In Spite of Higher Profit, Revenues, USANA Falls Short of Expectations

In spite of higher net sales, a heftier profit and what the company’s co-CEO characterized as “another outstanding year," USANA Health Sciences Inc. reported fourth-quarter results earlier this month that fell short of expectations.

USANA, the maker of nutritional supplements, healthy foods and personal care products, attributed lower than anticipated quarterly earnings (US$24 million versus $21.3 million in the prior year) to higher than expected selling, general and administrative (SG&A) expenses, and “incentive" expenses associated with its independent distributors who are known as associates.

In Greater China, sales increased 10.9 percent to $115.3 million. But Timothy Ramey of Pivotal Research Group, an equity research company, asked USANA’s management about the slowdown in growth there. Ramey noted four quarters in China had been marked by “40-percent-plus growth," according to a transcript of USANA’s Feb. 10 fourth-quarter earnings call made available by Seeking Alpha.

Dave Wentz, co-CEO of Salt Lake City-based USANA, said the direct-selling company is investing in infrastructure in order to support growth in the region. In Greater China, the number of active associates or independent distributors increased to 234,000 from 174,000 the prior year.

“Well, I definitely think that we have a strategy that requires us to get a lot more infrastructure in place before we step on the gas any harder," Wentz said in the conference call. “We've had some amazing growth in China, and we don't want to be one of those companies that grows too fast, outgrows their ability to take care of their customers, do things correctly and so we are just allowing things to go organically while we get the IT systems up to greater speed, while we get the manufacturing facility up and running, so that we can support further growth and we are working on building our management team.

For the quarter that ended on Jan. 2, 2016, net sales rose to $232.6 million from $227.9 million in the prior year. A stronger U.S. dollar negatively impacted sales by $16.5 million, and the fourth quarter of 2015 only included 13 weeks versus the 14-week quarter in the prior year. Excluding the impact of currency and extra week of sales in the prior-year period, sales would have increased 17.7 percent.

Sales in North Asia increased 13.5 percent to $10.3 million, but sales in Southeast Asia Pacific ($46.5 million) and the Americas and Europe ($60.5 million), were down 7.5 percent and 6.3 percent, respectively.

For the year, USANA’s net sales increased 16.2 percent to $918.5 million while the company reported a 23.5-percent increase in its annual profit ($94.7 million). The company ended the year with 421,000 total preferred active associates and 89,000 total preferred customers. Unlike active associates who can distribute products to third parties, preferred customers can only buy products for their own personal use.

“We generated our 13th consecutive year of record sales and reported our highest net earnings in the history of the company," said Kevin Guest, co-CEO of USANA, in a statement. “Importantly, we also reported a record number of active associates."

However, Eric Gottlieb of D.A. Davidson & Co., the investment banking company, downgraded his rating on USANA’s stock to a “neutral" from a “buy." USANA’s shares trade on the New York Stock Exchange under the symbol USNA. In a Feb. 10 institutional equity research note, Gottlieb said USANA’s earnings per share of $1.83 fell 16 cents short of Wall Street’s consensus. He also said sales were 2.6 percent below the consensus.

“The increased reliance on China adds more risk to the model and raises the likelihood of higher associate incentives, as a percent of sales, and additional SG&A investments limiting profits going forward," Gottlieb wrote in his note.

Shares of USANA were trading early this afternoon (ET) at $111.17. That’s up from a 52-week low of $92.00, the day of USANA’s earnings call and Gottlieb’s downgrade.