Shares of Nu Skin Enterprises, Inc. (NUS - Snapshot Report) surged 18.2% on March 24 after the company escaped a harsh judgment from China regulators, having to pay a smaller-than-expected fine. The move sent waves of optimism with the company believing that an investigation into its sales practices in China could have come to an end. Nu Skin can now normally operate in the country.
The regulatory reviews conducted by China's Administration of Industry and Commerce in Shanghai and Beijing disclosed that Nu Skin will be penalized only $781,000 for illegal product sales and for misleading consumers. Nu Skin will have to pay $524,000 for the sale of certain products by direct sellers, which were not registered appropriately in the country, $16,000 for product claims that lack sufficient documents, and $241,000 for unauthorized promotional activities carried out by six Nu Skin employees.
The penalty came as a warning to all direct-selling companies operating in China of the pitfalls of not abiding by Chinese laws. And just adhering to these laws does not seem to be enough. It is also important to train the staff about the correct protocol and trade practices.
Nu Skin, on its part, said that it is taking up necessary steps to correct the issues raised in the review and will cooperate with the government with the investigation. The company is also working towards enhancing training programs for its sales representatives in order to resume normal business in China.
The investigation by the Chinese government began in Jan 2014 following claims by a local newspaper People’s Daily (on Jan 15) that the company was operating an illegal pyramid scheme in the country.
The news of the investigation not only affected the share price of Nu Skin but also that of several other companies like Herbalife Ltd. (HLF - Snapshot Report) and USANA Health Sciences Inc. (USNA - Snapshot Report). These companies have the same distribution model and therefore investors feared that the investigation could extend to these direct selling companies as well.
Multi-level marketers like Nu Skin and Herbalife have always been under the scanner, as they employ sales representatives to sell their products. Most recently, Herbalife has received a Civil Investigative Demand from the U.S. Federal Trade Commission to investigate its operations. Herbalife welcomed the inquiry and insisted that its business model complied with anti-pyramid regulations.
Chinahas always been suspicious about direct selling companies. These were earlier banned by the Communist Party in 1998. Since then, any kind of pyramid selling scheme is illegal in the country. In 2005, the ban was lifted after multilevel-marketing companies changed their agent payment structure.
Nu Skin holds a Zacks Rank #4 (Sell). A better-ranked company in the cosmetics and toiletries industry is Helen of Troy Limited (HELE - Snapshot Report), which holds a Zacks Rank #1 (Strong Buy).