Nu Skin (NUS) was recently added to our Hedgeye Consumer Staples Best Ideas list as a SHORT.
NUS released (click HERE for the release) detailed information surrounding VitaMeal sales and profitability. The new information they provided conflicted with the information they gave shareholders on the 3Q15 earnings call.
Clearly, by putting out this new information, management is trying to calm the skeptics about the issues surrounding VitaMeal. Unfortunately, the new information sheet provided by the company only raised more questions about VitaMeal than it answered.
Now one of the biggest concerns we see coming out of this new information is where did all the money go? Which is arguably a bigger issue than we saw rising out of the VitaMeal controversy originally. Now, the original concerns are still there, they are just further compounded by this additional question.
In the new document it clearly says that VitaMeal is “1.5% of sales and less than 1.5% of operating profits.” Which contradicts what they said on the 3Q15 earnings call, Truman Hunt, CEO, said “Yeah, it's a product just like priced and sort of positioned just like any other product we would sell.”
Breaking down what they said in the new document, some things just don’t add up.
WHERE DID ALL THAT MONEY GO?
Looking at what the company recently disclosed the numbers just don’t add up.
In 3Q15, the company disclosed that there were 15.34 million meals donated or 510 thousands bags sold. Based on 1.6% (management 3Q15 guidance) of company sales ($571.3 million), VitaMeal sales in 3Q15 VitaMeal were $9.1 million. That implies that the ASP for VitaMeal was $17.87 per bag, significantly below the retail price of $25.50.
On the 3Q15 call CEO Hunt said “distributors purchase it for $20 to $25 depending on the market.” While the newly disclosed document specifically states that VitaMeal is sold for $25.50 per bag in the United States.
What accounts for the difference in the ASP? In 3Q15, where did the $7.59 per bag or $3.89 million dollars go? For the nine months of 2015 (according to the company’s numbers) the average VitaMeal bag sold for $14.45, implying that there is $19.1 million dollars unaccounted for.
Given these discrepancies in their own reporting what happened to the $19.1 million that is unaccounted for over just the last nine months?
MARGIN STORY ON VITAMEAL DOES NOT SEEM RIGHT
The company also said that VitaMeal contributes just under 1.5% of operating margins. It's incomprehensible in our eyes that VitaMeal has similar input costs to high end creams and nutritional supplements. Additionally, there are no distribution costs for Nu Skin given the charities take care of delivery. We strongly believe that VitaMeal holds a much larger percentage of operating profit than it does of sales.
Managements inconsistencies continue, below is an excerpt from the recently disclosed document stating that the margins on VitaMeal are “lower than its typical margin.” Directly contradicting what CFO Ritch Wood said during the 3Q15 earnings call when asked about VitaMeal margins, “it’s a product just liked priced and sort of positioned just like any other product we would sell.”
In 3Q15 we have VitaMeal sales representing 2.28% of total revenue via their Smile reports, which is 68bps above managements commentary of 1.6%. Accounting for distributor commission of 19% and COGS of 4% that would equate to roughly 39.7% of GAAP EPS or roughly 14.5%% of adjusted EPS.
One thing we would also like to point out, SAFI or Napoleon Dzombe are not mentioned once in this document. A troubling fact given only just two years ago SAFI was the largest recipient of funds from Force for Good, instead they mention Feed the Children.
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