Daily Letter | 1 31 October 2012______
Annual EPS Annual Revenue Target Today’s Changes 2012E $3.37 from $3.21 2012E $2.11B from $2.01B $65.00 from $66.00 2013E $3.85 from $3.62 2013E $2.25B from $2.14B
Nu Skin Enterprises Scott Van Winkle, CFA 1.617.371.3759 BUY [email protected] NUS : NYSE : US$47.00 Target: US$65.00 Mark Sigal 1.617.788.1591 [email protected]
COMPANY STATISTICS: Shares Out diluted: 64.2 Consumer & Retail -- Health, Wellness and Lifestyle Market Cap (M): US$3018.8 52-week Range: 35.44 - 62.01 MOMENTUM CONTINUES WELL Avg. Daily Vol. (000s): 1732.9 ABOVE EXPECTED RATE; REITERATE EV/EBITDA: 6.8
EARNINGS SUMMARY: BUY, TARGET TO $65 FYE Dec 2011A 2012E 2013E 2014E P/Sales: 1.7 1.4 1.3 1.3 Investment recommendation P/E: 17.8 13.9 12.2 10.9 Our thesis remains that Nu Skin is in the midst of a powerful Revenue (M): Q1 395.8 462.0A - - product cycle, coupled with a concerted effort to improve Q2 424.4 593.2A - - Q3 428.4 526.2A - - margins that should drive above-average EPS growth. Q4 495.3 528.1 - - Total 1744.0 2109.5 2248.3 2400.2 Investment highlights EPS: Q1 0.56 0.74A - - Q2 0.65 0.94A - - Nu Skin reported a much stronger than expected Q3 driven Q3 0.67 0.87A - - by robust sales growth and very healthy distributor trends. Q4 0.76 0.82 - - Total 2.64 3.37 3.85 4.32 The quarter was helped by ~$28 million in sales tied to Q2
SHARE PRICE PERFORMANCE: limited time offerings (LTO) that carried over, but grew 20% in local currency without the benefit.
Momentum should carry forward into Q4 despite a challenging comp given ageLOC launches in Japan and Korea. Q4 guidance was favorable to the Street (better sales, in-line EPS) with Japan expected to be up 15%. F2013 guidance comes at the November 14 analyst day.
Raising 2012E rev/EPS to $2.11B/$3.37 from $2.01B/$3.21. 2013E rev/EPS goes to $2.25B/$3.85 from $2.14B/$3.62. Source: Interactive Data Corporation
COMPANY DESCRIPTION: Valuation Nu Skin is a leading and innovative direct seller of personal care product and nutritional supplements NUS trades at 12x 2013E EPS and 7x EBITDA. The PE is at a operating in over 50 markets worldwide. 25% discount to the 10-year average of 15.8x forward earnings. All amounts in US$ unless otherwise noted. Price target revised to $65 from $66, reflecting peer valuations.
Canaccord Genuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : LSE) The recommendations and opinions expressed in this research report accurately reflect the Investment Analyst’s personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuity’s Online Disclosure Database. Daily Letter | 2 31 October 2012
INVESTMENT CONCLUSION Nu Skin reported surprisingly strong Q3 results despite challenging comparisons and a lack of new product launches in the quarter that led us to believe that the quarter wouldn’t provide any excitement for investors. The Q3 results are further evidence of the sustainability of NuSkin’s significant momentum even in the wake of the company’s largest ever limited time offer (LTO) in Q2 ($165 million ageLOC launch in Greater China and South Asia/Pacific). The momentum is expected to deliver growth in Q4 against a challenging comparison where we had assumed a flat comparison would be the most optimistic outcome. Even excluding $28 million in sales spillover from the Q2 LTO, NuSkin generated 20% sales growth in local currency during Q3, accelerating active distributor growth (now 10%) and healthy 20%+ executive level distributor growth. The favorable trends haven’t been interrupted and the Q4 ageLOC launches in Japan and South Korea have driven Q4 top line guidance well above us and the Street. The earnings upside is somewhat tempered by higher selling expense associated with higher commissions on the higher distributor productivity, but is a high class challenge and the associated volume is delivering significant G&A leverage. Further, a lower share count in Q4 given $66.3 million in repurchases during Q3 should provide additional earnings leverage. The next catalyst likely comes in just two weeks at the November 14 analyst day, where management will likely provide F2013 guidance and initial detail surrounding its venture into weight management.
In F2013, the next major new product will be a weight management system that we believe could easily surpass the $150 million launch level, if not double given the recent momentum. We assume in our forecasts that weight management is just equivalent to recent launches. We continue to believe that Nu Skin is in the midst of a powerful product cycle that is driving momentum in distributor growth and sales productivity that will lead the company toward its $4/share of EPS target faster than most anticipate. While there will always be doubters of the direct selling model – and Nu Skin has its own challenges and seems to be a magnet for negative publicity of late – the company’s long-term growth in most major markets (Japan the well known exception) is evidence of the sustainability of the sales model, and the attractiveness of the business model is clear in the financial results. We reiterate our BUY rating and recommend investors take advantage of an opportunity to buy NUS at a discount to historical average forward PE while business momentum is arguably at the highest level of the company’s history.
