Thursday, February 7, 2013

USANA May Have Misled Shareholders During Fourth Quarter Earnings 2012 Conference Call Regarding BabyCare, China, and Hong Kong

USANA Health Sciences, Inc. (USNA) appears to have misled shareholders during their fourth quarter 2012 earnings conference call on February 6, 2013 as well as several other calls in the past.

When USANA purchased BabyCare Ltd. in August 2010 (an already established direct selling (single level marketing) company in mainland China) it added 12,000 Active Associates and 7000 Active Preferred Customers to USANA's "Greater China" region. Over the last couple years USANA has attributed any of Hong Kong declining active associates to BabyCare, claiming that leaders would re-evaluate where to go (USANA Hong Kong, or China BabyCare).

Today (over two years later), BabyCare has about 17,000 Active Associates and about 2000 Active Preferred Customers. That's a net gain of ZERO customers since USANA purchased BabyCare! So all this talk about BabyCare being a hot market is simply untrue. All this talk about BabyCare siphoning off Hong Kong distributors was a farce. Truth be told, BabyCare is an utter failure and has virtually no growth.

I have datamined USANA's BabyCare distributor IDs and found there to be 38,000 issued ID numbers as of September 2012. If there are only 17,000 active associates in Babycare right now, then over half of all the associates recruited in BabyCare have quit since USANA purchased them.

As for Preferred Customers, what a utter failure. USANA doesn't explicitly state what the figure is this quarter, but since there are 4000 total preferred customers in Greater China, it seems like a safe bet that BabyCare accounts for 2000 active preferred customers. If this figure is accurate, then Babycare has lost 70% of their active preferred customers.

That's a huge problem if Active Associates in Babycare are required to have a certain number of customers to be qualified to earn a commission check.

What is hot right now is the growth in Hong Kong, which is largely attributed to Chinese Nationals from mainland China being illegally recruited into USANA's MLM Hong Kong market (instead of in BabyCare). They are recruited from mainland China and put in USANA under an address from someone living in Hong Kong. This way Auditors, shareholders, and federal regulators can be fooled. USANA allows this to happen and even has a policy set up that allows for over 15 distributors to share the same home address and the same credit card when signing up with USANA.

Stock analysts refuse to address these BabyCare issues with USANA and really don't seem to have a clue about what USANA is doing in China.

Tuesday, February 5, 2013

USANA Q4-2012 Earnings - Questions USANA Should Answer for Shareholders and Federal Regulators

USANA Health Sciences, Inc (USNA) Fourth Quarter Earnings for 2012 are released at the end of the day today. I'll give my two cents followed by a series of questions I think USANA should answer.

Flat to declining United States, Canada, and Mexico active associates. However, USANA might show a gain in North American active associates which could be due to European associate recruiting. USANA continues to combine Europe with United States associate numbers even though the market territories are over 3000 miles apart.

Greater China will see the biggest increase of active associates, which I attribute to mainland China citizens signing up primarily into USANA's MLM opportunity through Hong Kong rather than joining BabyCare which is only a singlelevel marketing company. As of mid-September 2012, I counted roughly 38,000 Babycare distributor IDs issued. It is unknown how many of those are actually considered "active" and how many have already dropped out.

Philippines will probably show gains since my blog is getting a lot more hits from that area of the world. This seems to be a good indication that recruiting is on the increase. Most of the Google searches that come to my website are searching the term "USANA Scam". Typically new recruits or those who have been approached by a recruit search these such terms. I also receive a lot of emails from concerned family members and friends from the Philippines.

Future sales will probably be forecast higher, which is no surprise since USANA increased the price of several top selling products. Shipping charges have been increased as well.

Questions USANA should answer during their 2012 fourth quarter earnings conference call on February 6, 2013.

New distributors who purchase a Professional Enrollment Pack for $1250 get a $100 commission check sent back to them from USANA. No customers were necessary to receive this commission check.

Question 1) How many Professional Enrollment Packs were sold to new sales reps during the 2012 year?

This answer would give investors an idea of just how much in Net Sales USANA makes upfront from newly recruited sales reps. It will also reveal what percentage of the distributor incentives was paid as a result of a phoney commission payout.

USANA has two classes of sales reps: Distributors and Associates. USANA states that "distributors" must satisfy the 5 customer rule by either having either Preferred Customers, Retail Customers, or a combination of the two. USANA goes on to further state that "associates" must satisfy the 5 customer rule by having only Preferred Customers (typically the terms are used interchangeably, except when referring to the 5 customer rule). There were only 64,000 Preferred Customers during the Q3-2012. This amount of preferred customers can only satisfy up to 12,800 active associates. USANA also states that 1 in 3 associates receive a commission check. There were 242,000 active associates in Q3-2012. So according to USANA's numbers, 80,600 active associates received a commission check.

Question 2) How many active associates received a commission check during the last quarter and how many of them are considered "Associates" and how many are considered "Distributors"?

If more than 12,800 sales reps who collected a commission check are officially classified as "associates", then USANA is not enforcing their own 5 customer rule policy.

