During our preliminary call three weeks ago, a question was asked about retention of our customers. Let me reiterate that our first quarter results were not the result of decreased customer retention. In fact our monthly auto ship rate during the first quarter continued to grow and represented 52.3% of our total product sales.
Our earnings per share from continuing operations were $0.46 in the first quarter, a decrease of about 28% compared with the $0.64 per share in the first quarter of 2007.
Major Line Items - Our gross margins in the first quarter of 2008 decreased by 80 basis points as a percentage of net sales to 78.8%. This is compared with 79.6% of net sales in the first quarter of 2007. This year-over-year decline can be attributed to higher relative freight costs and the decline in sales.
For the second quarter we expect gross margins to be more in line with margins achieved in the second quarter of last year, or approximately 79%. Associate incentives expense in the first quarter of 2008 was 40.7% of sales compared with 39.3% in the first quarter of last year.
This increase of 140 basis points relates largely to the opening of our Malaysian market last year and also to promotions and contests designed to increase sales. As we go forward, we expect that associate incentive expense will be up modestly as a percent of sales in the second quarter of 2008 compared with our first quarter of this year.
Selling, general and administrative expenses increased relative to net sales to 25.4% during the first quarter of 2008 compared with 21.4% in the first quarter of the prior year.
This year-over-year increase in SG&A was due primarily to the following factors.
Lower than expected net sales, which has a deleveraging impact on our SG&A expense line; higher wages related expenses of about $1.3 million which is primarily due to an increase in human resources staffing; higher than anticipated accounting and legal expenses that increased about $930,000; an $850,000 increase related to our worldwide regional celebrations and our Asia-Pacific Convention; a $840,000 increase in depreciation and rent expense related to our new Salt Lake facility, Australia facility and other facility improvements that were made to many of our international markets during 2007; and an increase in advertising expenses of about $500,000, including our investment in market research, which we believe will show a return in future quarters.
Over the last few quarters we have made several step expense investments including the expansion of facility space in several of our markets in order to keep pace with our associate and sales growth. We have also had to hire a number of new employees both locally and abroad to meet the growing needs of our customers. These were critical investments to align our infrastructure with our operational needs.
During the quarter our marketing group spent most of their efforts completing market research to identify factors that motivate our associates. Moving forward we plan to run a combination of both new promotions based on our market research as well as the tried and tested promotions that have produced significant results historically and Dave will talk more about this in his prepared remarks.
Please note that we are looking very closely at our current cost structure and have cancelled certain future expenses and postponed others until we see a sustained return to top line growth. However we fully expect that our investments in human and capital resources will pay off in the long run though the benefits don’t always coincide with the timing of expenditures.
Let’s now review the balance sheet. Cash at the end of the first quarter was $17.6 million compared with $12.9 million at year-end 2007. Inventories at the end of the first quarter were up to $21.1 million compared with $19.4 million at year-end 2007.
Capital expenditures for the quarter totaled about $6.1 million down from $8.8 million in the same quarter one year ago. These expenses are due to the various facility expansion projects mentioned earlier. While the increased depreciation did cause some near term expense pressures we expect to realize future operating leverage as we see sales growth return.
Second Quarter Guidance - Based on our current business trends we believe that net sales for the second quarter of 2008 will be between $103 million and $106 million. We anticipate that earnings per share will be between $0.48 and $0.51.
For the full year 2008 we believe that net sales will increase approximately 2% over 2007 and that earnings per share could decline as much as 20% compared with the full-year 2007. Operationally our business model is strong and we are confident that we can regain our momentum."
David Wentz
"The first quarter of 2008 was a challenging quarter for USANA. I was personally disappointed with our financial results but I am very optimistic about our future growth prospects.
Our sales in the U.S. during the first quarter declined 8.3% to $38.6 million compared with $42.1 million in the first quarter of last year. The addition in the number of active associates declined 3.3% on a year-over-year basis. There were three main factors that I believe contributed to our results in the U.S.
First, our promotions during the quarter did not have the positive impact that typically drives our sales. Frankly some of the new things we tried were simply not effective. For example this year we held our RESET meetings via a live satellite broadcast. We have been successfully doing this in our Mexico market and delivering good results.
We tried this technology in the U.S. and Canada because we thought we could reach more people throughout North America. What we found is that at least in the short-term, the live broadcast was far less effective than going out on the road and meeting face to face with our associate leaders.
Unfortunately the results did not pan out the way we had hoped. Keep in mind however that we often see a delayed or lag effect with our promotions. So it’s not always easy to tell right away if a promotion has or has not been effective. Our plans for future in sales and promotions in the U.S. is to do a combination of both new promotions based on our market research as well as the tried and tested promotions that we know incent and excite associates to grow the business.