Q3 RESULTS NUS posted a much stronger than expected Q3 reflecting continued strength in Greater China and South Asia/Pacific, accelerating growth in Europe, consistent performance in the Americas and the return to growth in North Asia (specifically Japan). In sum, NUS delivered $0.14 of EPS upside versus our forecast ($0.10
Daily Letter | 3 31 October 2012
beat vs. the Street) on an impressive $61 million sales beat ($45.5 million beat vs. the Street) despite a 3% currency headwind. While a summary of variances versus our forecast is shown in Figure 4, we note that EBIT margin of 15.7% was directly in line with our estimate as much stronger than expected G&A leverage (120 bps) largely offset a slighter softer gross margin (50 bps) and selling expense deleverage (80 bps). A lower than forecasted tax rate (35.2% vs. our modeled 36.0%) and lower share count (62.1 million vs. our modeled 63 million) further contributed to the EPS beat beyond the massive top line outperformance.
A further look into the quarter reveals that sales benefited roughly $28 million from the spill over of limited time offer sales made in Q2 tied to the ageLOC launches in Greater China and South Asia/Pacific. Even excluding this contribution, NuSkin posted 20% sales growth on a local currency basis and 40% sales growth in Greater China. Local currency growth in Japan (+1%) and South Korea (+6%) was notable, as this marked the first quarter of local growth for Japan in essentially a decade and a return to local currency growth in South Korea following negative growth in Q2 after a compensation plan change. Japan is now expected to be up 15% in Q4.
Moving down the P&L, gross margins were flat YOY at 83.5% and are likely to remain in the 83.5% to 84% range moving forward. The 180bp uptick in selling expense was attributable to 1) higher than normal sales volume and commission payouts tied to limited time offers, 2) more sales leaders achieving higher qualification levels that include greater incentive expense (“commission creep”), and 3) the beginning of accruals against stretch targets in some markets such as South Asia/Pacific and Greater China given their explosive growth. G&A leverage should help to offset some of the elevated selling expense (expected in the 44-45% range in Q4 given limited time offer activity in Japan and Korea) and yield overall EBIT margin consistency, if not expansion. The lower than forecast tax rate of 35.2% should return back to the 36% level in Q4, while a further incremental reduction in share count in Q4 ($66.3 million in share repurchases in Q3) should provide a bit of a tailwind as much of the Q3 repurchase activity happened in the second half of the quarter.
A key leading indicator accelerates. Active distributor growth accelerated 200bp QOQ to 10%, with the total number of distributors now standing at 913,000. The gains were lead by Greater China (+38%), South Asia/Pacific (+14%) and Europe (+11%), while North Asia and the Americas were relatively stable YOY. Executive level distributors were up a healthy 21% to 48,200, normalizing from the prior quarter’s 41% growth attributable to the Greater China and South Asia/Pacific ageLOC launches. Ultimately, the executive and active distributor totals should converge with any upward trend in active distributors seen as incrementally favorable. Consistent with active distributor trends, Greater China (+51%) and South Asia/Pacific (+22%) led the growth, while Europe posted impressive growth (+23%) as well. The Americas continues to generate solid mid-teens executive
Daily Letter | 4 31 October 2012
level distributor growth (+14%), while North Asia reversed several prior quarters of declines to achieve 2% positive growth.
