NU SKIN ENTERPRISES, INC. quarterly report, Q1 FY2023

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Nu Skin Enterprises, Inc. — Q1 2023 Form 10-Q

Business and period: The company develops and sells beauty and wellness products worldwide through Nu Skin, Pharmanex and ageLOC, alongside its Rhyz investment businesses. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Amounts are in U.S. dollars.

Financial performance and liquidity

  • Revenue: $481.5 million, down 20% reported and 16% in constant currency. Foreign exchange reduced Q1 revenue by 4%.
  • Profitability: Gross profit was $347.9 million; gross margin was 72.3%, down from 73.3%. Operating income was $16.1 million versus $52.1 million, and net income was $11.4 million versus $38.7 million. Diluted EPS was $0.23 versus $0.76.
  • Expenses and margins: Selling expense was $188.1 million (39.1% of revenue versus 40.1%). G&A was $133.9 million, down $14.7 million, but rose to 27.8% of revenue from 24.6%. Restructuring and impairment charges were $9.8 million; operating margin was approximately 3.3%, versus 8.6%.
  • Cash flow: Operating cash flow was a $22.1 million outflow, compared with $7.5 million provided in Q1 2022. The company attributed the change in part to a $19.7 million inventory build for upcoming launches and lower net income. Investing cash outflow was $14.7 million; financing cash inflow was $1.4 million. Cash and cash equivalents ended at $229.9 million, down from $264.7 million at year-end.
  • Liquidity and working capital: Cash plus current investments was $246.7 million, compared with $278.5 million at year-end. Working capital was $400.8 million, essentially unchanged from $400.6 million. Inventory increased to $366.5 million from $346.2 million.
  • Debt: At March 31, term-loan principal was $392.5 million and revolving borrowings were $30.0 million; the revolving balance rose from $10.0 million at year-end. The term loan and revolver carry variable SOFR-based rates. The company reported compliance with debt covenants. The filing gives inconsistent maximum leverage-ratio covenant figures in the debt note and MD&A; see investor verification items below.
  • Capital returns: The company paid $19.4 million in dividends, or $0.39 per share, and made no share repurchases. A further $0.39-per-share dividend was declared for June 2023.

Material changes and operating trends

  • Customer count fell 18% to 1.08 million, Paid Affiliates fell 12% to 221,354, and Sales Leaders fell 17% to 43,755 year over year.
  • Nu Skin geographic-segment revenue declined 22%; Mainland China was down 45% reported (41% constant currency), Southeast Asia/Pacific down 25%, and the Americas down 18%. South Korea was down 3% reported but up 3% in constant currency.
  • Mainland China’s results remained under pressure as the market reopened from COVID-related restrictions and faced economic headwinds. South Korea benefited from the ageLOC TRMe preview, which generated approximately $19.4 million in revenue.
  • Rhyz segment contribution turned negative at $3.3 million, versus positive $2.2 million in Q1 2022. Manufacturing revenue fell 11%, with management citing customer inventory rebalancing; it said orders were beginning to increase and anticipated a return to growth in Q2.
  • Lower G&A partly reflected 2022 restructuring savings, including reduced labor and occupancy costs. Management attributed lower earnings primarily to revenue declines and restructuring charges.

Outlook, risks and unusual items

  • No specific consolidated revenue or earnings guidance is provided in the filing. Management said it expected the first half of 2023 to remain difficult in Mainland China and expressed optimism about ageLOC TRMe and a new connected-device system, with launch activity planned for the second half of 2023. Launch timing and regulatory clearance remain relevant uncertainties.
  • Management estimated 2023 capital expenditures of $55 million to $75 million, including completion of a Mainland China manufacturing plant. Approximately $52.1 million had been spent on the project by March 31, 2023.
  • The global workforce and footprint restructuring program was estimated at approximately $53.3 million in total charges, with substantial completion expected in the first half of 2023. Q1 charges included cash and non-cash items; the company reported an $11.9 million ending accrual for this program. A separate Grow Tech exit restructuring accrual was fully paid in Q1.
  • Foreign exchange, macroeconomic conditions, sales-force momentum, Mainland China market conditions, regulatory requirements for products and direct selling, and tax or customs matters may affect results. The company said it was subject to litigation, investigations and other proceedings, but management did not expect the ultimate liability, if any, to materially affect consolidated financial condition, results or cash flows. No material legal developments or material changes to previously disclosed risk factors were reported.
  • The Manufacturing goodwill reporting unit had estimated fair value only about 8% above carrying value in the October 2022 annual test and was identified as at risk of future impairment if assumptions on revenue, margins or discount rates worsen.
  • After quarter-end, on April 29, 2023, the company acquired 60% of LifeDNA for $4.0 million cash, conversion of a prior $3.0 million SAFE, and a $0.2 million convertible note. Acquisition accounting was incomplete at filing.

Important facts for investors to verify

  • Clarify the credit-agreement maximum leverage covenant: the debt note states 2.75-to-1.00, while MD&A states 2.25-to-1.00; both report covenant compliance at March 31, 2023.
  • Track whether inventory converts to sales and operating cash flow improves as new product launches proceed.
  • Assess the trajectory of customer, affiliate and Sales Leader counts, particularly in Mainland China and Southeast Asia/Pacific.
  • Monitor restructuring cash payments and completion against the estimated $53.3 million program cost, and whether expected cost savings support margins.
  • Follow the connected-device launch schedule, regulatory clearance, LifeDNA acquisition accounting and performance, and the Manufacturing unit’s impairment headroom.