Research

Title Goes Here

Sector Analysis: Global Market Slowing & Fragmenting Further; Ample Opportunity for Successful Concepts

Investment Summary 

 2017 direct selling statistics were recently released, showing a slowing in the growth rates of both direct sales dollars and representatives globally.  However, an already fragmented market is fragmenting further and per capita consumption trends remain low, particularly for emerging markets, providing ample opportunity for successful direct selling concepts to sustain above average growth over the long term.

Key Points:

·       2017 Global direct sales were $189.6B, up +1.6% vs 2016 in constant dollars, according to recently released data from the World Federation of Direct Selling Associations (WFDSA).  This is a slowing from the +2.1% reported last year and the 3-year Compound Annual Growth Rate (CAGR) of +3.7%.  Total representatives participating in direct selling increased +2.0% to 116.7MM, a slowing from +8.7% growth last year and the 3-year CAGR of +8.1%.

·       While there was no specific reason given for the slowing we would note the following:  A) 3 of the top 10 markets, USA, Korea & Brazil, which combined account for 33.7% of the global total, declined in 2017.  The top 10 markets in aggregate were up only +0.7% in 2017.  B) 6 of the top 10 Direct Selling companies had either flat or down sales last year, which combined we estimate account for nearly a quarter of global direct sales.  The top 10 companies in aggregate grew sales just +0.3% last year.  The big companies and the big geographies, in aggregate, are losing market share.  The top ten geographies accounted for 78.9% of global sales last year, down from 80.4% in 2014.  We estimate the top 10 companies account for about 1/3 of global sales last year, down from over 40% in 2014.

·       Not surprisingly, emerging markets are key drivers of growth.  Among the Top 10 markets, China (+7.7% 3-yr CAGR), Malaysia (+7.4%) and Taiwan (+6.2%) have grown the fastest. Using the BRIICs (Brazil, Russia, India, Indonesia & China) as a proxy for emerging markets, the 3-yr CAGR there has been +5.5%, comfortably outpacing total direct sales.  The BRIICs have gone from accounting for 26.0% of total direct sales in 2014 to 27.4% in 2017.  All 5 BRIICs are regularly called out on several of the public company reports and conference calls, with either Brazil or China already the #1 market for each of the 5 direct sellers we follow that have an overseas presence.

·       But, judging by per capita consumption trends, we believe we are still in the very early days for the emerging markets contribution to direct selling sales totals.  Direct sales per capita for the BRIICs at $14 are a little over half as much as the global total at $25 and about ¼ the $60 rate of the Top 10 markets. Even within the top 10 markets, per capital direct sales are over $100 for 6 of the markets, including over $300 in Korea. 

Douglas Lane
Sentry Page Protection
Sector Analysis: Transit Strike in Brazil Will Likely Impact AVP & TUP
Douglas Lane
Sentry Page Protection
Sector Analysis: Expected 2Q Currency Benefit Receding; Could Turn Negative in 2H
Douglas Lane
Sentry Page Protection
HLF: Flash Note: Dutch Tender Results: 11.4MM Shares at $52.50; Icahn Participated, Not Unexpected
Douglas Lane
Sentry Page Protection
Sector Analysis: TPG Takes Stake In Skin Care Leader Rodan + Fields; PE Interest in Sector Remains Strong

Investment Summary

 This week, direct selling skin care leader Rodan + Fields announced that private equity firm TPG Capital has taken a minority stake in the firm.  Terms were not disclosed. This is another data point supporting our thesis that leading innovative direct selling companies continue to attract sophisticated institutional capital.  With the preponderance of PE investments in direct sellers, coupled with the recent demise of the second loud, highly visible and failed bear raid on public companies in the space over the past 12 years, we would look for increased IPO activity as valuations of the public peers improve and as private equity firms look to monetize their investments.

Key Points:

·       Privately held Rodan + Fields, with annual sales of $1.5B according to Direct Selling News, was named by Euromonitor as the largest skin care brand in the US in 2016 & 2017.  

·       After buying back the company from Estee Lauder (EL; $144.93; NR; $53B mkt cap) in 2007 to move it into the direct selling channel, Rodan + Fields was among the earlier direct sellers to incorporate social media into its selling platform.

·       Other TPG Capital investments include Airbnb, Spotify and Life Time Fitness according to this week’s release.

·       Two members of TPG, its co-founder and co-CEO Jim Coulter and TPG Capital’s consumer sector lead Paul Hackwell, will join the board, providing expertise and resources to take Rodan + Fields on its next phase of growth.

·       Coulter’s quote on the investment: “As a firm with a history of investing in businesses that are fundamentally changing their industries, we see Rodan + Fields as being at the intersection of emerging consumer trends and technology disruptions…This is exactly the kind of partnership we look for — an outstanding brand with proven success, an experienced and talented management team, and significant runway for growth."

