Nature’s Sunshine Products, Inc. (NASDAQ:NATR) Q1 2024 Earnings Call Transcript May 7, 2024
Nature’s Sunshine Products, Inc. misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.17. NATR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Nature’s Sunshine’s Financial Results for the First Quarter ended March 31, 2024. Joining us today are Nature’s Sunshine’s CEO, Terrence Moorehead; CFO, Shane Jones; and General Counsel, Nate Brower. Following their remarks, we’ll open the call for analyst questions. Before we go further, I would like to turn the call over to Mr. Brower as he reads the company’s safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Nate, please go ahead.
Nate Brower: Good afternoon, and thanks for joining our conference call to discuss our first quarter 2024 financial results. I’d like to remind everyone that this call is available for replay via telephonic dial-in through May 21 and via a live webcast that will be posted in the Investor Relations portion of our website. at ir.naturesunshine.com. The information on this call contains forward-looking statements. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will and other similar expressions. Forward-looking statements are not guarantees of future performance, and the actual results may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from those implied herein include, but are not limited to, those factors disclosed in the company’s annual report on Form 10-K under the caption Risk Factors and other reports filed with the Securities and Exchange Commission.
The information on this call speaks only as of today’s date, and the company disclaims any duty to update the information provided herein. Now I would like to turn the call over to the CEO of Nature’s Sunshine, Terrence Moorehead. Terrence?
Terrence Moorehead: Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today’s call to discuss our first quarter results as we continue to advance our global growth strategies, digital first, brand power and field energy. And in the first quarter, we continued to gain traction and delivered positive results. Today, I’ll provide some context for our first quarter performance and offer some insights on how we believe the business is progressing. From there, Shane will take you through our financials in more detail. During the first quarter, our omnichannel approach, high-quality products and field activation initiatives combined to drive continued momentum in the business as net sales came in at $111 million, up 4% versus prior year on a constant dollar basis, outpacing the market once again.
EBITDA slightly improved in the quarter, coming in at $9.2 million, flat versus prior year as increased macroeconomic headwinds placed added pressure on the business, especially gross margins. I’ll come back to discuss gross margins a little bit later. But first, I want to talk about our strategic investments in digital and field activation that continue to have a positive and transformative impact on our business. For the quarter, we continued to see strong results in North America as revenue outpaced industry trends with a 5% increase in net sales. Importantly, digital sales surged 33% and as new customer growth increased 34%, driven by strong consumer campaigns and attractive creative content. Our New Year, New You digital campaign kicked off the year, generating strong sales and consumer engagement by featuring some of our most attractive products.
Beyond the strong digital performance, we were also pleased to see continued stability with our nutritional health practitioners and specialty retailers. Overall, we’re very excited about the momentum we’re seeing and believe our omnichannel approach is the key to long-term sustainable growth. In 2024, we expect to build on this momentum by further expanding our digital footprint while increasing the performance of our practitioners and retailers. In Asia Pacific, First quarter sales were up 5% in local currency, led by strong growth in Taiwan and South Korea. The challenging economic environment in China negatively impacted performance as macroeconomic headwinds reduce the effectiveness of our customer activation initiatives. Our digital live streaming model is a powerful customer growth driver but the current economic environment is extremely challenging.
Importantly, we continue to be very positive about the long-term potential of our business in China. In Europe, the first quarter marked a return to growth as sales increased 2% in local currency. The successful launch of our new power products in Central and Eastern Europe, helped generate increased customer activation as orders increased 7%, supported by strong field activation. We expect the positive momentum to continue to generate year-over-year sales growth for the remainder of the year. Returning to gross margins. We remain committed to delivering the $10 million of gross cost of goods savings we previously discussed. Our team has already verified the savings and is making excellent progress implementing our key supply chain initiatives.
In 2024, we expect to see gradual improvement in our gross margins with quarterly fluctuations driven by mix, seasonal promotions and fluctuating costs. Importantly, we’re taking the appropriate steps to ensure we achieve our goal. Finally, I’m pleased to announce that we recently released our 2023 impact report. Our sustainability and transparency initiatives demonstrate our commitment to making a positive difference for our planet and its people. And we continue to set bold goals around commissions, waste reduction, renewable energy and more. As we near the completion of our 2 goals. We know that there’s still much more to do, and we look forward to making additional strides that will take us to an entirely new level in the years to come.
Our 2023 impact report can be found on the Sustainability section of our website, and I encourage you to look at some of the exciting things that our organization is doing. In summary, we’re very pleased with the progress we’ve made on our key strategies, and our first quarter results demonstrate the strength and resilience of our business. I’d like to leave you with the following thoughts. First, our business continues to outperform the market with sales growth driven by strategic investments in digital, field activation and brand building initiatives. Working in combination, these investments have allowed us to attract and retain more new customers, drive order growth and build momentum in the market. Second, we’re committed to delivering the $10 million of gross cost of goods savings that we’ve previously discussed.
We’re already well into the prospects, and we expect to see gradual improvements in our 2024 gross margins. Third and finally, we’ve built strong financial position with a solid balance sheet and strong positive cash flow that will allow us to continue to invest in our growth strategies as we move forward. We’re still operating in a very challenging external environment, but our team is focused, they continue to execute our strategies well and we believe, that as we look forward, we’ll continue to drive positive momentum in 2024 and beyond. With that, I’d like to turn the call over to our Chief Financial Officer, Shane Jones. Shane?
