Personal care company Nu Skin (NYSE:NUS) reported Q4 FY2023 results topping analysts' expectations, with revenue down 6.5% year on year to $488.6 million. On the other hand, next quarter's revenue guidance of $417.5 million was less impressive, coming in 13% below analysts' estimates. It made a non-GAAP profit of $0.37 per share, down from its profit of $0.89 per share in the same quarter last year.
Nu Skin (NUS) Q4 FY2023 Highlights:
- Revenue: $488.6 million vs analyst estimates of $476.4 million (2.6% beat)
- EPS (non-GAAP): $0.37 vs analyst estimates of $0.28 (29.9% beat)
- Revenue Guidance for Q1 2024 is $417.5 million at the midpoint, below analyst estimates of $479.7 million
- EPS (non-GAAP) Guidance for Q1 2024 is $0.05 at the midpoint, well below analyst estimates of $0.34
- Management's revenue guidance for the upcoming financial year 2024 is $1.8 billion at the midpoint, missing analyst estimates by 10.6% and implying -8.6% growth (vs -11.2% in FY2023)
- Gross Margin (GAAP): 72.1%, in line with the same quarter last year
- Market Capitalization: $859.2 million
With person-to-person marketing and sales rather than selling through retail stores, Nu Skin (NYSE:NUS) is a personal care and dietary supplements company that engages in direct selling.
The company operates three brands. Nu Skin is the beauty brand, ageLOC is the anti-aging brand, and Pharmanex is the health and wellness brand. The Nu Skin and ageLOC brands primarily sell skin care electronics such as facial massagers and toning devices as well as cosmetics and creams. The Pharmanex brand offers supplements for weight loss, weight management, and skin health as well as vitamins and minerals for general nutrition.
Nu Skin caters to customers who are interested in enhancing their appearance and overall well-being. These customers find value in a one-stop shop–a brand that can provide creams, devices, supplements, and more. The core customer therefore tends to be a lower to middle-income, middle-aged woman.
Nu Skin operates primarily through direct selling rather than distributing through retail stores. The direct selling model means that Nu Skin recruits and trains its own customers, who become representatives of the brand. In turn, these representatives aim to acquire new customers through marketing and sales efforts, which can be powerful because of their personal experience with Nu Skin products. Core customers therefore tend to value community and the chance to earn an extra buck as well.
Personal Care
Personal care products include lotions, fragrances, shampoos, cosmetics, and nutritional supplements, among others. While these products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. As with other consumer staples categories, personal care brands must exude quality and be priced optimally given the crowded competitive landscape. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.
Competitors in the broader personal care industry include Estée Lauder (NYSE:EL), L’Oreal (ENXTPA:OR), and Coty (NYSE:COTY). Companies that operate a direct selling model in the beauty, health, or wellness categories include Herbalife (NYSE:HLF) as well as private companies Avon and Mary Kay.Sales Growth
Nu Skin carries some recognizable brands and products but is a mid-sized consumer staples company. Its size could bring disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the other hand, Nu Skin can still achieve high growth rates because its revenue base is not yet monstrous.
As you can see below, the company's revenue has declined over the last three years, dropping 8.6% annually. This is among the worst in the consumer staples industry, where demand is typically stable.
This quarter, Nu Skin's revenue fell 6.5% year on year to $488.6 million but beat Wall Street's estimates by 2.6%. The company is guiding for a 13.3% year-on-year revenue decline next quarter to $417.5 million, an improvement from the 20.4% year-on-year decrease it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 2.3% over the next 12 months, an acceleration from this quarter.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
Nu Skin's gross profit margin came in at 72.1% this quarter, in line with the same quarter last year. That means for every $1 in revenue, only $0.28 went towards paying for raw materials, production of goods, and distribution expenses. 
Nu Skin has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see above, it's averaged an exceptional 70.3% gross margin over the last two years. Its margin, however, has been trending down over the last year, averaging 3.8% year-on-year decreases each quarter. If this trend continues, it could suggest a more competitive environment.
Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
In Q4, Nu Skin generated an operating profit margin of 3.3%, down 2 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by operational inefficiencies and a step up in discretionary spending in areas like corporate overhead and advertising.
Zooming out, Nu Skin was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer staples business, producing an average operating margin of 3.6%. On top of that, Nu Skin's margin has declined by 2.5 percentage points on average over the last year. This shows the company is heading in the wrong direction, and investors are likely hoping for better results in the future.EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q4, Nu Skin reported EPS at $0.37, down from $0.89 in the same quarter a year ago. This print beat Wall Street's estimates by 29.9%.
Between FY2020 and FY2023, Nu Skin's EPS dropped 49.5%, translating into 20.4% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer staples sector, where shrinking earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 11.3% year-on-year increase in EPS.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Although Nu Skin hasn't been the highest-quality company lately because of its poor top-line performance, it historically did a solid job investing in profitable business initiatives. Its five-year average ROIC was 15.9%, higher than most consumer staples companies.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Nu Skin's ROIC over the last two years averaged a 16.6 percentage point decrease each year. We like what management has done historically but are concerned its ROIC is declining, perhaps a symptom of waning business opportunities to invest profitably.
Key Takeaways from Nu Skin's Q4 Results
Sure, revenue and EPS exceeded Wall Street's expectations this quarter. However, guidance was very bad. Specifically, full-year revenue and EPS guidance missed analysts' expectations by a large amount. Next quarter's guidance was no better, with both revenue and EPS again coming in below expectations. Overall, this was a mediocre quarter for Nu Skin. The company is down 12.6% on the results and currently trades at $15.21 per share.
Is Now The Time?
Nu Skin may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Nu Skin, we'll be cheering from the sidelines. Its revenue has declined over the last three years, but at least growth is expected to increase in the short term. And while its impressive gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining EPS over the last three years makes it hard to trust. On top of that, its brand caters to a niche market.
Nu Skin's price-to-earnings ratio based on the next 12 months is 8.5x. While the price is reasonable and there are some things to like about Nu Skin, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $21 per share right before these results (compared to the current share price of $15.21).
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