Figure 1: Quarterly results comparison
Fiscal Year End - December Canaccord Income Statement Actual Last Year YOY Estimate In $ million, except per share amounts Q3:12A Q3:11A % Growth Q3:12E % Difference Revenue 526.2 428.4 22.8% 465.2 13.1% COGS (86.8) (70.6) 22.8% (74.4) 16.6% Gross Profit 439.4 357.8 22.8% 390.8 12.4% 0.0 Selling Expense (235.7) (184.2) 28.0% (204.7) 15.2% G&A (121.3) (106.4) 14.1% (113.0) 7.4% Operating Income 82.4 67.2 22.5% 73.1 12.7% Net Interest/Other 1.2 (0.7) (282.5%) (0.8) Pretax Income 83.6 66.5 25.7% 72.3 15.6% Income Tax (29.4) (23.4) 25.7% (26.0) 13.0% Net Income 54.2 43.1 25.7% 46.3 17.0% Average Shares 62.1 64.7 (4.1%) 63.0 (1.5%) EPS $0.87 $0.67 31.0% $0.73 18.8%
Margin Analysis Q3:12A Q3:11A BP Change Q3:12E BP Difference Gross Margin 83.5% 83.5% (0) 84.0 % (49) Selling Expense 44.8% 43.0% 180 44.0 % 79 G&A 23.1% 24.8% (177) 24.3 % (123) Operating Margin 15.7% 15.7% (4) 15.7 % (6) Interest 0.2% -0.2% 39 -0.2 % 40 Pretax margin 15.9% 15.5% 36 15.5 % 34 Net margin 10.3% 10.1% 23 10.0 % 35 Tax Rate 35.2% 35.2% 0 36.0 % (80) Revenue by Region ($Millions) Q3:12A Q3:11A % Growth Q3:12E % Difference North Asia 184.7 183.1 0.9% 186.4 (0.9%) Greater China 136.6 79.4 72.1% 124.8 9.5% South Asia/Pacific 91.1 59.2 53.9% 82.9 9.9% North America 70.5 59.8 17.8% 67.9 3.8% EuropeOther 43.2 42.9 0.7% 43.1 0.2% Total Revenue 526.2 424.4 24.0% 505.1 4.2%
Active Distributors (000s) Q3:12A Q3:11A % Growth North Asia 336 333 0.9% Greater China 188 136 38.2% South Asia/Pacific 105 92 14.1% North America 166 166 0.0% EuropeOther 118 106 11.3% Total Revenue Growth 913 833 9.6%
Executive Level Distributors (000s) Q3:12A Q3:11A % Growth North Asia 15.6 15.3 2.0% Greater China 16.3 10.8 50.6% South Asia/Pacific 5.9 4.8 22.3% North America 5.8 5.1 14.2% Europe 4.6 3.7 22.7% Total Active Distributors 48.2 39.8 21.2%
Source: Company reports and Canaccord Genuity forecasts
Daily Letter | 5 31 October 2012
A REGIONAL LOOK North Asia – Sales growth of 0.2% despite a 2% fx headwind. Local currency growth in Japan (+1%) and South Korea (+6%) was notable, as this marked the first quarter of local growth for Japan in well over a year and a return to local currency growth in South Korea following negative growth in Q2. Executive level distributor count returned to growth (+2%) given the October ageLOC launches, while active distributor growth was 1%.
Greater China – Sales growth of 63.9% driven by 60% local currency growth in mainland China. Excluding approximately $21 million in carry over sales from Q2’s ageLOC limited time offer, Greater China sales would have increased 40% YOY. Active distributor growth accelerated to 38% (vs. Q2’s 31%) while executive level distributor growth was a robust 51%.
South Asia/Pacific – Sales growth of 47.4% (despite a 5% fx headwind) including a $29.3 million contribution from limited time offers. Active distributor growth increased 5% sequentially to 14%, while executive level distributor growth was a solid 22%.
Americas – Sales growth of 18.6%, led by US growth of 15%. Active distributor growth was flat (vs. 3% in the prior quarter), while executive level distributor growth of 14% was consistent with recent mid-teen run rates.
Europe – Sales growth accelerated roughly 3% QOQ to 9.4% despite a 14% foreign currency headwind. Active distributor growth increased approximately 3% QOQ to 11%, while executive level distributor growth increased 5% sequentially to 23%.
WHAT WE LEARNED Japan is set to post real growth in Q4, reversing a decade-long trend. Japan is expected to be up 15% and visibility is high given the new product launch catalyst occurred earlier this month.
As a reminder Q4 will benefit from ageLOC launches in Japan and South Korea, the European launch of R2 , and a US limited time offer of the ageLOC Tru Face Essence Ultra. All of these launches occurred in October and are factored into Q4 guidance.
Expect detail on the H2/13 launch of a weight management platform as well as F2013 guidance at the November 14 Analyst Day
Following $66.3 million in share repurchases during Q3, NuSkin has $157 million remaining on its repurchase authorization exiting Q3.
Daily Letter | 6 31 October 2012
NuSkin is in the process of registering an alternative version of its facial galvanic spa as a medical device with the FDA. This product could be in place to sell during F2013.
Q3 sales include $70 million from LifePak, $65 million from the galvanic facial spa, and $75 million from ageLOC R2.
Looking forward, NUS provided net favorable (better revs, in-line EPS) Q4 guidance, including revenues $520-530 million (vs. Street’s $495.6 million) and EPS of $0.78-0.82 (vs. Street’s $0.81). The guidance was ahead of our sales expectation (even including an expected 2% fx headwind) as the aforementioned limited time offers (particularly the ageLOC launches in Japan and Korea) appear to support 6-7% YOY growth despite a challenging 23.5% comparison (International Convention in Q4/11 that helped drive $100 million in sales). Higher than anticipated selling expense (44-45% of sales vs. our prior 43.5%) and a return to a more normalized 36% tax rate keep the EPS outlook in line with the Street.
