They do provide a service that is valuable - they provide community support for whatever product they are selling.
But they have a tendency to sell the business opportunity rather than the product. And they have a tendency to decentralized law avoidance - for instance selling snake-oil cures in breach of FDA regulations.
I wrote a post once about good-and-bad MLMs - where I went through Avon and Pampered Chef as mostly good MLMs and Nuskin as a business built on decentralized law avoidance.
Herbalife was a fair way up the Pampered Chef end of the scale.
Nuskin sells mostly vastly overpriced vitamin pills. This is a picture of some:
Nuskin is in the process of blowing up.
Nuskin's main product is overpriced and is sold under the ridiculous label of "lifepak nano" as if they contain nano-technology. The pills promise "enhanced molecular delivery" without an explanation of what that might be. The pills are maybe 50, maybe 100 times overpriced. And they have a bunch of claims for them. Look at the original post for the whole comical list but they do (falsely) promise the fountain of youth. Here is one claim:
Advanced anti-aging formula helps protect the body with key nutrients such as NanoCoQ10™ and nano carotenoids*
The asterisk - which I am sure the distributors ignore - is to say that the claim is not evaluated by the food and drug administration.
But lets get into the true snake-oil here.
It is gobbledygook - but suffice to say that Coenzyme_Q10 is synthesized in pretty well all tissues in the body. There is some evidence that it reduces some headaches - so I guess there are cognitive benefits - if poorly explained.
Anyway - I am not writing about the business model - which on my observation differs substantially from Herbalife - I am writing about the accounts. And those are disastrous.
Here is the balance sheet:
And here is the P&L:
Now I want you to notice $389 million in inventory versus six months cost of goods sold of 263 million. It has about 270 days of inventory. By contrast Herbalife has about 50 days of inventory.
It looks like Herbalife is professionally run and Nuskin is not.
But I think it might be worse. Nuskin has $389 million of inventory and the inventory is mostly vitamin pills. Can you imagine what $389 million in vitamin pills sitting in warehouses at production cost looks like? It is kind of strange thinking just how much that is...
--
But the asset padding at Nuskin continues. It has less than half the sales of Herbalife but has $429 million of property plant and equipment. Herbalife has $363 million and that is after Herbalife has built some large impressive plants.
By comparison Nuskin seems profligate with plant - but hey - I have never seen one of their factories. Maybe they are gold-plated.
--
But the whole thing becomes worse on the cash flow line. Herbalife is massively cash generative - almost comically cash generative.
Nuskin is not.
Here is Nuskin's cash flow statement.
You might notice that 186 million of cash was used in operating activities and a further 49 million was used in investing activities.
The cash balance dropped from $525 to $220 million. And there is a bunch of long term debt as well. It has more cash than long term debt - so survival is at least possible. But they better turn around awfully fast.
With Nuskin we have to analyse in terms of survival which is far from guaranteed just on the accounts.
It is that bad.
--
Now as readers know I am a bit of a Herbalife fan. When I visit Herbalife distributors I see people providing a real service. The real service is emotional and physical support during dieting. Some sell Herbalife and run fitness clubs. Sometimes it looks more like a café. Some sell Herbalife out of "spiritual healing massage centres". Where I live in Australia it is often the personal trainers who sell Herbalife on the side - and comment (favourably I guess) on the new svelte bodies in their charge.
But in all cases there is a support network for dieting behind successful sellers. The product is not just the shake - it is the support network that goes with it - and the support network fits into the culture from where it is from. In Queens they reflect low-wage Hispanic workers. In more middle class areas of Miami the clubs are larger and better appointed. In Sydney they are fitness obsessed and at the beach and with upper-middle class customers.
And it shows. Herbalife generates more cash every year. The cash flow statement tells the story. This is for six months:
Note 348 million produced in operating cash flows, 113 million consumed in investing (but that includes the construction of the above-mentioned large and impressive factory). I suspect investing cash drain falls and Herbalife becomes even more cash generative.
The net free cash after six months is 234 million or 470 million annualized. I suspect it will be higher because the investing cash use should drop.
This does not look expensive versus market cap (or even market cap plus net debt).
Its a real business, providing real and valuable service to at least ten million people - and it is highly cash generative.
But hey - that was where I started. Not all MLMs are equal. And not all outcomes are equal either.
Billy Bob shorted the wrong MLM.
John
Disclosure: Long Herbalife, short a little Nuskin. I regret not having the Nuskin short on earlier. The balance sheet was always a little stretched - the inventory build in 2013 was insane - and the business model did not make sense - but the denouement is more rapid than I thought possible.
At least one person I talk to got that entirely right including timing both the long Herbalife and short Nuskin legs.
But lets get into the true snake-oil here.
NanoCoQ10 utilizes cutting-edge nanotechnology to deliver highly bioavailable coenzyme Q10 for potent cardiovascular and cognitive benefits.There was no asterisk where I took that quote from!
It is gobbledygook - but suffice to say that Coenzyme_Q10 is synthesized in pretty well all tissues in the body. There is some evidence that it reduces some headaches - so I guess there are cognitive benefits - if poorly explained.
