Usana recorded 67.8% of its earnings in the quarter in Asia, with the lion’s share of that coming from China. Sales in the region came in at $130.3 million, and grew 21.3% on a year-over-year basis. Sales in Mainland China grew by 69.1% year over year, driven by an increase of 85% in the number of associates. Sales elsewhere in Asia were up, too, especially in the Philippines, where sales jumped by 3.8% in the quarter. Sales in Hong Kong and Taiwan declined in the same period, however.
Sales also decreased in the US. Sales in the Americas/Europe region, coming in at $67.1 million, or 32.2% of consolidated net sales, a decline of 6.9%. Sales in the US declined by $4.7 million in the quarter, which the company attributed to the application of price discounts. But the company’s business in the US has been stagnating for several years, and the number of new associates was essentially flat in this most recent quarter. CEO Kevin Guest told analysts that new promotions in the market will help halt the sales slide.
Pressure on network marketing
Usana has felt some of the same pressure that has been directed at rival Herbalife by activist investor William Ackman. The company has not taken a hit in its stock price, nor has Ackman or other activist investors taken a short position in the company’s stock as has happened with Herbalife. But a cloud hangs over the whole sector, and in what could be seen as a preemptive move, in late 2013 Usana revised its pricing structure, and moved to one unified price for customers, from which some discounts are offered. In addition, the company revised its compensation model for its distributors.
“We made some significant changes to our compensation plan in 2013. And so we needed to let the dust settle to see actually where our numbers are going to fall out with relationship to the overall business model. We have visibility on what has occurred in that area. And so with that, we identified areas where we could utilize some capital to invest in these promotions and incentives,” Guest told analysts in the call that was transcribed by the site seekingalpha.com.
“We are not giving up on our other markets and in the United States. And with some of the strategies we have in place for 2015, I'm confident that we're going to see a resurgence as we continue to be more relevant in a market that is ever changing,” he said.
Made in USA
The company’s network marketing model is especially attractive in China, where a lot of the business is transacted through family networks. But even with all of the growth in China, growth that is unlikely to slow down soon and that will soon transform the company into one that derived two thirds or more of its sales in China, Guest rebuffed a suggestion by an analyst that Usana might consider moving its headquarters from Salt Lake City to somewhere in Asia.
“There is some appeal, great appeal in Asia actually for products that are manufactured in the United States as we operate and function here. And as we look at what's happening around the world, we attribute some of the allure, or I should say, the success to us is that we are operating in and manufacture out of the United States,” Guest said. But Guest said the company is moving in the direction of some autonomy for the Chinese market and will complete a manufacturing facility in Beijing in 2015, at which time the “made in USA” message will have to take on a more nuanced meaning.