Moreover, F2012 revenue and EPS guidance was raised by about $100 million in light of the sizeable Q3 beat ($60+ million vs. our estimates and $45+ million vs. the Street) to a range of $2.1-2.11 billion (vs. prior $2.0-2.03 billion) and $0.15 at the midpoint to a range of $3.33-3.37 from a prior $3.16-$3.24. Given the $0.14 EPS beat vs. our forecast ($0.10 beat vs. the Street) in Q3, the implied Q4 outlook is in line. We are adjusting our Q4/12 revenue and EPS forecast to $528M/$0.82 from $492M/$0.80 to reflect guidance and the incremental strength in Japan. Our F2012 revenue and EPS forecast adjusts to $2.11B/$3.37 from $2.01 billion/$3.21, reflecting the Q3 beat and implied incremental strength in Q4 given the beneficial impact of the ageLOC launches in Japan and South Korea. As a reminder, capex is expected to be $100M for the year.
Additionally, we are increasing our F2013 revenue and EPS estimates to $2.25 billion/$3.85 from a prior $2.14 billion/$3.62, respectively, as the Company should build upon its $1.4B AgeLoc brand with what we suspect could be a $200- 300 million launch of a new weight loss system to be called Remodel in H2/13. We believe that weight management is a highly attractive category for direct selling. Our forecasts assume about $150M of weight management sales contribution in Q4/13 at this point.
We are initiating F2014 revenue and EPS estimates of $2.4 billion and $4.32, reflecting high single digit revenue growth and low teens EPS growth.
Daily Letter | 7 31 October 2012
Figure2: Estimate revisions
New Previous New Previous New In $million, except EPS 2011 2012E 2012E 2013E 2013E 2014E Revenue 1,744.0 2,109.5 2,012.0 2,248.3 2,136.3 2,400.2 EBITDA 298.9 366.0 354.7 412.8 393.7 462.0 EPS 2.64 3.37 3.21 3.85 3.62 4.32
Gross margin 83.4 % 83.6 % 83.8% 83.4 % 83.7 % 83.4 % EBIT margin 15.3 % 15.7 % 15.9% 16.7 % 16.7 % 17.6 % EBITDA margin 17.1 % 17.3 % 17.6% 18.4 % 18.4 % 19.2 %
Source: Company reports and Canaccord Genuity forecasts
VALUATION Shares trade at 12x our F2013 EPS estimate and 7x our F2013 EBITDA forecast. While the shares rallied significantly on the Q3 results, we anticipate that the valuation will still normalize toward the historical range over the coming quarters. The shares now trade at a near-25% discount to historical average forward PE of about 16x, despite the business momentum being at a historical high. We are revising our price target to $65 from $66, predicated on the shares trading at about 15x our new F2014 EPS forecast. This valuation target reflects a combination of the strong growth, but a peer group that is out of favor with investors and thus we lowered our PE target to 15 from 17.
Figure3: Relative valuation of the Direct Selling peer group
EV to EV to Price Market Enterprise CY12E CY13E P/E P/E EBITDA EBITDA Company Symbol Rating 10/31/2012 Cap ($M) Value EPS EPS 2012E 2013E CY12E CY13E Avon Products AVP Not rated 15.49 6,693 8,915 0.82 0.99 19.0 15.6 9.9 9.0 Herbalife HLF Buy 51.32 6,234 6,504 4.02 4.55 12.8 11.3 9.2 8.2 Medifast MED Hold 25.51 353 292 1.34 1.60 19.0 15.9 6.1 5.4 Blyth Incorporated BTH Not rated 23.00 397 289 N/A N/A NA NA NA NA Tupperware Corporation TUP Not rated 59.12 3,294 3,836 4.96 5.53 11.9 10.7 8.6 7.9 USANA Health Sciences USNA Buy 43.59 649 572 4.36 4.78 10.0 9.1 5.4 5.0 Average 14.5 12.5 7.9x 7.1x
Nu Skin Enterprises NUS Buy 47.00 3,019 2,852 3.37 3.85 13.9 12.2 8.0x 7.2x Relative to Group (4.1%) (2.5%) 2.3% 2.2%
Source: Estimates for HLF, NUS, USNA and MED are Canaccord Genuity forecasts. All others are Thomson Reuters consensus.
