USNA - USANA: China's Rebound Might Reinvigorate Growth In This Stock

2023-05-03 17:39:00 ET

Summary

• USANA's Q1 results beat estimates, but signs of a turnaround remain elusive.
• China's economic recovery offers potential for USANA's growth.
• Entry into a new market and potential acquisitions could offer new growth opportunities.

China's economic recovery has put a spotlight on numerous stocks, and among them, USANA Health Sciences ( USNA ) stands out as a potential turnaround play worth keeping an eye on. Based in Salt Lake City, USANA has experienced a decline in revenues and profits, but its recent quarterly results exceeded analysts' expectations. So, is this the beginning of a turnaround for the company? Not quite yet.

Although there are positive indicators, and USANA seems poised for growth, I haven't seen any major signs of a comeback. As such, I encourage investors to keep USANA on their watchlist and exercise patience before making any investment decisions.

USANA's Bumpy Ride: Struggles and Silver Linings

USANA manufactures and sells nutritional supplements, personal care products, and functional foods in around two global markets, including China, which accounts for approximately half of its revenues and active customers. The company's active customers include independent distributors (also called associates) who sell USANA products to retail customers and preferred customers who purchase its products exclusively for personal use. USANA generates a vast majority (87% in 2022) of its revenues from selling nutritional products. The company produces around 65% of its products at its three manufacturing facilities in Salt Lake City, Utah, Beijing, China, and Tianjin, China, while third-party manufacturers supply the rest.

USANA struggled with declining revenues and earnings, but its recent quarterly results provide a glimmer of hope. As a reminder, last year , the company's revenues fell by 15.8% to $998.6 million, earnings fell by 37.4% to $3.59 per share, and the number of active customers declined by almost 13% to 490,000. These declines can be largely attributed to COVID-related disruptions and lockdowns in China, as well as inflationary pressures and economic slowdowns in other regions. The company's initial guidance for 2023 implied further weakness in revenues and earnings.

Last week, USANA released its first-quarter results , handily beating both revenue and earnings estimates. At first glance, the results appear impressive, especially considering the healthy revenues and earnings beat. However, a closer inspection reveals that they may not be as promising.

Dissecting the Earnings: A Cautious Celebration

Despite the better-than-expected revenues and earnings, I think it is crucial not to read too much into the earnings beat or improved performance in China. The increase was partially driven by the relaxation of COVID-19 restrictions in China, which not only lifted net sales but also active customers. However, during the conference call, the management described this as a "temporary lift." Additionally, the company experienced another temporary lift as some customers ramped up purchases ahead of the annual price increase. The management also clarified that the pre-buying activity in anticipation of higher prices was stronger than usual, suggesting that these gains could reverse as demand normalizes in the coming quarters.

USANA reported a net profit of $0.95 per share from net sales of $248 million, with earnings and revenues representing year-over-year drops of 17% and 9%, respectively. The company had 491,000 active customers, down 11% from last year. However, one positive aspect was that China showed signs of improvement, marked by lower drops in sales (-7% vs. Q1 2022) and active customers (-5% vs. Q1 2022) than the company average. In fact, on a constant currency basis, net sales from China were nearly flat compared to the previous year.

Note that USANA has modestly increased its net sales and earnings guidance for this year, but the changes are modest at best. It is now expecting to earn a profit of $2.85 per share from revenues of $912.5 million (based on the midpoint of the new guidance), which represent increases of 0.88% (earnings) and 1.40% (revenues) from the initial guidance. For the full year, the guidance still implies an 8.7% drop in revenues and a 20.6% decline in earnings for 2023.

That being said, the company has offered a glimmer of hope by saying that it has resumed sales and promotional activities in China after a long gap, which I think could be a more significant positive takeaway than the headline-beating numbers.

Harnessing China's Resurgence

As a China-focused company, I believe USANA is well-positioned to benefit from the country's economic recovery. The reopening of China's economy after a prolonged period of COVID-19 lockdowns has widely been expected to accelerate economic growth. The country's GDP could expand by 4.6% this year, up from 3.8% in 2022, according to the IMF. This will likely lead to increased consumption of goods, which could translate into better sales for USANA.

What I particularly like about USANA is that it is seizing the opportunity presented by China's recovery, making a massive sales push in the country. The lifting of COVID-19 restrictions has allowed the company to resume in-person marketing efforts, a vital part of its strategy to expand its active customer base and grow sales. The easing of restrictions has enabled USANA to organize large-scale events for its sales associates, which in turn can increase sales and active customer count. In fact, for the first time in three years, the company held such an event in Macau, hosting 10,000 associates.

USANA has planned numerous smaller-scale promotional and large-scale events for the remainder of the year as it returns to normal business operations in post-pandemic China. However, this may not immediately translate into higher revenues and earnings due to a typical lag effect. As the company continues its sales push, it should start seeing stability in sales and active customer count, followed by growth-potentially from the latter part of the year or from 2024. This could drive USANA's overall revenue and earnings growth.

Growth Horizon & Risks

Furthermore, USANA is planning to enter a new market and, based on what was said during the conference call, it could announce its name within a few days. While management has not yet provided any details, they have indicated that this move could eventually have a meaningful impact on growth. I think USANA's entry into a new country may not make a considerable difference in the short term, as it will take time for the company to establish operations and begin generating substantial sales. However, this development could create new growth opportunities, which is definitely worth watching. It also demonstrates that management is actively seeking ways to boost growth and explore new opportunities-an encouraging sign.

This situation also opens the door to the possibility of USANA using its financial muscle to make an acquisition that could supercharge its growth. In my view, one of the company's greatest strengths is its rock-solid balance sheet, boasting $295 million in cash reserves at the end of 1Q23 and no debt. This positions USANA to potentially acquire other companies. The company also has a successful history of acquiring and integrating businesses, such as Oola and Rise Bar, while realizing synergies. A major acquisition this time around, funded by cash, debt, or a combination of both, could help elevate USANA's revenues, profits, and cash flows.

Having said that, it's essential to acknowledge the challenges posed by the global economic environment and inflationary pressures, which are risks investors should consider before buying USANA's shares.

Like many other companies, USANA has been grappling with the rising costs associated with raw materials and supply chain. As a result, it has implemented a somewhat larger increase in product prices this year than usual. This adjustment is expected to conclude in the current quarter, after which the market's reaction will become clearer. While the price increases may not significantly impact the company's top and bottom lines in China, thanks to its robust economic growth, the response may differ in other markets like the Americas and Europe, where economic growth is slowing. The positive impact of improved performance in China could be overshadowed by weaker performance elsewhere, which might continue to exert pressure on revenues and earnings.

Takeaway

In my view, USANA presents a compelling opportunity to capitalize on China's economic recovery, with the potential for a turnaround and growth in revenues and profits. The management's plans appear promising, making the stock a worthy candidate for close monitoring as a turnaround play. However, we have yet to witness any significant signs of a turnaround. I recommend that investors refrain from purchasing this stock immediately and instead wait for clearer and early indicators of the company's recovery, such as stabilizing net revenues and a rise in active customers.

For further details see: