

A closer look at the 'cash at hand' reveals that is at their subsidiaries. Is it all repatriable? They are also borrowing in foreign currency in the same places where they claim to have cash (e.g. Japan). Doesn't pass the smell test.

Anonymous said...

If you could borrow at near 0% (i.e. Japan) you would too

Anonymous said...

Looking at just the accounts, I don't think the cash flow generation is so clearly negative as you've stated it - although it certainly raises a lot of questions.

Basically, what you can see is that cash flow was overstated in the last half of 2013, as accrued expenses grew far faster. I presume this was mostly incentives. These were then paid off during 1Q14.

So a charitable interpretation is that over a long enough period, cash flow is ballpark where it was for the years previous.

BUT: this increase in accrued expenses, and the capital expenditures, all correspond to a very large increase in sales and profits in second half 2014.

This could be consistent with several different explanations - overly aggressive expansion, poorly timed capital investments - but might not indicate that the ability to generate cash flow has been seriously impaired (it seems to have been reasonably consistent before 2013/2014).

[No comment on the rest of the business or the MLM aspect]

Anonymous said...

did they seriously just extend their boa line by 3 months... wow. reeks of desperation.

Tommy Tampers said...

Management has said that they plan to fix capital structure by 3Q14, which is probably going to be a big upside catalyst here for the stock. It will put these amateur claims to rests about FCF and insolvency for a company that has zero net debt (net cash position). You will have to cover before 3Q14 dude.

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