Daily Letter | 8 31 October 2012
Figure 4: NUS historical forward PE (10 Year)
25.0x
23.0x
21.0x
19.0x
17.0x
15.0x
13.0x
11.0x
9.0x
7.0x
5.0x
Jan-15-2004 Jun-10-2004 Jan-18-2006 Jun-13-2006 Apr-03-2007 Jan-22-2008 Jun-16-2008 Apr-03-2009 Jan-22-2010 Jun-17-2010 Apr-05-2011 Jan-24-2012 Jun-18-2012
Oct-31-2002 Nov-03-2004 Nov-03-2006 Nov-06-2008 Nov-09-2010
Mar-28-2003 Mar-31-2005
Aug-21-2003 Aug-23-2005 Aug-27-2007 Aug-27-2009 Aug-29-2011
Source: Capital IQ
Daily Letter | 9 31 October 2012
Figure 5: Historical and projected operating results
Fiscal Year End - December (in millions, except per-share data) 2011E 2011 2012E 2012E 2013E 2014E Income Statement Q1 Q2 Q3 Q4 FY Q1A Q2A Q3A Q4 FY FY FY Revenue 395.8 424.4 428.4 495.3 1,744.0 462.0 593.2 526.2 528.1 2,109.5 2,248.3 2,400.2 COGS (67.9) (71.2) (70.6) (80.2) (289.9) (75.8) (95.6) (86.8) (87.1) (345.2) (372.3) (399.3) Gross Profit 327.9 353.3 357.8 415.1 1,454.1 386.2 497.7 439.4 440.9 1,764.2 1,876.0 2,000.9 Selling Expense (169.1) (183.5) (184.2) (214.6) (751.4) (202.5) (267.4) (235.7) (235.0) (940.6) (996.6) (1,063.2) G&A (101.1) (103.7) (106.4) (125.0) (436.2) (112.0) (132.4) (121.3) (126.3) (492.1) (503.4) (515.4) Operating Income 57.7 66.0 67.2 75.6 266.5 71.7 97.9 82.4 79.6 331.5 376.0 422.4 Net Interest/Other (0.4) (0.1) (0.7) 0.5 (0.8) 3.6 (3.4) 1.2 (0.7) 0.8 (3.9) (3.9) Pretax Income 57.2 65.9 66.5 76.0 265.7 75.3 94.5 83.6 78.9 332.3 372.2 418.5 Income Tax (21.5) (24.2) (23.4) (26.5) (95.6) (27.5) (34.1) (29.4) (28.3) (119.4) (134.0) (150.7) Net Income 35.8 41.7 43.1 49.5 170.1 47.8 60.4 54.2 50.6 213.0 238.2 267.8 Average Shares 64.0 64.2 64.7 64.9 64.4 65.0 64.2 62.1 61.5 63.2 61.8 62.0 EPS $0.56 $0.65 $0.67 $0.76 $2.64 $0.74 $0.94 $0.87 $0.82 $3.37 $3.85 $4.32
Margin Analysis Gross Margin 82.8 % 83.2 % 83.5 % 83.8 % 83.4 % 83.6 % 83.9 % 83.5 % 83.5 % 83.6 % 83.4 % 83.4 % Selling Expense 42.7 % 43.2 % 43.0 % 43.3 % 43.1 % 43.8 % 45.1 % 44.8 % 44.5 % 44.6 % 44.3 % 44.3 % G&A 25.6 % 24.4 % 24.8 % 25.2 % 25.0 % 24.3 % 22.3 % 23.1 % 23.9 % 23.3 % 22.4 % 21.5 % Operating Margin 14.6 % 15.6 % 15.7 % 15.3 % 15.3 % 15.5 % 16.5 % 15.7 % 15.1 % 15.7 % 16.7 % 17.6 % Net margin 9.0 % 9.8 % 10.1 % 10.0 % 9.8 % 10.4 % 10.2 % 10.3 % 9.6 % 10.1 % 10.6 % 11.2 % Tax Rate 37.5% 36.7% 35.2% 34.9% 36.0% 36.5% 36.1% 35.2% 35.9% 35.9% 36.0% 36.0% Growth Rev. Growth (Vs. Year Ago) 8.7% 9.3% 11.7% 23.5% 13.4% 16.7% 39.8% 22.8% 6.6% 21.0% 6.6% 6.8% EBIT Growth 25.0% 11.6% 27.1% 28.4% 22.8% 24.3% 48.2% 22.5% 5.3% 24.4% 13.4% 12.3% Net Income Growth 15.3% 28.7% 22.2% 32.7% 25.1% 33.7% 44.9% 25.7% 2.1% 25.2% 11.8% 12.5% EPS Growth 16.6% 30.5% 21.0% 31.7% 25.3% 31.6% 44.8% 31.0% 7.7% 27.7% 14.4% 12.2% Selected Ratios : Cash / share $ 3.37 $ 3.64 $ 3.74 $ 4.48 $ 4.48 $ 4.46 $ 6.00 $ 5.44 $ 5.05 $ 5.05 $ 7.05 $ 11.23 Net Cash $65.0 $87.1 $104.1 $154.1 $154.1 $166.2 $166.6 $126.1 $113.8 $113.8 $314.6 $574.6
Days inventory 151.2 138.6 135.8 127.3 141.2 145.0 118.7 143.7 143.1 144.9 160.4 141.6 Inventory Turns 2.4 2.6 2.7 2.9 2.6 2.5 3.1 2.5 2.5 2.5 2.3 2.6
ROIC* 31.7% 35.5% 36.7% 41.0% 35.5% 36.2% 51.1% 42.3% 38.6% 40.2% 42.4% 47.4% Return on equity* 30.6 % 32.8 % 31.9 % 34.5 % 32.5 % 30.8 % 42.6 % 39.4 % 33.7 % 36.2 % 33.1 % 27.5 % Operating ROA* 26.9% 29.7% 29.9% 30.5% 28.3% 27.9% 34.5% 29.5% 29.0% 31.7% 31.7% 30.0% * Current quarter annualized Debt/total capital 14.4% 13.3% 12.2% 10.9% 19.2% 9.3% 16.8% 16.4% 15.3% 24.7% 12.5% 9.8% Cash Flow Analysis Operating cash flow 42.3 38.5 46.6 79.0 206.3 31.6 136.8 56.4 17.7 242.5 259.4 270.9 Free cash flow 35.8 28.6 35.0 65.1 164.5 16.9 121.3 26.4 (12.3) 152.4 204.4 215.9 EBITDA 65.6 74.0 75.4 83.9 298.9 80.2 106.4 91.0 88.5 366.0 412.8 462.0
