OpTree

Stephen Ellison

It’s hard to go wrong in a business where some of your best customers are also your best salespeople.

Just ask Usana Health Sciences Inc. (NasdaqGS:USNA), a nutritional products maker based in Salt Lake City. Usana has built a global following through its direct-selling model, which contracts thousands of independent sales associates, most of whom began as Usana customers.

For those commissioned associates, direct selling is a thriving industry totaling $30.8 billion in the United States and about $112 billion worldwide last year, according to the Direct Selling Association. But the numbers don’t necessarily translate well for all consumer product companies, and those designated as direct sellers tend to come and go, the DSA says.

Usana arrived in 1992 and hasn’t gone anywhere but up. Annual revenue has more than doubled in the past five years, eclipsing $420 million in 2007. Usana credits a trusted product line and a proven marketing strategy for its continued success.

The company made three significant announcements at its annual convention on Aug. 28: a new energy drink product called Rev3; expansion into the Philippines; and new compensation incentives for associates.

Spurred by a challenge from CEO David Wentz, Usana scientists came up with an alternative to the sugary, “crash-and-burn” energy drinks common in today’s market. The resulting Rev3 is a green-tea based drink that contains an advanced formula of antioxidants as well as Usana’s patented olive-fruit extract, Olivol.

“This is a product that will appeal to a wide audience,” Wentz said in a statement.

During the company’s earnings conference call on Oct. 15, Usana chief operating officer Fred Cooper said a growing number of gen-X and gen-Y associates trying to build their businesses have been clamoring for an energy drink to sell.

“Rev3 is a fun product to talk about,” he said. “It’s a way to open doors to people, an ice-breaker. We see this as an opportunity with this (younger) demographic to gain a significant market share.”

The Philippines represents Usana’s 14th global market, and Cooper said the country’s $500 million direct-selling industry makes it “very promising for us.”

The two incentive programs are designed not only to increase sales volume but also to boost enrollment of new associates. One program is geared toward spiking competition among Usana’s top-selling associates. The other is a matching bonus where existing associates who enroll new business builders, referred to as “platinum pacesetters,” can earn up to 100% matching commissions produced by their recruits.

Usana is coming off a disappointing third quarter in which net income dropped 28.6 % year over year to $8.14 million, or $0.50 a share, and revenue increased less than 1% to $107.2 million. Analysts had expected earnings of $0.60 a share on revenue of $112 million. The company said decreased sales in North America, higher base commission payouts and expenses related to litigation contributed to the dip in net income.

Usana shares jumped nearly 10% to $44.22 a day after the earnings report, perhaps on the company’s fourth-quarter guidance. The company expects record sales of $114 million to $120 million and EPS of $0.64 and $0.70 for the period, above analysts’ average earnings forecast of $0.64 a share.

With that optimism, a new product to pitch and incentives for its salespeople to order more and spread the word, Usana can’t go wrong.

Popularity: 6% [?]

We got word that USANA has settled their lawsuit with Barry Minkow and the Fraud Discovery Institute.

In exchange for dropping the lawsuit against Minkow, both Minkow and the FDI agreed that they will no longer trade USANA stock (NASDAQ: USNA). In addition, the FDI will remove all information regarding USANA within their control from their website and will cease from publishing any future statements about the company.

Minkow, who is a convicted criminal, served eight years in jail for stock fraud and when released decided to dedicate his life to torturing network marketing companies (Nu Skin), (Herbalife) and attempting to manipulate their stocks.

Minkow came out with his first negative report about Usana in February of 2007. Minkow went on to buy “put” options on the stock betting that the price would fall. USANA responded by suing both Minkow and the FDI for defamation and stock manipulation.

Apparently after a lengthy battle, both parties were ready and willing to come up with a compromise although it is very unclear what Minkow gets out of this since it seems he has given up all future chances to attack the company but it seems awfully strange that Minkow would agree to no longer trade the stock and will stop talking about USANA.

Hopefully each party is satisfied with the ruling and they can resume business. Minkow is free to torture and manipulate other companies, and USANA, who is in the midst of a corporate restructuring after a failed attempt to go private, can put another legal battle behind them and move on with creating and distributing its nutritional products.

Popularity: 13% [?]

Shares of USANA have been a bit beaten up over this week after the news that the efforts to take the company private have been scrapped.

USANA has been plague d the last few months with lawsuits and fighting between the company and the minority shareholders over low-ball bid offers. After Monday’s hearing, during which a judge ruled to temporarily halt the bid, USANA had to throw in the towel and admit that they would not be able to acquire enough shares to complete the move to a private company.

Over the last year, USANA’s stock has fallen 34 percent. But the bigger news is the percentage of shares that are floated short. Short Selling is when you reverse the classic buy-low/sell-high order. You first borrow shares of a stock you’re bearish on (through your brokerage) and then sell them, expecting the price to fall. If the price does fall, you buy shares back on the market to replace the ones you borrowed. You’ll have collected more from the initial sale than you spent buying the replacements. Voila — a profit from bearishness!

Think of the many stocks on the market about which people are pessimistic. Many of them will be heavily shorted. If the market starts soaring, taking these stocks with them, what typically happens is that some of those short-investors panic, as their would-be gains are transformed into escalating losses as the stock price rises. They’ll “cover” their positions by buying shares to replace their borrowed-and-sold ones. Doing so will increase demand for those shares and will therefore push prices up even further.

We happen to take a look at what % of Float Shorted is for various companies and USANA happens to have the most at a whopping 68%! Only Beazer homes (NYSE: BZH) was higher at 69% according to Motley Fool. This does not bode well for the company in its continuing struggle to take more control of its shares. Also keep in mind that short selling appears to be the strategy that Minkow has been using to fund his legal efforts.

USANA also announced the date for the release of second quarter results. The results will be released on July 22nd after the close of the market. A conference call will be held the following morning, July 23rd to discuss the announcement with analysts and investors. The call will be held at 11 am eastern time. It should be a very interesting conference call…we will keep you up to date on the details.

Popularity: 9% [?]

The Herbalife lawsuit just keeps getting worse…..In an unprecedented legal action, the attorney for the woman suing Herbalife over health problems she says was caused by the company’s Dietary Supplements, Christopher Grell, has expanded the scope of his lawsuit by adding a new group of defendants- the plaintiff’s “up-line distributors.”

The current suit against the company is seeking damages for fraud and product negligence.
Grell says that they will go after multiple “defendants” who were in the up-line of his client and will keep adding new defendants as the discovery portion of the case moves along.

Herbalife announced over a week ago that independent lab tests showed that the company’s products were in compliance with Proposition 65 which maintains safety as far as lead levels in dietary and nutritional supplements. Although the company claimed they had tests to prove this, no documents were ever released. Grell has since won a motion to get those test results. In the last week and a half, we have heard nothing from Herbalife, and now this case is expanding getting a lot worse for Herbalife.

While I think its important to maintain the quality and safety of the products, it seems a bit unfair to sue the distributors in the up-line. Those distributors only go by the information provided by their company. Distributors cannot be expected to run their own experiments to determine the efficacy or safety of products provided to them by the company. Hopefully Herbalife will find a way to settle this lawsuit quickly and can also provide results from scientific tests that back up their claim that their products are safe. Distributors from the company should not be held responsible for the company’s mistakes.

Popularity: 17% [?]