Nu Skin Enterprises Inc. (NUS:US) plunged the most ever after the Chinese government said it would investigate the maker of skin-care and nutritional products following a Chinese newspaper’s report that Nu Skin was a “suspected illegal pyramid scheme.” Shares of other direct sellers such as Herbalife Ltd. and Usana Health Sciences Inc. also dropped.
Nu Skin fell 30 percent to $81.24 at 2:37 p.m. in New York and earlier declined as much as 41 percent for the largest intraday decrease since its 1996 initial public offering.
The State Administration for Industry and Commerce said it will probe Nu Skin’s operations after the People’s Daily report. China is treating the allegations seriously and has asked for an immediate investigation, the department said in a statement on its website. Nu Skin representatives yesterday denied the allegations in the newspaper report.
“We have initiated our own province-by-province business review and will invite relevant regulators to provide guidance,” Nu Skin said today in an e-mailed statement. “There will likely be a negative impact on China revenue, but it is too early to know whether our previous guidance will be affected.”
Nu Skin also said it will add procedures to reinforce training and education.
Herbalife, a Cayman Islands-based seller of nutrition products, fell 12 percent to $69.74. Salt Lake City-based Usana, which sells personal-care and weight-management products, dropped 13 percent to $57.05.
Foreign firms have been contending with new obstacles in China in recent months. Last year, the government-controlled media accused Starbucks Corp. (SBUX:US) of charging too much and said Samsung Electronics Co.’s smartphones don’t work properly. International Business Machines Corp.’s China revenue fell after state-owned companies delayed orders of servers and mainframes. Qualcomm Inc. technology is largely absent from devices on China Mobile Ltd.’s network because the state-owned carrier deployed a related system it said was developed locally.
Multilevel marketers, which use salesmen to recruit other sellers in addition to hawking products, also have come under renewed scrutiny in the U.S. after hedge fund manager Bill Ackman in 2012 accused Herbalife of being a pyramid scheme and placed a bet against the company’s shares. Herbalife has denied Ackman’s allegations, and investors including billionaire Carl Icahn have rushed to its defense.
Yesterday, the People’s Daily said Nu Skin brainwashes its trainees and sells 104 products in China, 20 more than the government allows. Nu Skin said the article “contains inaccuracies and exaggerations that are not representative of our business in China.”
In 2012, 20 percent of the company’s sales (NUS:US) came from China and Hong Kong. As of July, Nu Skin had licenses to operate its direct-selling network in 19 of the country’s 32 provinces and municipalities.
Scott Van Winkle, an analyst at Canaccord Genuity Inc., today cut his recommendation on the stock to hold from buy, saying the Chinese market is large enough to significantly affect Nu Skin’s results and valuation.
Network marketers such as Nu Skin “have always been questioned,” causing “outsized share price movements,” Olivia Tong, an analyst at Bank of America Corp., wrote in a note yesterday. “There does not seem to be tangible evidence to validate negative claims targeted at the company thus far.”
Tong, based in New York, recommends (NUS:US) buying the shares, citing strong cash flow.
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