Source: Company reports and Canaccord Genuity forecasts
Daily Letter | 10 31 October 2012
Figure 6: Historical and projected regional results
2011E 2011 2012E 2012E 2013E 2014E Q1 Q2 Q3 Q4 FY Q1A Q2A Q3A Q4 FY FY FY Revenue by region ($Millions) North Asia 179.4 183.1 184.3 204.3 751.2 182.2 177.7 184.7 226.1 770.8 813.9 845.2 Greater China 68.6 79.4 83.4 110.6 341.9 92.6 199.7 136.6 105.7 534.7 528.2 612.5 South Asia/Pacific 49.9 59.2 61.8 65.2 236.2 77.3 98.3 91.1 81.5 348.3 382.6 440.0 North America 55.9 59.8 59.4 76.9 252.0 66.3 71.8 70.5 74.5 283.1 341.4 311.2 Europe/other 42.0 42.9 39.5 38.3 162.7 43.5 45.7 43.2 40.2 172.6 182.2 191.3 Total Revenue 395.8 424.4 428.4 495.3 1,744.0 462.0 593.2 526.2 528.1 2,109.5 2,248.3 2,400.2
Revenue Growth by Region North Asia 5.0% 11.6% 8.1% 13.1% 9.5% 1.5% (3.0%) 0.2% 10.7% 2.6% 5.6% 3.8% Greater China 18.9% (1.5%) 31.6% 66.2% 27.5% 35.0% 151.5% 63.9% (4.4%) 56.4% (1.2%) 16.0% South Asia/Pacific 41.3% 28.9% 23.0% 27.2% 29.2% 54.8% 66.1% 47.4% 25.0% 47.5% 9.8% 15.0% North America (10.5%) (4.1%) (6.8%) 25.1% 0.8% 18.7% 20.0% 18.6% (3.1%) 12.3% 20.6% (8.8%) Europe/other 11.2% 21.6% 10.6% (7.5%) 8.3% 3.7% 6.5% 9.4% 5.0% 6.1% 5.5% 5.0% Total Revenue Growth 8.7% 9.3% 11.7% 23.4% 13.4% 16.7% 39.8% 22.8% 6.6% 21.0% 6.6% 6.8%
Active Distributors (000s) North Asia 325.0 331.0 333.0 338.0 338.0 335.0 337.0 336.0 335.0 335.0 335.0 335.0 Greater China 121.0 130.0 136.0 143.0 143.0 151.0 170.0 188.0 192.0 192.0 228.9 273.0 South Asia/Pacific 84.0 91.0 92.0 99.0 99.0 91.0 99.0 105.0 103.0 103.0 108.0 113.0 North America 159.0 165.0 166.0 166.0 166.0 170.0 170.0 166.0 174.3 174.3 183.0 192.2 Europe/other 109.0 110.0 106.0 109.0 109.0 113.0 119.0 118.0 123.0 123.0 137.0 151.0 Total Active Distributors 798.0 827.0 833.0 855.0 855.0 860.0 895.0 913.0 927.3 927.3 991.9 1,064.1
Source: Company reports and Canaccord Genuity forecasts
Daily Letter | 11 31 October 2012
Investment risks Japan still accounts for about one-quarter of Nu Skin's revenue and the market in Japan remains under pressure. Any disruptions to the Japanese market may have adverse impact on Nu Skin's stock performance. Dollar/yen currency fluctuations also pose risk to reported results and thus the performance of the shares.
China Direct Selling: Nu Skin is rapidly growing in Mainland China. The company began direct selling under the new China rules in its home market of Shanghai in Q4/06 and continues grow geographically with broader approvals. Since direct selling is still relatively young under the new rules in China, the timing of future approvals or potential compensation plan changes in the future remain questions. Additionally, multi-level marketing is not allowed, which leads to Nu Skin's use of a single level model that is inconsistent with traditional marketing plans outside of China.
Sales of Pharmanex nutritional supplement products account for roughly half of Nu Skin's total revenue. Nutritional supplement consumption is driven by positive medical research and media attention. Negative research and/or publicity could negatively impact Nu Skin performance.