Shane Jones: We are excited about the momentum in our key markets, especially in North America where the turnaround continues, driven by our healthy and growing digital business. Consolidated net sales in the first quarter were $111 million compared to $108.6 million in the year ago quarter, representing a 4% increase on a local currency basis or 2%, including the impact of foreign exchange. The increase was driven by strong performance in our digital business, along with continued robust growth in Taiwan. Looking at results by market in the first quarter. Asia Pacific sales grew 5% on a local currency basis to $46.2 million despite significant macroeconomic pressure. Foreign exchange rates posed a $2.5 million headwind, yielding basically flat year-over-year results net of FX.
In addition to the foreign exchange impact in Asia, poor macroeconomic conditions, along with deteriorating consumer sentiment in China impacted results in that market with sales down 13% or 9% on a local currency basis. While our digital live streaming approach has been well received by consumers, current leading indicators suggest that the difficult macroeconomic situation is likely to deter growth in China for the near term. In Japan, sales were up 3% on a local currency basis. But due to the recent spike in the yen-dollar exchange rate, sales were down 8% net of foreign exchange. The sequential dip in growth is primarily due to the timing of events, and we expect to be back on track with stronger growth through the remainder of the year.
Taiwan continues to show strong momentum, reporting 15% growth on a local currency basis or 11%, including foreign exchange, during Q1 driven by the adoption of Subscribe & Thrive along with strong overall execution in the field. Korea also showed good momentum in Q1, with sales on a local currency basis growing 8% were up 3%, including the impact of foreign exchange. This represents their best quarter in nearly 2 years, and supports our belief that we are in the early stages of a turnaround there, as the team builds out sales tools and capabilities focuses on improved customer acquisition, activation and continues to drive sequential improvement in order growth. We anticipate this turnaround will take additional time but are confident that we are taking the right steps to return to sustained growth later this year.
In North America, Q1 sales grew 5% versus last year to $36.5 million as a result of strong digital adoption, combined with a continued robust increase in new customers during the quarter. Digital sales grew 33%. New customers increased by 34% and average order value improved 10% versus prior year. These metrics, along with a 6% increase in Subscribe & Thrive revenue, provide a strong signal regarding the opportunity of this channel and continue to validate our belief regarding its potential. Sales in Europe increased 2% on a local currency basis or 4%, including the impact of foreign exchange. This is reflective of strong performance in Central Europe, driven by outstanding customer engagement with our recently launched Power line products, along with relative stability in Eastern Europe.
Now shifting to margins. Gross margin in the first quarter increased 33 basis points to 71.2% compared to 70.8% a year ago. The increase was driven by our gross margin improvement initiatives, which were partially offset by increases related to inflation and unfavorable foreign currency exchange. We continue to be pleased with the progress that we are making with our gross margin initiatives, expect continued savings throughout this year and reiterate our commitment to meet or exceed our $10 million goal. In addition to our gross margin initiatives, we will continue to consider targeted price increases on certain products and in certain markets to account for increases in inflation and foreign exchange. Volume incentives as a percentage of net sales were 30.2% compared to 30.5% in the year ago quarter.
The decrease was primarily due to changes in market and channel mix. As our digital business continues to grow, we would expect volume incentives as a percentage of net sales to continue to decline. Selling, general and administrative expenses during the first quarter were $40.8 million compared to $43.6 million in the year ago quarter. The decrease was driven primarily by a nonrecurring loss in Japan in the prior year. As a percentage of net sales, SG&A expenses were 36.7% in the first quarter compared to 40.2% in the year-ago quarter. Excluding Japan-related charges of $5.8 million, SG&A was 36.7% in the first quarter compared to 34.8% a year ago, with the increase driven by global compensation and the timing of event expenses. Operating income increased to $4.6 million compared to $0.2 million in the year ago quarter.
GAAP net income attributable to common shareholders for the first quarter was $2.3 million or $0.12 per diluted common share. compared to $0.9 million or $0.04 per diluted share in the year ago quarter. Adjusted EBITDA, as defined in our earnings release, increased slightly to $9.2 million compared to $9.1 million in the year ago quarter. Our balance sheet remains clean with cash and cash equivalents of $77.8 million and $2.1 million of debt. Inventory was $62.7 million at the end of the first quarter, which is $4.2 million less than we ended 2023. Net cash provided by operating activities was $3.1 million compared to $9.3 million in the prior year period. reflecting the timing of incentive compensation payments in 2024. As part of our capital allocation plan, we repurchased 105,000 shares in the quarter for $1.8 million or an average price of $17.61 per share.
As of March 31, 2024, $15.8 million remains of our $30 million share repurchase program. Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and other strategic initiatives. Now turning to our 2024 outlook. We are reiterating our financial targets and continue to expect full year 2024 net sales to range between $455 million and $480 million. As a reminder, this includes an estimated 100 basis point headwind to growth due to foreign exchange. As such, our guidance equates to constant currency growth of 3% to 9%. The — please note that we expect sequential improvement in sales as we progress through the year. But due to the difficult year-over-year comparison in Q2, growth is likely to be more weighted to the back half of 2024.
We also continue to expect adjusted EBITDA to range between $42 million and $48 million. Overall, we are pleased with the progress we are making in each of our markets, encouraged by continued customer growth in digital and confident in our ability to continue to drive strong shareholder returns through growth in sales and profitability in 2024 and beyond. Now, I will turn it back to the operator.
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