As was mentioned on our preliminary conference call on March 27, we’ve launched a global promotion on March 29. This is the PaceSetter Creator cash reward program. While we are pleased with the first two weeks of sales in the current quarter, it is too early at this point to determine whether these results represent a lag effect from first-quarter promotions and events or the success of our new PaceSetter Creator promotions. Nevertheless, we are optimistic that this promotion and other planned promotions will turn on momentum and drive top line growth.
Second, we are hearing from our leaders that the economic uncertainties in the U.S. are making it more difficult to bring in new customers. As a result we have modified some of our marketing approaches and are considering other ways to help our associates capitalize on a deteriorating economic conditions in the U.S.
We continue to believe that our home-based business model offers us flexibility in both up and down economic environment. While declining disposable income spending has impacted us and our associates in the near term, we believe that in the long run our direct selling opportunity will attract individuals as a way to supplement their income and/or provide security during tough economic times.
Third and to a lesser extent is the negative noise that is still pervasive on the Internet however it is important to note that we continue to hear less about this as every day passes. We believe that we are doing everything possible to counter the false and malicious attacks that have been levied against us. The third-party detractors and short sellers have been, we believe, discredited. Now we will just take time for the remaining noise to filter out of the Internet.
In Asia-Pacific during the first quarter of 2008, net sales in our Asia-Pacific regions increased by 8.8% to $39.3 million. The growth in these regions was led by year-over-year growth in Hong Kong of 48.8% and growth in Malaysia of 43.8%. These increases were partially offset by declines in Taiwan and Singapore.
Over the past few quarters Taiwan has been hampered by some political uncertainty and the election of a new president. We believe this uncertainty is now behind us and we expect Taiwan to return to one of our strong growth markets.
What I hope you take away from this call today is that we have a clear plan of action for the future. We have a solid management team, who know and understand our leaders and this business model. We are 100% committed to turning the momentum back in our favor. We are focused on ensuring that our partnership with the field remains strong and becomes stronger.
We have planned a meeting with our top associates to make sure that management is in lock step with our leaders. They are no doubt the key to making USANA a successful company. It is our job to provide the tools and resources that they need to build successful and residual home-based business.
Next we are offering promotions that incent our leaders to grow and build their businesses. We just completed a great convention in Kuala Lumpur and have also had successful regional meetings in North America. We also have another global promotion that we will be announcing in the next couple of weeks that we believe will add to the upward momentum of our field leaders.
And finally we are considering ways to increase profitability including delaying and cutting certain expenses. Without question we needed to invest in our business infrastructure to support the significant growth we have seen over the past several years. We are now to a point where we can better manage our operating costs and leverage our business model as we grow sales.
On a call three weeks ago it was mentioned that we are also considering some enhancements to our associate compensation plan. These changes are based on our market research and will provide our business builders with incentives to grow their businesses beyond their current levels of activity.
We believe we can fund these enhancements through improved gross margins and better cost control. By targeting our business builders and leaders, we can do a better job of efficiently returning value for both our associates and our shareholders.
Finally, we are working diligently on some exciting new products that we plan to rollout at our international convention. Again it is our marketing research that is driving this effort and we look to target our growing customer demographic."
Executives
Riley Timmer - Executive Director of Finance
Gil Fuller - Executive Vice President and Chief Financial Officer
Dave Wentz – President
Bradford Richardson - Executive Vice President of Asia-Pacific
Fred Cooper - Executive Vice President of Operations
Analysts
Simeon Gutman - Goldman Sachs
Doug Lane – JefferiesScott Van Winkle - Canaccord Adams
Rommel Dionisio - Wedbush Morgan
Mimi Noel – Sidoti
USANA Health Sciences, Inc. (USANA) develops and manufactures science-based nutritional and personal care products. The Company operates through two business segments: Direct Selling and Contract Manufacturing. Under the direct selling segment, the Company sells products from two primary product lines: USANA Nutritionals, which includes supplements and functional foods, and Sense—beautiful science (Sense), a line of skin and personal care products. The Company distributes and sells its products through a network marketing system, a form of direct selling, using independent distributors that it refers to as Associates. It also sells its products directly to Preferred Customers who purchase the Company’s products for personal use and are not permitted to resell or distribute the products.
Special Note: Black Hills Today's staff are proud to take USANA as their nutritional supplements of choice!
Scott Prentice, Publisher & Founder of BlackHillsToday.com has joined USANA so that we can share this important part of life and make these supplements available to our full staff and to join others like the USA Bobsled Team Radcliff in their success.
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