Why Nu Skin Has China Problems

• The share price of Nu Skin Enterprises, Inc. NUS has declined almost 42 percent over the past six months, from $59.27 on May 6.
• J.P. Morgan’s John Faucher has maintained a Neutral rating on the company, with a price target of $40.
• Following the lower than expected Q4 sales outlook and lowered guidance, Fauchner expressed concern regarding management’s “read of the business,” especially in China.

Analyst John Faucher said that the company has reported its Q3 results, with the topline in-line with the pre-announced range, while the EPS missed the estimate and the consensus, due to significantly higher other expenses.

“However, we appreciate the company’s optimism surrounding the upcoming launches of ageLOC me and Youth across its markets, and we find the initial demand for Youth and growth in executive leaders in South Asia/Pacific encouraging,” Faucher stated.

The Q3 results for EMEA and South Asia/Pacific were better than anticipated, offsetting the weaker performance in the Americas and North Asia.

The weakness in China also increased, in-line with expectations, with Greater China declining 16.8 percent and Mainland China down 9.7 percent.

According to the J.P. Morgan report, “Reasons for the weakness in China range from lackluster demand for the recently launched cosmetic oil product to reduction in promo activity on existing products to macro issues.”

While a major product launch might help trends, Faucher expressed concern regarding the health of Nu Skin’s business in Mainland China, “particularly since the number of sales leaders and active distributors fell sequentially.”

The company incurred a non-cash charge of $37.9 million for the inventory write-down in China, “with roughly half of it for the Tru Face Essence Ultra product that was slated to be sold during the 2014 LTO and the remaining for a variety of items that were also meant for early 2014/end of 2013 LTOs.”