Why Nu Skin Must Come Clean On Troubling Inventory Red Flags

This coming Wednesday morning, Utah based multi-level marketing company Nu Skin Enterprises (NYSE: NUS) is scheduled to report its second quarter earnings. In its Q1 2014 10-Q report issued in May, major questions were left unanswered as inventories ballooned to $410 million. This pile of inventory is equal to enough merchandise to fulfill 346 days of sales – compared to only 149 days of sales in the comparable first quarter of the previous fiscal year. It's an increase of 132% over the prior year – an enormous red flag that shareholders would have expected management to explain in significant detail.

Rising inventory levels don't square with management's explanation

In its Q1 2014 10-Q report (page 17), Nu Skin claimed that, "we built a large amount of inventory during the first quarter for planned product launches in 2014...." However, Nu Skin’s excuse does not square with its own reported numbers. In reality, the inventory buildup had been going on for some time.

Since 2011, there is a clear and growing trend of inventory pileup – even as management consistently beats its most optimistic revenue guidance. See the chart below:
 


In the second half of 2013, Nu Skin introduced its ageLOC TR90 weight management system through limited-time offerings in each of its regions. Those sales were carefully choreographed with local management to maximize short term purchases of ageLOC TR90 under the rubric of a limited-time offer (LTO). On the surface, the new product introductions appeared to be highly successful. Revenues during the second half of 2013 rose 78.7% to $1.96 billion compared to $1.099 billion in the second half of 2012 fueled most by growth in Mainland China. In the 2013 10-K report (page 55), management had this to say about ageLOC TR90’s contribution to revenues:
 

In the second half of 2013, the successful limited-time offers of ageLOC TR90 generated approximately $550 million in revenue with over half of this volume coming from the Greater China region.
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