USANA Second Quarter 2014 Earnings - Questions USANA Should Answer To Investors and Their Associates

USANA Health Sciences released their 2014 second quarter financial results. I would like to point out a few observations.

- USANA claims to now restrict associates purchases to within the country they reside. I believe this is in light of the fact they have had thousands possibly hundreds of thousands of USANA associates counted in their Hong Kong market that actually live in mainland China. This circumvents China's ban on multilevel marketing. USANA allowed all of these members to sign up in USANA's MLM using the SAME Hong Kong address (even though they actually lived in the mainland). Since USANA instructed these members to use a phoney address from Hong Kong, USANA knew this was wrong and violated foreign laws. Only a rat would construct such a circumvention.

I would love for a stock analyst to ask during the conference call "How many USANA associates switched to become Babycare associates?"

- USANA's Greater China sales declined year over year by $3.3 million. However, their active associates increased by 22,000 (102,000 to 125,000). This does not jive with historical patterns since there is a very direct correlation between the sales figure and the number of associates. So how is it that there is a 21% increase in the number of active associates yet a 4% decline in sales in the Greater China region? I have two theories!

Theory 1) 

Hong Kong USANA associates have decreased while mainland China Babycare associates have increased and I believe a USANA associate spends a lot more money upfront to activate their business center(s). USANA associates participating in the MLM pyramid scheme have incentives to purchase excess product (Professional Starter Kit costs $1250) in order to partake in many gimmicks that they are led to believe will help their chances of succeeding (Platinum Pace Setter, Matching Bonus, Contests, etc...). This is all based on the fact that upline associates will get commissions from their downline's spending spree.

Babycare associates do not have downlines and do not collect any commission from the personal product purchases made by fellow Babycare associates. So there is no incentive to spend a lot of product that they aren't going to sell anyway.

Theory 2)

Assuming USANA is making all Hong Kong associates who actually live in mainland China switch over to Babycare, USANA may have actually counted the same individual twice! Once for Hong Kong and once for Babycare.

I would love for a stock analyst to ask during the conference call "Did you switch Hong Kong associates over to Babycare associates and did you 'accidentally' count the same person twice? I ask this because it doesn't make sense that you have a 21% increase in active associates yet experience a 4% decline in sales."

And for the sake of the world, disclose the number of Babycare associates! The sales from that market represents more than 10% of overall sales. Therefore you should be required to disclose the number of associates you have in that market.

Lastly, I would like USANA to disclose a couple very simple numbers:

1. Number of active Babycare associates

2. Amount of commission paid to Babycare associates

3. Percentage of product purchased by Babycare associates that was retailed to the general public

USANA's 2 Star Diamond Director Aaron Dinh Quits USANA and Joins Nerium International

USANA Million Dollar Club Member

USANA's 2-star diamond director Aaron Dinh quits and joins Nerium International instead, another multilevel marketing pyramid scheme. Aaron was also a member of USANA's prestigious million dollar club. Why would someone at the top of the distributor hierarchy need to quit and start over with a similar scheme? I've sent Aaron a message asking for his comment and have not received any reply.

Thought this was note worthy since USANA would like people to believe in residual income. Well, when your downline drops out, you have no more income.

October 22, 2012: Aaron Dinh's Lamborghini

Why USANA Products Are So Expensive - USANA's Own Words

A new USANA document written for their customer service employees shows them how to explain to customers why the products are so expensive. Why bother contacting USANA for the answer when yours truly can give you the document they provided for their customer service?

http://www.usana.com/UPLOADS/usana/2014/115/115-1_KAA.html

Product Pricing (Why the Products Are So Expensive)

Occasionally, we receive questions as to why our products are so expensive. You can use the following in response to this question:

Before pricing our products, we do our research to ensure that we not only supply the finest quality products, but at the best price possible. There are many factors that go into pricing: research, formulations, raw materials, costs associated with batch size, manufacturing, packaging, transportation, commissions, regulations, inflation, taxes based on the market, etc. All of these add up to the cost of doing business and impact the price USANA is able to offer on a product.

Posted: 25-Apr-2014

Lets break this down so we can see exactly why the products are "so expensive" as USANA puts it.

- Research and Formulations would be categorized under "Research & Development" and represents a measly 0.7% of the price of the product.

- Raw Materials, Costs associated with batch size, manufacturing, packaging, and transportation would be categorized under "Cost of Sales" and represents 18.5% of the price of the product.

- Commissions are categorized as "Associate Incentives" (which also includes bonuses, and certain awards and prizes) represents 43.2% of the price of the product - the biggest reason why the products are overpriced. It is also worth mentioning that two thirds of all USANA associates have never collected a single commission. Most of the commission is paid to the top 1% of associates. Last but not least, 99% of USANA associates do not make a profit. This category is the heart of the pyramid scheme.

- Regulations and Inflation. well I'm not sure where these fits in with the cost. However, even USANA's 10K SEC filings state this about inflation: "We do not believe that inflation has had a material impact on our historical operations or profitability." So why does USANA want their customers to now believe otherwise?

Interestingly enough, nothing about voluntarily manufacturing to "pharmaceutical good manufacturing practices" even made the list of excuses, although that would be considered part of Cost of Sales anyway.


So lets look at the price of the USANA Healthpak100 which can be purchased through auto-order (formally known as autoship) for $105.75

Healthpak100 Auto-Order price: $105.75
Cost of Sales: $19.61
Associate Incentives (commissions): $45.73
Selling, General, & Administrative (SG&A): $25.84 (Includes Research & Development of $0.74)
USANA Earnings: $14.56

How do USANA customers feel about this? Only 74 cents toward research and development! Now lets remove the commissions from the price of the Healthpak100. Instead of $105.75 for the Healthpak100, the product is now only $60.02 (We'll call it $59.95 for marketing purposes). Wouldn't you rather pay $59.95 for the product as a distributor (or customer) and be able to mark up the price yourself if you choose to retail the product? Remember, 66% of USANA associates never make a commission and 99% of associates never make a profit. So then what good does it do to overcharge 99.9% of USANA customers for an incentive they never benefit from? It only benefits the top 1% of distributors who are out primarily selling the "get rich scam" rather than selling the product...

USANAWatchDog answer to why USANA products are so expensive: 
To fund the pyramid scheme.

USANA Training Material Teaches Its Distributors Not To Defend Their Position Against Negative Information

USANA provides their distributors with the following training material explaining how to deal with negative information about USANA. Here is a quick USANA review of an important piece of training material.

HOW TO DEAL WITH NEGATIVE MATERIAL ONLINE

 http://www.usana.com/media/File/Training page/ANZ Training Folder/SEO_NZ.pdf

Here's a few quotes from USANA:

- If it is negative, you need to ignore it
- Do not defend your position
- Do not view it again
- Do not leave a comment
- Do not rate positive OR negative
- Do not link to it
- DO NOT TALK ABOUT IT
- USANA is working to fix the problem
- Ignore negative information
- If approached, encourage others not to talk about it
- Report negative or false information to your market office
- DO NOT VIEW NEGATIVE MATERIAL AGAIN
- DO NOT COMMENT, RATE, VOTE OR LEAVE MESSAGES ON NEGATIVE POST
- DO NOT TALK ABOUT IT UNLESS IT IS BROUGHT UP TO YOU

Do not defend your position? This is because USANA cannot defend their position. I think this is important for people who are considering joining the distributorship to see USANA's training material before they waste thousands of dollars on a pyramid scheme that can't defend their position.