Distributor retention: Nu Skin's business model is built around revenue generated by a global distributor base. If competitors lure away Nu Skin distributors or new product introductions fail to energize the distributor force, Nu Skin performance may be negatively impacted.
Commodities: Nu Skin utilizes several commodities in the production of its products, including nutritional ingredients and packaging. While Nu Skin utilizes third party manufacturers, production costs add risk.
Currency and political risk: Nu Skin operates in dozens of markets around the world and generates revenue in numerous currencies. Currency fluctuations or political turmoil in foreign markets may have a material impact on financial results
In addition, we strongly encourage investors to review the complete set of risk factors that can be found in NUS' most recent SEC filings.
Daily Letter | 12 31 October 2012
APPENDIX: IMPORTANT DISCLOSURES
Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.
Site Visit: An analyst has visited the issuer's material operations in the United States and China. No payment or reimbursement was received from the issuer for the related travel costs.
Price Chart:*
Distribution of Ratings: Coverage Universe Global Stock Ratings IB Clients (as of 1 October 2012) Rating # % % Buy 575 60.7% 31.5% Speculative Buy 63 6.7% 50.8% Hold 267 28.2% 13.9% Sell 34 3.6% 5.9% 947* 100.0% *Total includes stocks that are Under Review
Canaccord Genuity BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. Ratings System: HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.
“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.
Risk Qualifier: SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.
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Canaccord Genuity Research Disclosures as of 31 October 2012 Company Disclosure Nu Skin Enterprises 5, 7
1 The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided the following services to the relevant issuer: A. investment banking services. B. non-investment banking securities-related services. C. non-securities related services. 2 In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Corporate Finance/Investment Banking services from the relevant issuer. 3 In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offer of securities of the relevant issuer or in any related derivatives. 4 Canaccord Genuity acts as corporate broker for the relevant issuer and/or Canaccord Genuity or any of its affiliated companies may have an agreement with the relevant issuer relating to the provision of Corporate Finance/Investment Banking services. 5 Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the securities of the relevant issuer or in any related derivatives. 6 In the past 12 months, Canaccord Genuity, its partners, affiliated companies, officers or directors, or any authoring analyst involved in the preparation of this research has provided services to the relevant issuer for remuneration, other than normal course investment advisory or trade execution services. 7 Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Corporate Finance/Investment Banking services from the relevant issuer in the next six months. 8 The authoring analyst, a member of the authoring analyst’s household, or any individual directly involved in the preparation of this research, has a long position in the shares or derivatives, or has any other financial interest in the relevant issuer, the value of which increases as the value of the underlying equity increases. 9 The authoring analyst, a member of the authoring analyst’s household, or any individual directly involved in the preparation of this research, has a short position in the shares or derivatives, or has any other financial interest in the relevant issuer, the value of which increases as the value of the underlying equity decreases. 10 Those persons identified as the author(s) of this research, or any individual involved in the preparation of this research, have purchased/received shares in the relevant issuer prior to a public offering of those shares, and such person’s name and details are disclosed above. 11 A partner, director, officer, employee or agent of Canaccord Genuity or its affiliated companies, or a member of his/her household, is an officer, or director, or serves as an advisor or board member of the relevant issuer and/or one of its subsidiaries, and such person’s name is disclosed above. 12 As of the month end immediately preceding the date of publication of this research, or the prior month end if publication is within 10 days following a month end, Canaccord Genuity or its affiliated companies, in the aggregate, beneficially owned 1% or more of any class of the total issued share capital or other common equity securities of the relevant issuer or held any other financial interests in the relevant issuer which are significant in relation to the research (as disclosed above). 13 As of the month end immediately preceding the date of publication of this research, or the prior month end if publication is within 10 days following a month end, the relevant issuer owned 1% or more of any class of the total issued share capital in Canaccord Genuity or any of its affiliated companies. 14 Other specific disclosures as described above.