·       Other PE-involved direct sellers include Stella & Dot (Sequoia) and Modere (Z Capital Partners).

·       Last year Coty (COTY; $14.35; NR; $11B mkt cap) took a 60% stake in privately held Younique, also a social selling pioneer in direct selling, with annual sales circa $500MM.

 

Analyst Certification

I, Douglas M. Lane, hereby certify that the views expressed in the foregoing research report accurately reflect my personal views about the subject securities and issuer(s) as of the date of this report. I further certify that no part of my compensation was, is or will be directly, or indirectly, related to the specific recommendations or views contained in this report.

Financial Interests

Neither I, Douglas M. Lane, nor a member of my household, owns any security (ies) which is/are the subject of this research report. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. I do not know or have reason to know at the time of this publication of any other material conflict of interest.

Important Disclosures

Lane Research is an independent research company and is not a registered investment advisor and is not acting as a broker dealer under any federal or state securities laws.

Lane Research is a member of IRC Securities’ Research Prime Services Platform. IRC Securities is a FINRA registered broker-dealer that is focused on supporting the independent research industry. Certain personnel of Lane Research (i.e. Research Analysts) are registered representatives of IRC Securities, a FINRA member firm registered as a broker-dealer with the Securities and Exchange Commission and certain state securities regulators. As registered representatives and independent contractors of IRC Securities, such personnel may receive commissions paid to or shared with IRC Securities for transactions placed by Lane Research clients directly with IRC Securities or with securities firms that may share commissions with IRC Securities in accordance with applicable SEC and FINRA requirements.

As registered representatives of IRC Securities, our analysts must follow IRC Securities’ Written Supervisory Procedures. Notable compliance policies include (1) prohibition of insider trading or the facilitation thereof, (2) maintaining client confidentiality, (3) archival of electronic communications, and (4) appropriate use of electronic communications, amongst other compliance related policies.

Finally, Lane Research does not have the same conflicts that traditional sell-side research organizations have because Lane Research (1) does not conduct an investment banking activities, (2) does not manage any investment funds, and (3) our clients are only institutional investors.

Company Disclosure

Lane Research has no long or short position in any security of any of the companies mentioned in this report. The Company has no contractual relationship, nor have we received any compensation from any of the companies listed in this research report.

Stock Ratings

Lane Research assigns one of three ratings based on an expectation of absolute total return over a 12-month time frame based on the following criteria:

BUY (B): The security is expected to have an absolute return in excess of +20%.

HOLD (H): The security is expected to have an absolute return of between +/- 20%.

UNDERPERFORM (U): The security is expected to have an absolute return less than -20%.

Douglas Lane
Sentry Page Protection
HLF: 1Q EPS Beat Handily But Maintaining FY Estimates
Douglas Lane
Sentry Page Protection
MED: Momentum Accelerates; Once Again Raising Estimates and Price Target
Douglas Lane
Sentry Page Protection
Flash Note: MED: Another Strong Beat and Raise
Douglas Lane
Sentry Page Protection
Flash Note: HLF: 1Q Sales and Ongoing EPS Ahead of Expectations; FY Ongoing EPS Raised
Douglas Lane
Sentry Page Protection
AVP: Momentum Softens Further; Reducing Price Target
Douglas Lane
Sentry Page Protection
TUP: Reducing 2018E EPS; Share Repurchase Should Offset Lower Operating Profits in 2019
Douglas Lane
Sentry Page Protection
NUS: Maintaining EPS Estimates; Underlying Momentum Better Than Expected
Douglas Lane
Sentry Page Protection
USNA: Raising Estimates and Price Target
Douglas Lane
Sentry Page Protection
Flash Note: NUS: Strong Underlying Operating Momentum Belies Tepid Reported and Forecasted EPS
Douglas Lane
Sentry Page Protection
Flash Note: USNA: 1Q EPS Ahead of Expectations; Momentum Continues; FY Raised
Douglas Lane
Sentry Page Protection
TUP: Compelling Value; Follow the Cash
Douglas Lane
Sentry Page Protection
AVP: Financial Profile Improving; Maintain Hold Pending Resumption of Growth
Douglas Lane
Sentry Page Protection
Flash Note: TUP: 1Q Sales and EPS Light; FY EPS Outlook Reduced; Cash Flows Ample to Support 5.8% Yield
Douglas Lane
Sentry Page Protection
NUS Lowering 2018E; Maintain $80 PT; Moving to Hold
Douglas Lane
Sentry Page Protection
USNA: Raising Estimates and Rating
Douglas Lane
Sentry Page Protection
Member Login
Welcome, (First Name)!

Forgot? Show
Log In
Enter Member Area
My Profile Log Out