Nu Skin Enterprises, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited consolidated results. Nu Skin develops and sells beauty and wellness products internationally and also operates Rhyz investment businesses.
Financial performance
Amounts in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2022 period.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $500.3 | $560.6 | $981.7 | $1,165.5 |
| Gross profit | $364.7 | $412.5 | $712.6 | $855.9 |
| Gross margin | 72.9% | 73.6% | 72.6% | 73.4% |
| Operating income | $42.5 | $51.5 | $58.6 | $103.7 |
| Net income | $26.9 | $34.2 | $38.3 | $73.0 |
| Diluted EPS | $0.54 | $0.67 | $0.76 | $1.43 |
| Cash from operations | Not provided for Q2 alone | $13.4 | $54.1 |
Q2 revenue declined 11% (8% at constant currency); first-half revenue declined 16% (12% at constant currency). Reported revenue was reduced by foreign exchange by 3% and 4%, respectively. Q2 operating and net margins were approximately 8.5% and 5.4%; first-half margins were 6.0% and 3.9%. Selling expenses fell as a share of revenue, but G&A rose as a share of revenue as sales contracted.
- Liquidity: At June 30, cash and cash equivalents were $235.6 million, with current investments of $16.8 million. Working capital was $347.5 million, down from $400.6 million at year-end 2022.
- Debt: Debt facilities comprised a $390 million term-loan balance and $120 million drawn on the revolving facility. The company drew $80 million in June, primarily to fund BeautyBio. The debt carries variable SOFR-based rates; the disclosed 30-day rates were 7.20% for the term loan and 7.24% for the revolver. The filing states the company was covenant-compliant.
- Cash uses and investment: First-half investing cash outflow was $107.2 million, including $77.3 million for acquisitions and $26.2 million for capital expenditures. The company paid $38.9 million in dividends and reported no share repurchases in the first half.
Material changes and business developments
- Customer count fell 25%, Paid Affiliates fell 23%, and Sales Leaders fell 9% year over year. Changes to affiliate reward eligibility affected reported Paid Affiliate counts in certain markets; Mainland China also used a modified Sales Leader definition.
- Geographic Nu Skin revenue declined 14% in Q2 overall. Mainland China revenue increased 2% in Q2, but was down 26% for the first half. Southeast Asia/Pacific fell 32% in Q2; the Americas fell 14%. Rhyz Investments revenue increased 33% in Q2, including growth in Manufacturing and newly acquired businesses.
- Q2 gross margin fell 0.7 percentage points, partly because Manufacturing, which has lower margins than core Nu Skin, represented a larger share of consolidated revenue. Core Nu Skin gross margin increased 0.2 percentage points in Q2.
- Q2 selling expenses decreased to 37.0% of revenue from 39.1%; G&A decreased in dollars but increased to 27.4% of revenue from 25.3%. First-half results included $9.8 million of restructuring and impairment expense, versus none in the prior-year period.
- In April, Nu Skin acquired 60% of LifeDNA; in June, it acquired BeautyBio for $75 million net of cash acquired. Together the acquisitions contributed $0.9 million of post-acquisition Q2 revenue. Purchase-price allocations were not final at quarter-end.
Outlook, commentary and risks
- Nu Skin began the ageLOC TRMe launch process in Q2; management reported approximately $12.7 million of revenue from the product. The filing anticipates ageLOC WellSpa iO launches across markets from Q3 2023 through the first half of 2024 and estimates $70–90 million of sales in the second half of 2023.
- Management estimated 2023 capital expenditures of $55–75 million. It reported that the Mainland China manufacturing plant was materially completed in Q2; total project spending was expected to be approximately $56–58 million.
- Management said existing cash, expected operating cash flow and credit facilities should meet short- and long-term cash needs, while noting it could reduce capital spending, repurchases or dividends, or seek additional financing if needed. The board declared a $0.39-per-share dividend for payment in September 2023; future dividends remain subject to board discretion.
- Management attributed weaker sales primarily to macroeconomic pressures, reduced business momentum, inflation and price increases in certain markets. It cited launch timing and business-platform and compensation changes as factors to monitor. It also warned of foreign-exchange exposure, market-specific cash-repatriation limits, regulatory and tax contingencies, and cybersecurity and privacy risks.
- The filing reports ongoing tax examinations in certain foreign jurisdictions; outcomes are undetermined. Management believes litigation and other contingencies are not likely to materially affect consolidated results, but cannot assure regulatory compliance challenges will not have a material adverse effect. Manufacturing goodwill was identified as sensitive to revenue, margin and discount-rate assumptions and at risk of future impairment.
Key facts for investors to verify
- Whether customer, affiliate and Sales Leader trends stabilize, particularly given changes in eligibility and reporting definitions.
- Whether the WellSpa iO launch achieves the stated $70–90 million second-half sales estimate and whether acquisitions contribute meaningfully beyond the reported $0.9 million.
- Whether operating cash flow recovers from the first-half $13.4 million level as inventory builds and acquisition-related spending continues.
- Debt classification, refinancing needs and covenant headroom: the notes state a maximum leverage ratio of 2.75-to-1.00, while MD&A states 2.25-to-1.00. The filing text does not reconcile this discrepancy.
- Acquisition purchase-price allocations, integration results, and the assumptions supporting Manufacturing goodwill and future impairment tests.