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China 2019

China health products probe dampens results for multi-level marketers

A 100-day government review of health products in China has weighed down multi-level marketers' second-quarter sales and hurt forecasts—at least temporarily.

For years, China functioned as a powerful growth engine for U.S.-based multi-level marketers (MLMs) of nutritional supplements, skin care products and other things.

But a 100-day government review of health products in China has weighed down second-quarter sales and hurt forecasts—at least temporarily.

Herbalife Nutrition Ltd. on Thursday reported second-quarter net sales of US$1.2 billion, a 3.5% decrease over the prior year, with China weighing heavily into the equation. Net sales in the world’s most populated country ($187 million) plummeted $99.8 million, or 34.8%.

Other MLMs also cited adverse impacts tied to China. For the second quarter, USANA Health Sciences Inc. reported net sales of $256 million, a 15.1% decrease over the prior year.

“The continuing challenging market environment in China was the major factor that impacted our second quarter results,” said Kevin Guest, CEO of USANA, in a statement. “During the second quarter, we offered promotions and incentives in China that have historically generated meaningful sales and customer growth. However, the contribution of these promotions was significantly lower than we anticipated, which we believe is due to the low consumer sentiment toward health products in China.”

On July 16, Nu Skin Enterprises Inc. revised its guidance and said it anticipated annual revenues of $2.48 to $2.52 billion with a negative foreign currency impact of roughly 4 percent, and earnings per share (EPS) of $3.20 to $3.35. It previously forecast annual revenues of $2.76 to $2.81 billion with an approximate 2 to 3 percent unfavorable foreign currency impact, and EPS of $3.80 to $4.05.

“We are adjusting our guidance for the year primarily due to a reduced revenue outlook in Mainland China following the government's 100-day campaign to review and inspect the health products and direct selling industries," Ritch Wood, CEO of Nu Skin, said in a statement. "Continued restrictions on sales meetings, as well as media scrutiny, have negatively impacted consumer sentiment and contributed to this adjustment.”

In a 100-day review beginning in January 2019, Chinese government agencies and ministries investigated “the unlawful promotion and sales of health products,” Herbalife Nutrition noted in its Aug. 1 regulatory filing.

China has posed challenges for the company on a number of fronts. The Securities and Exchange Commission (SEC) has requested from Herbalife Nutrition documents and other information related to its disclosures regarding its marketing plan in China.

In the Aug. 1 filing, Herbalife Nutrition disclosed it is in talks to possibly resolve the SEC matter “and, based on the course of these discussions to date, believes that a final resolution of this matter is likely to include a civil penalty in the amount of $20.0 million.”

The company has recorded an accrued liability for the amount above. In a previous regulatory filing, the company signaled anticipating a liability of $8 million related to the SEC matter.

“While the company believes the final resolution of this matter is nearing a conclusion, there can be no assurance as to the timing or the terms of any final resolution, or that a settlement will be reached at all,” Herbalife Nutrition said in its Aug. 1 filing.

Separately, as Herbalife Nutrition previously disclosed, the SEC and the U.S. Department of Justice (DOJ) have been investigating the company’s compliance with the Foreign Corrupt Practices Act in China.

Herbalife in 2016 reached an agreement with the FTC to restructure its U.S. business operations and pay $200 million after battling years of allegations that it operated an unlawful pyramid scheme.

In North America, the company’s second-quarter sales rose 6% to $278.3 million. Excluding China, that’s roughly on par with its overall growth (5.4%) across the world. Herbalife Nutrition reported growth in eight of its top 10 countries.

“Our performance demonstrates the strength of our geographic diversity as this was the company’s second largest quarter in history, despite the challenges in China,” Michael Johnson, chairman and CEO of Herbalife Nutrition, said in a statement.

While the quarter was “somewhat disappointing,” Timothy Ramey of Pivotal Research Group suggested the results were decent in many ways.

“If you can get your mind around the issues of China being transitory and not structural in any meaningful way, it was a good quarter with organic EPS growth of about 7.5%,” he wrote in an equity research note.

TAGS: Ingredients
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