Large Cap Direct Selling Stocks Continue March Higher and an Old Friend Comes Back to Play

Transformation Capital has now been providing these updates for several months and we plan to continue to do so. Each month we have increased the quality and comprehensiveness of our offering and, we believe, the best is yet to come. Our goal is to be your primary source for financial information related to the direct selling industry – all in one place. Too often, the financial community miscategorizes direct selling businesses. In some cases, this is okay, and, maybe even preferable. However, the fact remains that direct selling companies are direct selling companies. They are their own industry and their own comp-set. We recognize this and we live this. It’s what we do and why we are here. We intend to continue to increase the quality and value of information we bring to you within the space. If you have any suggestions on how we can improve the quality of the information and data we provide, we would love to hear them.

Large Cap

The four large cap direct selling stocks continued to march higher during July, surging a collective 16.5% during the period, compared to a relatively paltry 2.4% gain in the Dow Jones Industrial Average (DJIA) for the period, and have now risen more than 67% since February 28, 2020, as compared to 5.7% increase for the DJIA. Both individually and as a group, these direct selling stocks continue to dramatically outperform the major indices since March 1, 2020.

Medifast, Inc. (NYSE: MED) continues to stand out as a leader amongst the group as it gained an additional 20.4% over the course of July, and has now more than doubled since its February 28, 2020 close (106.8%). MED is expected to report its second quarter 2020 financial results after the market close on August 5. The Company declined to provide guidance for the quarter, and withdrew its full year guidance, due to uncertainty related to the COVID-19 pandemic. However, during its first quarter 2020 earnings conference call, management stated that April revenue had tracked slightly ahead of the same month of the proceeding year. Analyst’s consensus estimates call for earnings of $1.84 per share, which would represent a year-over-year increase of 5.1%, on revenue of $194.75 million, or 4.1% above the second quarter of last year. Medifast is currently trading near its 52 week high, which represents its highest levels since the fall of 2018, and the stock has doubled in the last four months alone. Based on these facts alone, it would not surprise us to see some profit taking at these levels, regardless of the strength of the Company’s performance. However, if the Company reports results and issues guidance significantly ahead of expectations, then we would not be surprised to see the stock continue its upward trajectory.

Nu Skin Enterprises, Inc. (NYSE: NUS) also continued its strong, pandemic environment performance with a July gain of 17.3%, which allowed it to maintain its position as the second leading performer amongst the top-tier direct selling stocks since March 1, with a total gain of 87.1% over the last four months. Following the markets close on July 1, 2020, Nu Skin reported preliminary second quarter revenue results in range of $603 to $608 million, which was well ahead of its internal guidance range of between $520 and $550 million for the period. The following day the stock surged 25% on more than 4X average trading volume. Since that announcement, the stock has generally traded sideways in a consolidating pattern ahead of its complete second quarter earnings announcement, which is also scheduled after the market close on August 5. Analyst consensus estimates call for earnings of $0.63 per share on revenue of $606.02 million, which both represent year-over-year declines. Like Medifast, Nu Skin is also trading near its 52-week high. As a result, if the Company doesn’t come in ahead of those numbers and/or raise guidance for the remainder of the year, then we would not be surprised to see some profit taking here as well. However, based on our proprietary look at industry trends and data, as well as Nu Skin’s strong pre-announcement, it is our expectation that the Company will report results ahead of estimates and raise guidance for the remainder of the year. We believe the stocks shot term performance will be dependent upon not if, but by how much.

Herbalife Nutrition, Inc. (NYSE: HLF) turned in a strong July performance as well, rising 13.8% during the period and now 58.3% since March 1. Before the market open on Monday, July 13, Herbalife announced a modified Dutch auction tender offer to repurchase up to $750 million of the company’s shares at a price of not more than $50, and not less than $44.75, per share. At the same time, the Company announced the largest volume points(1) quarter in the Company’s history (following a record first quarter). Following these announcements, Herbalife’s stock moved aggressively higher, on more than 6X average trading volume, and closed the day 13% higher. Since that time, and much like Nu Skin and Medifast, Herbalife’s stock has been consolidating near the 52-week high it set on July 13, and much will depend on its earnings announcement scheduled for after the market close on August 6, as well as managements outlook going forward. Herbalife declined to provide guidance when they announced first quarter results, however, record volume points serves as a strong indicator of the manner in which the Company’s business is performing.

