As Bill Ackman makes the rounds presenting his thesis for why Herbalife, a nutrition company with a multi-level marketing scheme, is actually a pyramid scheme, another stock is floundering in the shadows — Nu Skin.
Nu Skin, another nutrition company, uses the same business model as Herbalife. That’s why, back in May when notorious short-seller, David Einhorn got on Herbalife’s call and smashed the stock by asking questions about its business model, Nu Skin got crushed as well.
David Einhorn said nothing about Nu Skin, the multilevel marketing outfit whose shares tanked to $40 from $62 ahead of a May 16th conference where some had expected the hedge-fund celebrity to critique the company and its rival Herbalife..
…if you believe a defamation suit filed in a Salt Lake City state court, Nu Skin shares (NUS) fell after an ex-husband of founder Sandie Tillotson allegedly disparaged her to “Wall Street insiders.” Tillotson is an executive vice present and the largest individual shareholder of Nu Skin, a Provo, Utah-based outfit that sells its beauty products through thousands of independent distributors. Like other multilevel sales operations, Nu Skin exhorts distributors to recruit others who will, in turn, recruit recruits devoted to ordering company products. However, as we reported in our earlier story, regulatory filings indicate that most distributors never make a profit.
The lack of profit is exactly what Einhorn suggested on his Herbalife call, asking:
“First is, how much of the sales that you’d make in terms of final sales are sold outside the network and how much are consumed within the distributor base?”
In short, if you believe Ackman and Einhorn’s thesis, Nu Skin is a short, same as Herbalife. They have the same problem — vendors become consumers to the point that very little profit is made. Without more and more recruits, the jig is up.
It doesn’t help that in the 1990s Nu Skin was fined twice by FTC for deceptive marketing complaints regarding its products intended to aid weightloss and cure baldness, either.
This would explain why the stock has been getting crushed since yesterday, down 9.06% since Ackman made his announcement.
[credit provider=”Yahoo Finance”]
Nu Skin has its problems abroad too. In China, multi-level marketing schemes are illegal. That’s why research firm Citron Research (known for targeting Chinese companies) is sceptical of Nu Skin’s growth in the country will continue, even though CEO CEO Truman Hunt has said emerging markets will drive the company’s growth.Earlier this year Nu Skin said that China comprised almost 75% of its year-over-year revenue growth in Q2 alone.
Citron published a report pointing all of this out in August of this year, and according to the WSJ, the stock subsequently fell 9.2%.
And there’s political component to all of this as well. Nu Skin is a Mormon-owned company and was a huge supporter of Presidential candidate Mitt Romney. Now that he’s not going to occupy the White House, Nu Skin could come under the scrutiny of regulators without the help of powerful friends who share ties to the Mormon Church.
There’s an old joke in the direct-selling business: MLM stands for “Mormons losing money.” It’s no coincidence that Latter-day Saints have a reputation as having a particular affinity for direct selling. Their missionary work, which requires knocking on doors, spreading a message, and recruiting followers, often in foreign countries, offers perfect training.
Nu Skin itself is an insular organisation dominated by faith and family, blending the evangelical and the commercial. Top executives hold prominent positions in the Mormon church. Myriad relatives of the company’s founders have played key roles…
The way things are going, though, investors could get to Nu Skin first, and crush the company just because of its association with the same business model as the highly publicized Herbalife short.
Definitely not a good shadow to be standing in.