Usana reported year end earnings this week that missed analysts’s expectations by a significant margin. While the network marketing company, which is based in Utah, continues to turn in positive results and passed the $1 billion annual sales mark, results have softened and the future outlook was ratcheted back, with only modest growth expected for 2017. This led traders to push the company’s share price down almost 22% in the trading session following the earnings release.
Usana makes a significant portion of its annual revenue in mainland China. The company had instituted some changes there in the past two years or so in an effort to restrict cross border sales from Hong Kong. Usana continues to place a big emphasis on the country with the completion in 2016 of a 350,000 sq-ft manufacturing facility there.
But a big red flag has emerged with the announcement of an internal investigation into the company’s business practices in China, specifically as to how they might have crossed the line drawn by a federal anti-bribery law. Usana officials said they could not comment beyond their official statement, which read in part:
“The Company is voluntarily conducting an internal investigation of its China operations, BabyCare Ltd. The investigation focuses on compliance with the Foreign Corrupt Practices Act (“FCPA”) and certain conduct and policies at BabyCare, including BabyCare’s expense reimbursement policies. The Audit Committee of the Board of Directors has assumed direct responsibility for reviewing these matters and has hired experienced counsel to conduct the investigation. While the Company does not believe that the subject amounts are quantitatively material or will materially affect its financial statements, it cannot currently predict the outcome of the investigation on its business, results of operations or financial condition.”
The Trump question
The company’s emphasis on China puts it at risk from currency fluctuations. Usana’s sales in mainland China are now just about equal its sales from everywhere else, including the Americas, Europe and other parts of Asia. And the company now has 276,000 active associates within China compared to 195,000 everywhere else. This raises the company’s exposure to currency fluctuations, which hurt it in the fourth quarter. It also raises the risk of fallout from moves by the Trump administration. The president has been on record that the trade situation with China, Mexico and other countries needs to change and has implied that new trade barriers and duties might be in store. But he has also talked about cutting back on regulations in general, so the effect of the administration changeover was seen as a double edged sword by Usana’s chief financial officer Paul Jones.
“We don't anticipate at this point that we're going to have any more challenges getting product from the U.S. to the countries where we are doing business. We believe that at this point it will be business as usual and we have hope going forward that less regulations can help us not only in the US, but around the world, so it’s really a wait-and-see,” said Jones in an earnings call with analysts. The call was posted in transcript form on the site seekingalpha.com.