Wrapping up the large cap’s, USANA Health Sciences, Inc. (NYSE: USNA) rose 10.5% during the month, despite some significant profit taking following the Company’s second quarter earnings announcement on July 21, and now sits 22.8% above its February 28 closing price. USANA reported earnings of $1.32 per share, which beat analysts expectations by $.13, and revenue of $259 million, slightly below expectations, but up year-over year. The Company also raised its full year guidance for both revenue and earnings per share. Leading up to its earnings release, USANA traded up to a 52-week high of 92.26 before declining due to mixed results and some profit taking through the end of the month.

While, as we have previously stated, there will be some bumps in the road along the way, we remain bullish on the prospects of each of these four companies. While several of them possess complex operating and financial dynamics related to their global footprint, we believe the macro environment continues to provide tailwinds to each of their businesses, which leads us to believe that the short to mid-term outlook for each remains strong.

Small Cap

Switching focus to the smaller capitalization stocks within the industry, all but one has continued to outperform the DJIA since the beginning of March and, collectively, the group is up 42.6% since that time. The group, in general, had a relatively flat July, with two notable exceptions.

The big performance story (surprise?) amongst the smaller cap stocks is one that, historically, might have topped our large cap list and, based on recent performance, might be rejoining it shortly. Tupperware Brands Corporation (NYSE: TUP) closed June at 4.75 per share and, one month later, closed July at $15.43 – a huge one month gain of 225% (482% since March 1). On July 29, Tupperware announced financial results that included revenue and earnings per share ahead of analysts expectations and, apparently, brought some new believers to the Company’s turnaround story. The largest hurdle currently facing the Company is approximately $500 million in debt that must be refinanced, or renegotiated, by June, 2021. Investors now seem bullish regarding the Company’s prospects in addressing this key financial issue. Furthering investor confidence was the Company’s ability to retire approximately $100 million of their outstanding bonds at less than par value and the new management team’s success in cutting approximately $60 million in expenses on the way to a $180 million goal. Our internal definition of “large cap” within the direct selling industry is a minimum of a $1 billion market cap, which, based on its current $757 million valuation, puts Tupperware in play for inclusion on that list sometime in the near future.

The second small cap with market moving news during the month was New Age Beverages Corporation (NASDAQ: NBEV), which, on July 20, announced an agreement to merge with ARIIX, along with four subsidiary companies, with consideration including $25 million in cash, 18 million shares of NBEV’s common stock, a six month convertible note for $10 million and an additional $141.25 million convertible note that matures 24 months from closing. Based on our internal estimates this implies total consideration of more than $200 million. Further, based on our research, this transaction makes ARIIX and/or its previous equity owners, easily the largest shareholders in the Company with a position north of 16% (next closest is 5.8%). As a result, we consider this to be a de facto reverse merger and, as a result, we would not be surprised to see a significant shift in the C-suite in the coming months. The day following the announcement the stock closed 41% higher on approximately 15X normal trading volume and has since settled into a consolidating pattern. The stock closed the month up 43% overall. New Age acquired Morinda Holdings, Inc. in December of 2018, which represented the Company’s initial entry into the direct selling space. NBEV’s stock has generally trended downward since that time, likely due to a history of significant operating losses. Management projects that the combined company will generate in excess of $500 million in revenue in 2020 and that the acquired businesses will provide a significant lift to the Company’s profitability.

A New Addition

Sharing Services Global Corporation (OTCQB: SHRG) is a new addition to this month’s report after the parent Company of Elepreneurs and Elevacity, rose 309% over the course of July and now stands 819% above its February 2020 close. In mid-March, the Company settled a long-standing piece of litigation with a former large holder and executive. Subsequently, on July 13, SHRG reported revenue of $131.4 million for its fiscal year ended April 30, 2020, which represented a year-over-year increase of 53%. The stock surged higher the last two days of the month, on volume significantly higher than average, indicating a bullish sentiment from investors. SHRG’s market capitalization now stands at $50 million, placing it well above our internal minimum of $25 million for inclusion on this list.

Looking Forward

The public direct selling companies have, so far, continued to prove up our thesis and support our proprietary data, which all indicate that the direct selling model is in step with the world we live in today. All indications within our proprietary data set show another strong month for the industry in July amongst private companies, which leads us to believe most of the publics will follow suit. Well run, customer-focused companies with consumable product offerings, particularly within nutrition, wellness, weight loss and personal care, are thriving today and we see no reason that should change in the near future.