Question 3) How many retail customers combined do the active associates who collected a commission check have?

It has to be over 339,000 to cover the remaining active associates who collected a commission check.

Over 200 of USANA sales reps are part of the million dollar club. 10 of them are part of a $5 million dollar club. So over $240 million in commission has been paid out to roughly 200 associates since USANA joined the stock market in 1996. That is over 13% of all commission ever paid out.

Question 4) Are the million dollar club members (who have received over 13% of all commission ever paid out) audited to ensure they have 5 or more customers and if so, how frequently are they audited?

USANA's Asia markets have exploded with distributor growth over the last several years. During that time, i have shown on numerous occasions how unlikely these numbers are real. In fact, according to USANA, 1 in every 100 Hong Kong citizens is a USANA distributor. Citron Research uncovered USANA distributors recruiting Chinese Nationals and training them on how to circumvent US and Chinese laws by opening a bank account in Hong Kong and signing up under their sponsor's home address. Recently I have uncovered a USANA document that shows how USANA has no limit to the number of distributors that can sign up under the same address let alone the same credit card.

Question 5) How long has USANA allowed three or more associates to sign up using the same address?

Question 6) How many USANA associates share the same address with 3 or more other associates?

Question 7) How many USANA associates share the same creditcard with 3 or more other associates?

Question 8) How many Chinese Nationals who live in mainland China have joined USANA's MLM business opportunity in other markets such as Hong Kong, Australia, Philippines, Malaysia, etc...? (Not related to BabyCare)

USANA has defined an "Active Associate" two different ways. In the SEC filings it states that an active associate has purchased product at anytime during the most recent three months. In every single other publicized location regarding USANA's business opportunity, an active associate is defined as one who personally purchases over 100/200 PSV points in order to qualify for commissions.

Question 9) What exactly is an "active associate" as described in your SEC filings. Is it an associate who could have simply purchased a single tube of toothpaste for $7.50, or is it an associate who has met the 100/200 PSV point requirement ($110 to $240) to be commission eligible?

The FTC has made the following statement in a letter to the Direct Selling Association: "a multi-level compensation system funded primarily by payments made for the right to participate in the venture is an illegal pyramid scheme."

Question 10) What percentage of net sales was the result of the distributor's PSV purchases to be commission qualified and remain as "active associate" status?

The FTC letter further states that "Modem pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme."

USANA has never published a worldwide statistic of their distributor's leadership ranking and the percentage of distributor incentives paid out to each of those rankings. Doing so I believe would raise a red flag to federal regulators like the FTC as it would reveal just how little USANA distributors make.

Question 11) How many distributors in 2012 were in each of the Leadership Rankings from plain "associate" (commissionless) to "sharers" (bare minimum) to "#-Star Diamond Directors" (yes, each of the star rankings listed separately)?

Question 12) How much distributor incentives was paid out to each of the leadership rankings during the 2012 year?

It has been stated for many years now that MLM companies (including USANA) have a 99% distributor failure rate, meaning they did not make a profit. Based on my years of research into USANA I also have come to the same conclusion based on available information I have been able to find. However, USANA could clarify this issue once and for all and answer the following:

Question 13) What percentage of USANA sales reps make a "profit" after expenses are subtracted?

USANA states in their SEC filings "we experience a high turnover among new Associates from year to year". This is very vague and could mean 10% or it could mean 90%. This needs to be clarified with a real value.

Question 14) What is USANA's distributor turnover rate in 2012 among new associates from year to year in terms of a percentage? 

USANA claims to have about 242,000 active associates as of Q3-2012. Last year at this time it was said to have 222,000 active associates (Q4-2011). This would lead investors to believe USANA recruited 20,000 more active associates. However, because of a high turnover rate, it is actually unknown how many new associates joined.

Question 15) How many unique individuals were USANA Active Associates during the 2012 year (total)?

Question 16) How many associates left their distributorship and cancelled their membership?

I believe many USANA associates stay as a member because upline leaders discourage their members from cancelling memberships and tell them that one day they may have a downline under their business center. So the idea is that all these associates who didn't drop out have to do is keep paying a yearly renewal fee of $20. As of mid-September 2012, I have counted over 1.3 million USANA distributor IDs.

Question 17) How many distributor's paid a $20 renewal membership fee during the 2012 year?

Question 18) How many Business Development Systems (BDS) were sold or given to new distributors throughout 2012?

All of these questions are useful in continuing to build the case that USANA is a product-based pyramid scheme similar to the MLM Fortune Hi-Tech Marketing (FHTM) which was recently shut down by the FTC. It may be that the FTC chose to go after Fortune Hi-Tech first, build a strong case, and then apply that case and the judges rulings to other MLMs in the industry like Herbalife (HLF), Nu Skin (NUS), Amway, Monavie, Ariix, and hundreds of others that all have a similar business model.

Disclosure: I have no stock position in USANA or any of their competitors. I have never and will never hold a stock position with USANA. I am not paid to write this article. I make no money from this blog. I have never and will never be a USANA distributor or a distributor of any other MLM company.