“Canaccord Genuity” is the business name used by certain wholly owned subsidiaries of Canaccord Financial Inc., including Canaccord Genuity Inc., Canaccord Genuity Limited, Canaccord Genuity Securities LLC, Canaccord Genuity Corp., and Canaccord Genuity (Australia) Limited, an affiliated company that is 50%- owned by Canaccord Financial Inc. The authoring analysts who are responsible for the preparation of this research are employed by Canaccord Genuity Corp. a Canadian broker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal, or Canaccord Genuity Inc., a US broker-dealer with principal offices located in Boston, New York, San Francisco and Houston or Canaccord Genuity Securities LLC, a US broker-dealer with principal offices located in New York or Canaccord Genuity Limited., a UK broker-dealer with principal offices located in London and Edinburgh (UK), or Canaccord Genuity (Australia) Limited, an Australian broker-dealer with principal offices located in Sydney and Melbourne. In the event that this is compendium research (covering six or more relevant issuers), Canaccord Genuity and
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its affiliated companies may choose to provide by reference specific disclosures of the subject companies or its policies and procedures regarding the dissemination of research. To access this material or for more information, please refer to http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx or send a request to Canaccord Genuity Corp. Research, Attn: Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2 or [email protected]. The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon (among other factors) the Corporate Finance/Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance/Investment Banking activities, or to recommendations contained in the research. Canaccord Genuity and its affiliated companies may have a Corporate Finance/Investment Banking or other relationship with the issuer that is the subject of this research and may trade in any of the designated investments mentioned herein either for their own account or the accounts of their customers, in good faith or in the normal course of market making. Accordingly, Canaccord Genuity or their affiliated companies, principals or employees (other than the authoring analyst(s) who prepared this research) may at any time have a long or short position in any such designated investments, related designated investments or in options, futures or other derivative instruments based thereon. Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of research. This research has been prepared in accordance with Canaccord Genuity’s policy on managing conflicts of interest, and information barriers or firewalls have been used where appropriate. Canaccord Genuity’s policy is available upon request. The information contained in this research has been compiled by Canaccord Genuity from sources believed to be reliable, but (with the exception of the information about Canaccord Genuity) no representation or warranty, express or implied, is made by Canaccord Genuity, its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Genuity has not independently verified the facts, assumptions, and estimates contained herein. All estimates, opinions and other information contained in this research constitute Canaccord Genuity’s judgement as of the date of this research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. Canaccord Genuity’s salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research. Canaccord Genuity’s affiliates, principal trading desk, and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. This research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designated investments discussed in this research may not be eligible for sale in some jurisdictions. This research is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to clients and does not have regard to the investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, none of Canaccord Genuity, its affiliated companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of the information contained in this research.
For Canadian Residents: This research has been approved by Canaccord Genuity Corp., which accepts sole responsibility for this research and its dissemination in Canada. Canadian clients wishing to effect transactions in any designated investment discussed should do so through a qualified salesperson of Canaccord Genuity Corp. in their particular province or territory.
For United States Canaccord Genuity Inc. and Canaccord Genuity Securities LLC, US registered broker-dealers, accept Residents: responsibility for this research and its dissemination in the United States. This research is intended for distribution in the United States only to certain US institutional investors. US clients wishing to effect transactions in any designated investment discussed should do so through a qualified salesperson of Canaccord Genuity Inc. or Canaccord Genuity Securities LLC. Analyst(s) preparing this report that are not employed by Canaccord Genuity Inc. or Canaccord Genuity Securities LLC are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Such analyst(s) may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
For United Kingdom and This research is distributed in the United Kingdom and elsewhere Europe, as third party research by European Residents: Canaccord Genuity Limited, which is authorized and regulated by the Financial Services Authority. This research is for distribution only to persons who are Eligible Counterparties or Professional Clients only and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the
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communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the United Kingdom only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) (High Net Worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. This material is not for distribution in the United Kingdom or elsewhere in Europe to retail clients, as defined under the rules of the Financial Services Authority.
For Jersey, Guernsey This research is sent to you by Collins Stewart (CI) Limited ("CSCI") for information purposes and is not to be and Isle of Man construed as a solicitation or an offer to purchase or sell investments or related financial instruments. Residents: This research has been produced by an affiliate of CSCI for circulation to its institutional clients and also CSCI. Its contents have been approved by CSCI and we are providing it to you on the basis that we believe it to be of interest to you. This statement should be read in conjunction with your client agreement, CSCI's current terms of business and the other disclosures and disclaimers contained within this research. If you are in any doubt, you should consult your financial adviser. CSCI is licensed and regulated by the Guernsey Financial Services Commission, the Jersey Financial Services Commission and the Isle of Man Financial Supervision Commission. CSCI is registered in Guernsey and is a wholly owned subsidiary of Canaccord Financial Inc. For Australian This research is distributed in Australia by Canaccord Genuity (Australia) Limited ABN 19 075 071 466 Residents: holder of AFS Licence No 234666. To the extent that this research contains any advice, this is limited to general advice only. Recipients should take into account their own personal circumstances before making an investment decision. Clients wishing to effect any transactions in any financial products discussed in the research should do so through a qualified representative of Canaccord Genuity (Australia) Limited. Canaccord Wealth Management is a division of Canaccord Genuity Limited. Additional information is available on request. Copyright © Canaccord Genuity Corp. 2012. – Member IIROC/Canadian Investor Protection Fund Copyright © Canaccord Genuity Limited 2012. – Member LSE, authorized and regulated by the Financial Services Authority. Copyright © Canaccord Genuity Inc. 2012. – Member FINRA/SIPC Copyright © Canaccord Genuity Securities LLC 2012. – Member FINRA/SIPC Copyright © Canaccord Genuity (Australia) Limited 2012. – Authorized and regulated by ASIC. All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Canaccord Genuity Corp., Canaccord Genuity Limited, Canaccord Genuity Inc., Canaccord Genuity Securities LLC or Canaccord Financial Inc. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of the entities listed above.