Anyway - I am not writing about the business model - which on my observation differs substantially from Herbalife - I am writing about the accounts. And those are disastrous.
Here is the balance sheet:
June 30, 2014 |
December 31, 2013
| ||||
ASSETS
| |||||
Current assets:
| |||||
Cash and cash equivalents
|
$
|
219,501
|
$
|
525,153
| |
Current investments
|
14,227
|
21,974
| |||
Accounts receivable
|
41,712
|
68,652
| |||
Inventories, net
|
389,650
|
339,669
| |||
Prepaid expenses and other
|
180,957
|
162,886
| |||
846,047
|
1,118,334
| ||||
Property and equipment, net
|
429,332
|
396,042
| |||
Goodwill
|
112,446
|
112,446
| |||
Other intangible assets, net
|
79,258
|
83,168
| |||
Other assets
|
136,531
|
111,072
| |||
Total assets
|
$
|
1,603,614
|
$
|
1,821,062
| |
LIABILITIES AND STOCKHOLDERS' EQUITY
| |||||
Current liabilities:
| |||||
Accounts payable
|
$
|
35,836
|
$
|
82,684
| |
Accrued expenses
|
383,012
|
626,284
| |||
Current portion of debt
|
99,828
|
67,824
| |||
518,676
|
776,792
| ||||
Long-term debt
|
111,621
|
113,852
| |||
Other liabilities
|
81,559
|
71,799
| |||
Total liabilities
|
711,856
|
962,443
| |||
Commitments and contingencies (Note 9)
| |||||
Stockholders' equity:
| |||||
Class A common stock – 500 million shares authorized, $.001 par value, 90.6 million shares issued
|
91
|
91
| |||
Additional paid-in capital
|
410,440
|
397,383
| |||
Treasury stock, at cost – 31.3 million and 31.6 million shares, respectively
|
(844,615)
|
(826,904)
| |||
Accumulated other comprehensive loss
|
(42,284)
|
(46,228)
| |||
Retained earnings
|
1,368,126
|
1,334,277
| |||
891,758
|
858,619
| ||||
Total liabilities and stockholders' equity
|
$
|
1,603,614
|
$
|
1,821,062
| |
And here is the P&L:
Three Months Ended
|
Six Months Ended
| ||||||||||
June 30, 2014
|
June 30, 2013
|
June 30, 2014
|
June 30, 2013
| ||||||||
Revenue
|
$
|
650,027
|
$
|
671,328
|
$
|
1,321,088
|
$
|
1,212,633
| |||
Cost of sales
|
156,010
|
111,273
|
262,654
|
201,318
| |||||||
Gross profit
|
494,017
|
560,055
|
1,058,434
|
1,011,315
| |||||||
Operating expenses:
| |||||||||||
Selling expenses
|
283,575
|
297,170
|
596,676
|
530,264
| |||||||
General and administrative expenses
|
155,705
|
148,302
|
305,824
|
283,809
| |||||||
Total operating expenses
|
439,280
|
445,472
|
902,500
|
814,073
| |||||||
Operating income
|
54,737
|
114,583
|
155,934
|
197,242
| |||||||
Other income (expense), net
|
(21,119)
|
(1,187)
|
(38,627)
|
(1,075)
| |||||||
Income before provision for income taxes
|
33,618
|
113,396
|
117,307
|
196,167
| |||||||
Provision for income taxes
|
14,111
|
38,961
|
42,946
|
67,450
| |||||||
Net income
|
$
|
19,507
|
$
|
74,435
|
$
|
74,361
|
$
|
128,717
| |||
Now I want you to notice $389 million in inventory versus six months cost of goods sold of 263 million. It has about 270 days of inventory. By contrast Herbalife has about 50 days of inventory.
It looks like Herbalife is professionally run and Nuskin is not.
But I think it might be worse. Nuskin has $389 million of inventory and the inventory is mostly vitamin pills. Can you imagine what $389 million in vitamin pills sitting in warehouses at production cost looks like? It is kind of strange thinking just how much that is...
--
But the asset padding at Nuskin continues. It has less than half the sales of Herbalife but has $429 million of property plant and equipment. Herbalife has $363 million and that is after Herbalife has built some large impressive plants.
By comparison Nuskin seems profligate with plant - but hey - I have never seen one of their factories. Maybe they are gold-plated.
--
But the whole thing becomes worse on the cash flow line. Herbalife is massively cash generative - almost comically cash generative.
Nuskin is not.
Here is Nuskin's cash flow statement.
