Flattening sales force Nature’s Sunshine to look for cheaper ingredients and manufacturing savings

07-Nov-2022 - Last updated on 07-Nov-2022 at 16:52 GMT

©Getty Images - Oakozhan

Inflationary pressures and currency fluctuations have impacted Nature Sunshine’s results, leading the multi-level marketing company to reformulate some products with cheaper ingredients and revamp manufacturing in an effort to control costs.

According to information disclosed in an earnings call with stock analysts yesterday, Nature’s Sunshine found itself sitting on an uncomfortably large amount of inventory as it got hit by the waves of inflation and international currency volatility that have followed in the wake of the war in Ukraine, which is now entering its ninth month.

Strong sales in parts of Asia prop up the whole

Sales in the third quarter declined to $105 million, down from $112 million in the same period a year previously. The company claimed, however, that most of that decline was attributable to currency fluctuations, with sales down only about 2% on a constant currency basis.

Sales declined most steeply in North America, Europe and China. Sales elsewhere in Asia helped prop up overall results in the region, which is now Nature’s Sunshine’s biggest market, in common with some other MLMs selling nutritional products, like Usana.

“While we believe the underlying fundamentals of our business in China remain strong, sales struggled in the third quarter, down 31%, driven by deteriorating macroeconomic conditions and the hangover effects from China’s zero COVID policy. Once external headwinds abate, we hope to see a return to growth,” said CEO Terrence Moorehead. His comments were taken from a transcript of the earnings call posted on the site seekingalpha.com.

While sales declined only modestly overall, earnings were off sharply. In a measure referred to as ‘GAAP net income,’ Nature’s Sunshine earned essentially no profit in the quarter: $0.2 million versus $5.5 million in the same period a year previously.

The company has been severely impacted both by the costs of carrying the excess inventory as well as high raw material prices and high manufacturing costs. To try to rein those in, the company created a new executive position five months ago—executive vice president of global supply chain—and tapped former Molson Coors executive Martin Gonzalez to take the job.

Wringing costs out of the system

Gonzalez’s mandate was to cut costs in a three prong strategy that focused on ingredients, manufacturing and logistics.

On the inputs side, Nature’s Sunshine is reformulating some products with cheaper ingredients. Gonzalez claims this is being done “while maintaining quality and performance.”

Second, Gonzalez said manufacturing is being reorganized. The company manufactures many of its products in smaller batches at its Lehi, UT headquarters and Gonzalez said savings were being found there by “prioritizing production rounds, improving preventive maintenance and reducing change-over time.”

Finally, Gonzalez said the company was doing a better job of managing its shipping via trucks to “increase pallet density in the warehouse and reduce the amount of air freight.”

Gonzalez said the program is expected to cut costs by $10 million. But those effects won’t start turning up on the bottom line until late 2023, as the company is still selling through inventory with a higher built-in cost basis. That inventory was built up pending an upswing in some markets after the pandemic, a plan that was derailed by the Russian invasion of Ukraine and the continued zero COVID policy in China.