Nu Skin Enterprises, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless stated otherwise, amounts are U.S. dollars. Nu Skin develops and sells beauty and wellness products globally; its reporting segments include seven geographic businesses and two Rhyz Investments businesses.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $498.8 million | $537.8 million | $1,480.5 million | $1,703.3 million |
| Gross margin | 58.6% | 67.7% | 67.9% | 71.6% |
| Operating income (loss) | $(26.4) million | $(20.3) million | $32.2 million | $83.4 million |
| Net income (loss) | $(37.0) million | $(25.4) million | $1.3 million | $47.6 million |
| Diluted EPS | $(0.74) | $(0.51) | $0.03 | $0.94 |
- Q3 selling expenses were $187.8 million and G&A was $130.9 million. Nine-month selling expenses were $561.0 million and G&A was $401.8 million.
- Operating cash flow for the first nine months was $64.5 million, versus $82.5 million a year earlier. Investing cash flow was $(119.1) million, including $77.3 million for acquisitions; financing cash flow was $31.0 million. Cash and cash equivalents declined $31.4 million to $233.3 million. Cash plus current investments was $250.0 million at period end.
- Working capital was $267.1 million, down from $400.6 million at December 31, 2022. Current assets were $701.1 million and current liabilities $434.0 million.
- Debt facility balances were $385 million on the term loan and $120 million on the revolving facility, or $505 million in total before debt issuance costs. The term loan’s stated variable rate was 7.42% and the revolver’s 7.43%. The company reported covenant compliance at September 30.
Material changes versus the prior-year period
- Revenue fell 7% in Q3 and 13% for the first nine months; at constant currency, declines were 6% and 10%. Foreign exchange reduced reported revenue by approximately 1% and 3%, respectively.
- Management attributed the decline mainly to macroeconomic pressure, weaker consumer spending and customer acquisition, and lower activity across much of the core business. Customers fell 21%, Paid Affiliates 23%, and Sales Leaders 6% year over year in Q3.
- Gross margin fell sharply, particularly in Q3, after a portfolio rebalancing decision led to a $65.7 million incremental inventory reserve/write-off. The filing reports total inventory-reserve additions of $68.6 million in Q3 and $83.6 million for the nine months. Lower-margin manufacturing revenue also represented a larger share of sales.
- Core Nu Skin revenue fell 12% in Q3 and 16% for the nine months. Manufacturing revenue grew 20% and 9%, respectively. Rhyz other also grew, partly due to acquisitions, but its segment contribution was negative.
- Q3 included no restructuring charge, compared with $30.1 million in Q3 2022. The first nine months of 2023 included $9.8 million of restructuring expense in Q1.
- Cash from operations declined year over year. Cash and current investments also decreased, with acquisitions, dividends, capital expenditures, restructuring payments and foreign exchange among the cited factors.
Outlook, management commentary and risks
- No specific consolidated revenue or earnings guidance is provided in the filing. Management said it believes existing cash, operating cash flows and credit lines will be adequate for short- and long-term needs.
- Management estimated 2023 capital expenditures of $50–60 million; $38.1 million had been spent in the first nine months. The Mainland China manufacturing plant was substantially completed in Q2, with production expected to begin in Q4 2023.
- New product launches contributed revenue: ageLOC TRMe generated $30.2 million in Q3 and $66.3 million year to date; ageLOC WellSpa iO generated $35.6 million in Q3. The WellSpa iO rollout was expected to continue into the first half of 2024. Launch previews may make period comparisons less representative.
- In October 2023, the company adopted another workforce-reduction plan. It estimated Q4 2023 cash severance charges of $15–25 million and expected substantial completion in the first half of 2024; the program could expand.
- The board declared a Q4 dividend of $0.39 per share, subject to board discretion. The company had $162.4 million remaining under its repurchase authorization at September 30.
- Key exposures include macroeconomic conditions, foreign exchange, inflation and price increases, direct-selling and product regulation, tax and customs matters, cybersecurity and data privacy, and interest rates. Some markets impose restrictions or delays on cash repatriation. Management said pending litigation and other contingencies were not expected to have a material adverse effect, but outcomes of certain foreign tax examinations were undetermined.
- The credit agreement covenant limit is described inconsistently: the debt note states a maximum consolidated leverage ratio of 2.75-to-1.00, while MD&A states 2.25-to-1.00. The filing reports compliance, but the applicable threshold should be confirmed.
Important facts for investors to verify
- Whether the $65.7 million portfolio-related inventory charge is nonrecurring and how inventory reserves and gross margins evolve after the product-line reset.
- Whether customer, affiliate and sales-leader declines stabilize, and whether launches generate durable demand rather than temporary preview-related sales.
- The covenant leverage threshold and available borrowing capacity under the credit agreement, given the filing’s conflicting covenant disclosures and variable-rate debt.
- Execution and financial returns from BeautyBio and LifeDNA acquisitions, including final purchase-price allocations and Rhyz other segment profitability.
- Cash generation and liquidity after planned capital spending, dividends, debt service and the additional workforce-reduction charges.
- Progress on foreign cash repatriation, tax examinations, regulatory compliance and cybersecurity risks.