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Nu Skin Boasts Customer Growth, Faces Weak Gross Margin

Zacks Equity Research

Nu Skin Enterprises, Inc. NUS is on rough seas, thanks to weak gross margins and adverse currency impacts. Nevertheless, this well-known cosmetics player is relying on growth programs, product launches and customer expansion to revive lost sheen. Let’s take a closer look.

Strong Customer Base Boosts Revenues

Nu Skin sells and distributes products through a network of sales leaders and customers, spread across 50 markets globally. Notably, the top line is consistently benefitting from growth in consumer count. In the fourth quarter of 2018, the company’s customers grew approximately 16%. This followed a respective rise of 9%, 8% and 7% in the third, the second and the first quarter of 2018. The company relies on social media as well as well-knit product and marketing programs to widen customer reach. We expect the company to keep gaining from an expanding customer base in the forthcoming periods as well.

Growth Programs On Track

With the help of advanced technology and well-strategized product programs, Nu Skin tries to capture greater market share and maintain growth momentum. In fact, the company’s long-term strategies are based on three factors — Products, Programs and Platforms. Notably, the launch of the revolutionary ageLOC LumiSpa has been a success. The company also introduced LumiSpa Accent in the fourth quarter and expects it to remain a growth driver in 2019. Apart from product launches, Nu Skin’s well-knit product strategies are driving growth in several market locations. It has also been working toward expanding sales compensation program — Velocity — across different nations.

Challenges in the Path

Nu Skin’s gross margin has been declining year over year for the past few quarters. Gross margin slid 140 basis points (bps) during fourth-quarter 2018. Also, gross margin declined approximately 190 bps, 180 bps and 140 bps during the third, the second and the first quarters of 2018, respectively. Such persistent declines pose considerable threats to the company’s overall profitability.

Additionally, adverse impacts from currency rates are weighing on the company’s performance. Markedly, the bottom line in the fourth quarter was hurt by foreign currency translation. Also, the top line in the said period was hurt by 4% negative impact from foreign currency changes. Going ahead, management expects foreign currency fluctuations to negatively impact the company’s top line in the first quarter and full year 2019 by 5-6% and 2-3%, respectively.

We note that such headwinds are marring investors’ optimism. Evidently, the company’s shares have plummeted roughly 17% in the past three months, against the industry’s rally of 26.1%.

Final Thoughts

We expect this Zacks Rank #3 (Hold) company to overcome the aforementioned hurdles, backed by underlying strength in sales leaders and customers. In fact, supported by such upsides and robust operational strategies, Nu Skin’s top line have been improving year on year in the past five quarters. In fact, management expects revenues to grow in 2019 as well. We expect such upsides to keep fueling the company and revive the stock’s lost sheen in the forthcoming periods.

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General Mills GIS, with a Zacks Rank #2 (Buy), has long-term earnings per share (EPS) growth rate of 7.5%.

Sysco Corporation SYY, with long-term EPS growth rate of 10.3%, carries a Zacks Rank #2.

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