I think the pyramid scheme here topped out last year, probably in the 2nd quarter. For the first time ever, the number of subscribers/customers/sales agents, has actually declined on a sequential qtr basis. On the conf call, they said they struggled extra hard to avoid this outcome during Q4, but it happened anyway. I think the subscriber churn starts to push way up from here.
Question: have they ever discussed churn in previous reports or conference calls?
Also, on today's conference call, one questioner asked if they couldn't just complete the remaining $50 million of authorized share repurchases to by itself achieve the 2008 EPS growth target. The company officer responded by kind of hedging, suggesting that it was mathematically correct. What he didn't say was that total liquidity at year end was under $25 million -- they simply don't have the cash available to do the authorized buyback. In fact, they haven't bought back a single share since 9/1/07 -- more than 5 months ago.
Anyway, I think the pyramid structure starts falling apart from here, and they won't be able to recruit new subscribers fast enough to replace the ones that drop off.
The conference call was an excuse festival. A whole set of new excuses was used even when they conflicted with past conf. calls.
The reason there was not as many associates added in the US was distributor fatigue. They were just working too hard all year in response to the allegations. That directly conflicts with the 3rd quarter excuse that they all take vacations during that quarter and that seasonally, the 3rd quarter is weak. One analyst even asked how they couldn't complete good training when there weren't even that many added and then Dave said, well, the timing of the additions were bad, too many associates were added at once and they weren't properly trained.
Someone asked if they could tell internally if the reduced distributor purchases were from the economy weakening and Dave said that a recession would be good news because people would want extra income. This directly conflicts with Gil saying on the last two conf calls that most people enter just to buy the vitamins, they don't enter to make money. Also, just common sense would tell you a recession is not good for a high priced vitamin company. Dave knows this because he also said the media was touting a recession and people are unsettled.
There was a surprisingly astute analyst question. The new lowered guidance for EPS does not use the same number of outstanding shares. Gil admitted he had assumed some buyback. AND Usana met its current quarter numbers by capitalizing interest on the new facilities expansion. He seemed surprised an analyst noted that but said GAAP made him do it. It was 3 cents per share.
They still have to expense $6.1 million for options for management though and that's if no new options are granted.
So now the company has spent almost $20 million on facilities, owes $30 million for stock repurchases, still didn't make the numbers, have cut inventories and raw materials to the bone, capitalized interest expense, and are projecting a portion of cash flow to be used to buyback more shares so that the year over year numbers show an increase in EPS.
Maybe the growth in Asia will take over for growth in the US but there still aren't any significant customers being added so it's plain as day that the product can't be counted on to drive revenues. They were asked about the lower revenue per distributor, down 2%, and maybe if the new product launch of the customized healthpak wasn't taking off but management still asserted it would be adopted.
One of the analysts was really trying to help them and they discussed that Usana had a slow period in the past and they bounced right out of it. We shall see. I still maintain I wouldn't want to be holding the stock with debt to be repaid, slowing growth, huge depreciation for the new facilities, officer option dilution possibly requiring more buybacks. The only thing this was all offset by was that Gil said no governmental agency is conducting any sort of review or investigation right now that they are aware of.