Six Months Ended
June 30,
| |||||
2014
|
2013
| ||||
Cash flows from operating activities:
| |||||
Net income
|
$
|
74,361
|
$
|
128,717
| |
Adjustments to reconcile net income to net cash provided by operating activities:
| |||||
Depreciation and amortization
|
24,965
|
15,527
| |||
Foreign currency (gains)/losses
|
48,264
|
863
| |||
Stock-based compensation
|
13,726
|
11,411
| |||
Deferred taxes
|
3,871
|
(2,901)
| |||
Changes in operating assets and liabilities:
| |||||
Accounts receivable
|
27,121
|
(24,647)
| |||
Inventories, net
|
(54,218)
|
(45,228)
| |||
Prepaid expenses and other
|
(31,157)
|
(25,515)
| |||
Other assets
|
(14,797)
|
(10,987)
| |||
Accounts payable
|
(46,503)
|
3,593
| |||
Accrued expenses
|
(233,532)
|
132,787
| |||
Other liabilities
|
3,034
|
5,237
| |||
Net cash provided by (used in) operating activities
|
(184,865)
|
188,857
| |||
Cash flows from investing activities:
| |||||
Purchases of property and equipment
|
(57,136)
|
(82,515)
| |||
Proceeds of investment sales
|
22,011
|
9,701
| |||
Purchases of investments
|
(13,655)
|
(5,077)
| |||
Net cash used in investing activities
|
(48,780)
|
(77,891)
| |||
You might notice that 186 million of cash was used in operating activities and a further 49 million was used in investing activities.
The cash balance dropped from $525 to $220 million. And there is a bunch of long term debt as well. It has more cash than long term debt - so survival is at least possible. But they better turn around awfully fast.
With Nuskin we have to analyse in terms of survival which is far from guaranteed just on the accounts.
It is that bad.
--
Now as readers know I am a bit of a Herbalife fan. When I visit Herbalife distributors I see people providing a real service. The real service is emotional and physical support during dieting. Some sell Herbalife and run fitness clubs. Sometimes it looks more like a café. Some sell Herbalife out of "spiritual healing massage centres". Where I live in Australia it is often the personal trainers who sell Herbalife on the side - and comment (favourably I guess) on the new svelte bodies in their charge.
But in all cases there is a support network for dieting behind successful sellers. The product is not just the shake - it is the support network that goes with it - and the support network fits into the culture from where it is from. In Queens they reflect low-wage Hispanic workers. In more middle class areas of Miami the clubs are larger and better appointed. In Sydney they are fitness obsessed and at the beach and with upper-middle class customers.
And it shows. Herbalife generates more cash every year. The cash flow statement tells the story. This is for six months:
| Six Months Ended | ||||||||
| June 30, 2014 | June 30, 2013 | |||||||
| (In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES
| ||||||||
Net income
| $ | 194,160 | $ | 262,035 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
| ||||||||
Depreciation and amortization
| 44,776 | 42,310 | ||||||
Excess tax benefits from share-based payment arrangements
| (6,693 | ) | (15 | ) | ||||
Share-based compensation expenses
| 23,398 | 15,253 | ||||||
Non-cash interest expense
| 19,021 | 1,295 | ||||||
Deferred income taxes
| (7,838 | ) | (7,939 | ) | ||||
Inventory write-downs
| 12,373 | 10,448 | ||||||
Unrealized foreign exchange transaction loss (gain)
| 2,532 | (44 | ) | |||||
Foreign exchange loss relating to Venezuela
| 86,108 | 15,116 | ||||||
Other
| 3,717 | (674 | ) | |||||
Changes in operating assets and liabilities:
| ||||||||
Receivables
| (1,163 | ) | (312 | ) | ||||
Inventories
| (2,409 | ) | (14,094 | ) | ||||
Prepaid expenses and other current assets
| (50,669 | ) | (13,150 | ) | ||||
Other assets
| (4,642 | ) | (534 | ) | ||||
Accounts payable
| 13,038 | 4,586 | ||||||
Royalty overrides
| (12,113 | ) | (2,051 | ) | ||||
Accrued expenses and accrued compensation
| 16,661 | 43,761 | ||||||
Advance sales deposits
| 20,915 | 4,481 | ||||||
Income taxes
| (8,158 | ) | (12,546 | ) | ||||
Deferred compensation plan liability
| 4,569 | 3,527 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES
| 347,583 | 351,453 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES
| ||||||||
Purchases of property, plant and equipment
| (105,482 | ) | (56,048 | ) | ||||
Proceeds from sale of property, plant and equipment
| 11 | 33 | ||||||
Investments in Venezuelan bonds
| (7,588 | ) | — | |||||
NET CASH USED IN INVESTING ACTIVITIES
| (113,059 | ) | (56,015 | ) | ||||
Note 348 million produced in operating cash flows, 113 million consumed in investing (but that includes the construction of the above-mentioned large and impressive factory). I suspect investing cash drain falls and Herbalife becomes even more cash generative.
The net free cash after six months is 234 million or 470 million annualized. I suspect it will be higher because the investing cash use should drop.
This does not look expensive versus market cap (or even market cap plus net debt).
Its a real business, providing real and valuable service to at least ten million people - and it is highly cash generative.
But hey - that was where I started. Not all MLMs are equal. And not all outcomes are equal either.
Billy Bob shorted the wrong MLM.
John
Disclosure: Long Herbalife, short a little Nuskin. I regret not having the Nuskin short on earlier. The balance sheet was always a little stretched - the inventory build in 2013 was insane - and the business model did not make sense - but the denouement is more rapid than I thought possible.
At least one person I talk to got that entirely right including timing both the long Herbalife and short Nuskin legs.
