Do Nu Skin Inventory Red Flags Spell Trouble Ahead?

In Q1 2013, Nu Skin turned its inventory into sales 0.6 times (cost of goods sold $90 million/inventory $149.1 million). In Q1 2014, its inventory mushroomed to $410.7 million. To maintain the same rate of inventory turnover in Q1 2014 as it did in Q1 2013, Nu Skin would have needed to sell inventory costing it $247.9 million during Q1 2014 (Q1 2013 inventory turnover 0.6 X Q1 2014 inventory $410.7 million). In Q1 2014, Nu Skin realized revenues on its inventory at a multiple of 6.29 times its cost ($671.1 million revenues/$106.7 million cost of goods sold). Therefore, the approximate amount of revenues required for Nu Skin to maintain its historical level of inventory turnover without eroding gross profit margins was $1.559 billion for that quarter.

However, Nu Skin reported only $671.1 million revenues for Q1 2014. In May 2014, Nu Skin projected only $700 million of revenues for Q2 2014. The current analyst consensus estimate for Q2 2012 is $712.2 million in revenues, Q3 2014 is $858.5 million in revenues, and Q4 2014 is $948.2 million in revenues. The analyst consensus estimate for revenues in full year 2014 is $3.19 billion, slightly higher than revenues of $3.17 billion reported for 2013.

There are plenty of other issues of concern involving Nu Skin's multi-level marketing business model, domestic and foreign regulatory issues, its apparent dislike of whistleblowers and financial disclosures, but it will have to wait for another day. If Nu Skin's management does not act like mature grownups, I might make investigating and reporting about the company my new hobby. Right now, I have my doubts on management's story about its disproportionately huge rise in inventory levels.

Written by:

Sam E. Antar

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I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of ...

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