Nu Skin Enterprises, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Nu Skin develops and sells beauty and wellness products globally through direct selling and reports seven geographic Nu Skin segments and three Rhyz Investments segments. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $704.1m (+15%; +9% constant currency) | $612.4m | $1,381.1m (+22%; +16% constant currency) | $1,130.4m |
| Gross profit / margin | $532.1m / 75.6% | $458.3m / 74.8% | $1,038.5m / 75.2% | $850.5m / 75.2% |
| Operating income / margin | $85.4m / 12.1% | $58.1m / 9.5% | $148.3m / 10.7% | $94.6m / 8.4% |
| Net income | $59.3m | $41.9m | $106.8m | $61.6m |
| Diluted EPS | $1.15 | $0.81 | $2.06 | $1.15 |
Q2 net income margin was approximately 8.4%, compared with 6.8% a year earlier; first-half net income margin was approximately 7.7%, compared with 5.4%. Reported revenue benefited about 6% from currency movements in both 2021 periods. The effective tax rate was 27.1% for Q2 and 26.8% for the first half, down from 29.8% and 31.6%, respectively.
- Expenses and margins: Q2 selling expense was 39.5% of revenue versus 40.6% a year earlier; first-half selling expense was 39.9% versus 40.2%. G&A was $168.8m in Q2 and $338.6m in the first half, up from $151.6m and $301.2m. G&A as a share of revenue declined to 24.0% in Q2 and 24.5% in the first half. Management cited higher incentive compensation and IT spending, partly offset by operating leverage.
- Cash flow: First-half operating cash flow was $1.9m, down from $166.1m. Inventory growth used $80.2m of cash; accrued expenses used $55.4m, which management attributed in part to payouts of prior-quarter commissions and employee incentives. Investing cash outflow was $55.2m, including $36.8m of capital expenditures and $19.0m for acquisitions.
- Liquidity: June 30 cash and cash equivalents were $354.8m, with $24.5m of current investments; combined, $379.3m, versus $423.9m at year-end 2020. Working capital was $345.2m, down from $360.3m.
- Debt: Gross borrowings were $442.5m: $322.5m under the term loan and $120.0m drawn on the revolving facility. Balance-sheet debt, net of issuance costs, was approximately $440.8m. The revolving facility is $350m, and the credit agreement matures in 2023. The company was in compliance with its leverage and interest-coverage covenants and said it planned to refinance within 12 months.
- Capital returns: First-half dividends totaled $38.3m; share repurchases totaled $60.4m. A $0.38-per-share quarterly dividend was declared in August for payment in September. $265.4m remained authorized for repurchases at June 30.
Material changes and business drivers
- Revenue growth was led by EMEA (+64% Q2; +85% first half, reported) and Americas/Pacific (+19%; +49%). EMEA benefited from social commerce adoption and the ageLOC Boost introduction, which generated $11.1m in Q2 sales. Manufacturing revenue grew 27% in Q2 and 45% in the first half.
- Mainland China revenue rose 5% in Q2 but declined 4% on a constant-currency basis; management cited a 9% currency benefit. Japan was flat in Q2, while Southeast Asia revenue grew 6% as reported but was down 2% constant currency for the first half.
- Sales Leaders increased 15% year over year to 64,228, while reported Customers declined 2% to 1,467,617. Management said the customer comparison reflected a significant prior-year surge. COVID restrictions continued to weigh on some Asian markets.
- Q2 gross margin improved 0.8 percentage points, reflecting favorable product mix and lower freight costs. Management linked EPS growth to stronger revenue, these margin benefits, lower Q2 selling expense as a share of revenue, and reduced first-half tax rates.
Outlook, risks and unusual items
- Outlook: No specific revenue or EPS forecast is provided in the filing text. Management estimated 2021 capital expenditures of $80m–$95m. A new Mainland China manufacturing plant is under construction; approximately $28m had been spent, with total project spending expected to be about $55m over the next one to two years, including $25m–$30m in 2021.
- Products and investment: ageLOC Boost was generally available in eastern markets; EMEA and the U.S. were slated for the second half of 2021. The company planned launch processes for Beauty Focus Collagen+ and ageLOC Meta in the second half, with general availability expected in 2022. Grow Tech is expected to continue generating losses in 2021 as it develops controlled-environment agriculture technology; the company was evaluating strategic alternatives.
- Acquisitions: The April 2021 MyFavoriteThings acquisition cost $16.8m net of acquired cash, with up to $24.0m of contingent consideration tied to targets. The purchase-price allocation was not finalized at June 30. Contingent consideration liabilities increased to $12.0m, including $8.7m recognized for this acquisition.
- Key risks: COVID-19 and variants, supply-chain disruptions and freight costs; uncertainty over post-pandemic digital and in-person selling trends; regulation of direct selling and sales-force product or earnings claims; foreign-exchange movements; and economic instability in Argentina. Argentina revenue fell 73% in Q2 and 56% in the first half, with sharp declines in Customers and Sales Leaders.
- The company cited potential regulatory changes, including the FTC’s review of the Business Opportunity Rule, which could affect direct-selling companies. It also disclosed ongoing foreign tax examinations whose outcomes were not determinable; management did not expect the ultimate liability from disclosed litigation and contingencies to materially affect consolidated results.
- Management said existing cash, operating cash flows and credit lines should meet short- and long-term needs, while noting it could reduce capital spending, repurchases or dividends or seek additional financing if needed. The board retains discretion over future dividends.
Important facts for investors to verify
- Whether operating cash flow recovers as the inventory build and timing of commission and incentive payments normalize; inventory reached $391.0m, up from $314.4m at year-end.
- Progress on refinancing the credit agreement, covenant headroom and the availability and cost of revolving credit.
- How much reported growth reflects sustainable underlying demand versus foreign exchange, product introductions, and comparisons with pandemic-affected periods.
- Whether customer counts stabilize and Sales Leader growth translates into repeat customer demand, particularly in Asia and Argentina.
- Actual capital spending and returns from the China plant and acquisitions, including MyFavoriteThings contingent payments and Grow Tech’s strategic review.
- Developments in direct-selling regulation, COVID-related operating conditions, supply constraints, and foreign-currency exposure.