Health and wellness products company USANA Health Sciences (NYSE:USNA) announced better-than-expected results in Q4 FY2023, with revenue down 3% year on year to $221.1 million. On the other hand, the company's full-year revenue guidance of $885 million at the midpoint came in 1.2% below analysts' estimates. It made a GAAP profit of $0.87 per share, improving from its profit of $0.66 per share in the same quarter last year.
USANA (USNA) Q4 FY2023 Highlights:
- Revenue: $221.1 million vs analyst estimates of $212.4 million (4.1% beat)
- EPS: $0.87 vs analyst estimates of $0.52 (68.9% beat)
- Management's revenue guidance for the upcoming financial year 2024 is $885 million at the midpoint, missing analyst estimates by 1.2% and implying -3.9% growth (vs -7.6% in FY2023)
- Management's EPS guidance for the upcoming financial year 2024 is $2.70 per share at the midpoint, missing analyst estimates of $2.91 (7% miss)
- Gross Margin (GAAP): 80.9%, up from 79.6% in the same quarter last year
- Market Capitalization: $888.2 million
Going to market with a direct selling model rather than through traditional retailers, USANA Health Sciences (NYSE:USNA) manufactures and sells nutritional, personal care, and skincare products.
Specifically, the company relies on the multi-level marketing approach to selling. This means that USANA customers act as its salespeople and these salespeople earn money through the recruitment of new salespeople, getting a percentage of sales made by their recruits.
With regard to its product portfolio, USANA offers vitamin and mineral supplements designed to meet cardiovascular, skeletal/structural, and digestive health needs. The company also sells meal replacement shakes, snack bars, and other related products. Lastly, it is also known for Celavive, a skin care regimen.
The USANA core customer is someone who cares about health and nutrition. These individuals are willing to spend a little extra to achieve their wellness goals, whether that is weight loss or improved overall health. Given its multi-level marketing approach, USANA customers are typically connected to someone who has had a good experience with the products.
However, many are skeptical about multi-level marketing approaches. Some say these companies are nothing more than pyramid schemes, which are illegal businesses where returns for older customers or investors are paid using the capital of newer customers and investors, rather than from profit earned. The structure relies on recruitment to sustain itself rather than actual demand for products.
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 offering health and wellness supplements and products include Herbalife (NYSE:HLF), Bellring Brands (NYSE:BRBR), and The Simply Good Foods Company (NASDAQ:SMPL).
USANA is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.
As you can see below, the company's revenue has declined over the last three years, dropping 6.7% annually. This is among the worst in the consumer staples industry, where demand is typically stable.
This quarter, USANA's revenue fell 3% year on year to $221.1 million but beat Wall Street's estimates by 4.1%. Looking ahead, Wall Street expects revenue to decline 2.7% over the next 12 months.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
USANA's gross profit margin came in at 80.9% this quarter, up 1.2 percentage points year on year. That means for every $1 in revenue, only $0.19 went towards paying for raw materials, production of goods, and distribution expenses.
USANA 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 80.7% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it has stable input costs (such as raw materials).
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
In Q4, USANA generated an operating profit margin of 11%, up 1.1 percentage points year on year. This increase was encouraging, and we can infer USANA had stronger pricing power and lower raw materials/transportation costs because its gross margin expanded more than its operating margin.Zooming out, USANA has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 10.4%, higher than the broader consumer staples sector. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q4, USANA reported EPS at $0.87, up from $0.66 in the same quarter a year ago. This print beat Wall Street's estimates by 68.9%.
Between FY2020 and FY2023, USANA's EPS dropped 43.6%, translating into 17.4% 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).
Wall Street expects USANA to continue performing poorly over the next 12 months, with analysts projecting an average 11.8% year-on-year decline in EPS.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
Although USANA hasn't been the highest-quality company lately because of its poor top-line performance, it historically did a wonderful job investing in profitable growth initiatives. Its five-year average ROIC was 87.8%, splendid for a consumer staples business.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, USANA's ROIC has averaged a 26.6 percentage point decrease each year. We like USANA's average ROIC but are concerned it has declined recently, perhaps a symptom of waning opportunities to invest profitably.
Key Takeaways from USANA's Q4 Results
It was good that revenue, operating margin, and EPS all outperformed expectations this quarter. On the other hand, its full-year revenue and earnings forecast missed analysts' expectations. Overall, this quarter's results were fine but the outlook may cause Wall Street analysts to cut their estimates, which could weigh on the stock. The stock is flat after reporting and currently trades at $47.8 per share.
Is Now The Time?
USANA may have had a favorable 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 USANA, 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 projected EPS for the next year is lacking.
USANA's price-to-earnings ratio based on the next 12 months is 16.4x. While the price is reasonable and there are some things to like about USANA, we think there are better opportunities elsewhere in the market right now.
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