Nu Skin Enterprises Inc. expects China’s investigation of its business to temper its sales growth during and possibly beyond the current quarter, but the firm remains optimistic about its long-term prospects in the key market after reporting global full-year revenue growth of 49% in 2013.

Analysts also see positive signs that Nu Skin’s troubles in China could be resolved speedily with minimal disruption to its long-term trajectory.

The Provo, Utah-based direct seller of weight management products recorded its first $1 billion quarter to close fiscal 2013, with revenue soaring 82% to roughly $1.06 billion in the October-December period. The performance contributed to a record year, with sales topping $3 billion, according to the firm’s March 3 release.

“We achieved this growth by continuing to increase our consumer base and sales force, while also executing the limited-time offering of our ageLOCTR90 weight-management and body-shaping system,” President and CEO Truman Hunt notes.

Touted as the firm’s biggest launch to date, the TR90 system consists of nutritional shakes and supplements along with a “science-based eating plan” and lifestyle tips. The product launched via a global limited-time offer in September, consistent with the firm’s historical sales model, and generated approximately $560 million in sales, Hunt noted in a same-day earnings call Also see "NUFA hearing" - Pink Sheet, 31 July, 2006..

He indicated Nu Skin likely will hold a Greater China rollout of the TR90 system later in 2014 as it awaits the outcome of a regulatory probe into its business practices there, following a January report from state-run news outlet that linked Nu Skin to “illegal multi-level marketing activities” ([A#05140127005]).

Nu Skin launched its own investigation into the allegations and identified deviations from company policies among its sales people during the firm’s recent period of explosive growth. In response, it suspended recruitment activities to focus on strengthening its training and education programs.

It expects the recruiting halt, combined with the impact of investigation expenses, to result in lower sales growth – 20% to 24% – and compressed margins in the first quarter of fiscal 2014.

Nu Skin’s stock price plummeted in January amid the media blitz surrounding the regulatory news from China, from $136.47 to close the month at $85.15, and has hovered around there since.

On March 7, the law firm Kessler Topaz Meltzer & Check, LLP, announced a class action on behalf of Nu Skin shareholders who purchased stock between July 10, 2013, and Jan. 14, 2014. The Radnor, Pa.-based firm’s filing alleges that “throughout the class period, Nu Skin made materially false and misleading statements regarding the company's business, operational and compliance policies” in China, specifically failing to disclose that “the company’s operations in China were based on pyramid selling schemes” in violation of Chinese law.

Tru Face Essence Ultra Poised For China LTO

Nu Skin believes the moves it has made have been appropriate for succeeding in China.

“While our voluntary measures to temporarily suspend some business-development efforts in China will slow growth this year, we believe these steps and the internal business review that we're undertaking will make our long-term success more likely,” Hunt asserted during the call.

He said the firm is nearing completion of an Innovation Park in Shanghai, which will include product-development and manufacturing facilities and serve as Nu Skin’s headquarters in Greater China.

Nu Skin plans to launch a limited-time only offer in China for its ageLOC Tru Face Essence Ultra this year. The daily anti-aging serum is formulated with the company’s Ethocyn firming active and was associated with reported improvements in overall and eye-area firmness in 55% of study subjects after one week, the firm says.

It points to the success of its ageLOC Galvanic Spa product – with “significant” share within the Chinese market for home-use skin-care devices – as evidence that “the appetite for high-quality anti-aging products is both large and robust” in China.

The Tru Face Essence Ultra offer and planned TR90 introductions throughout China will help drive revenue gains, with $650 million to $670 million projected for its fiscal 2014 first quarter, Nu Skin says.

Analysts Project Confidence

Analysts have faith in the company’s strategy and prospects going forward.

In a March 3 note, Deutsche Bank analysts led by Bill Schmitz Jr. acknowledged Nu Skin’s efforts to work with the Chinese government and ventured that “the company’s growth intentions remain aligned with China’s wealth creation and internal consumption agenda, and both parties are racing to a speedy resolution that placates the well-communicated government concerns about the business and the channel.”

They added that historical precedent supports the likelihood that the regulatory investigation will be tied up expeditiously, and cited their belief “that discovery phase of the investigation is largely done” and Nu Skin’s China business, “with likely changes to the way the company recruits, trains and sells its products, will be running at a new normal by the back half of the calendar year.”

The Deutsche Bank analysts maintain a “buy” rating for Nu Skin.

A March 3 note from Wedbush rates the firm “outperform,” noting that based on initial reports, the regulatory fallout in China “may not be all that severe,” though timing elements remain uncertain.

China Regulatory Probe Slows Nu Skin Growth After Record Year

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