10-Q: USANA Q2 Earnings Fall Amid Direct Selling Decline

USANA Health Sciences reports a 7.4% drop in Q2 net earnings and a 3.7% decrease in diluted EPS, despite a 10.8% revenue increase driven by the Hiya acquisition.

Summary

• Net sales for Q2 2025 increased by 10.8% to $235.8 million, up from $212.9 million in Q2 2024, primarily due to the Hiya acquisition.
• Net earnings attributable to USANA decreased by 7.4% to $9.7 million in Q2 2025, compared to $10.4 million in Q2 2024.
• Diluted earnings per share (EPS) attributable to USANA fell to $0.52 in Q2 2025 from $0.54 in Q2 2024.
• For the six months ended June 28, 2025, net sales rose 10.1% to $485.4 million, while net earnings attributable to USANA dropped 29.3% to $19.1 million, and diluted EPS decreased 27.9% to $1.01.
• The direct selling segment's net sales declined by 5.7% in Q2 2025 (5.2% constant currency) and 6.4% for the six months (4.7% constant currency).
• Active customers in the direct selling segment decreased by 10.7% year-over-year to approximately 418,000 as of June 28, 2025.
• The Hiya direct-to-consumer segment, acquired in December 2024, contributed $33.9 million in net sales for Q2 2025 and $71.0 million for the six months.
• Gross profit margin decreased to 78.7% in Q2 2025 from 81.1% in Q2 2024, largely due to the inclusion of Hiya, which has lower gross margins.
• Selling, general and administrative expenses increased by $17.6 million in Q2 2025, reflecting higher marketing spend and amortization costs from the Hiya segment.
• Cash and cash equivalents decreased to $151.3 million as of June 28, 2025, from $181.8 million as of December 28, 2024.
• The company repurchased 528,000 shares for $15.4 million in Q2 2025 and 927,000 shares for $27.7 million for the six months ended June 28, 2025.
• A new Third Amended and Restated Credit Agreement provides a revolving credit limit of up to $75.0 million, with an option to increase by up to $200.0 million.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in net earnings and EPS, coupled with a substantial decrease in active customers and sales in the core direct selling business. While the Hiya acquisition boosted top-line revenue, it came with lower margins and increased expenses, diluting overall profitability. The ongoing challenges in customer acquisition for the primary segment are a major concern, outweighing the benefits of diversification and increased average spend per customer.

Positives

• Consolidated net sales increased by 10.8% in Q2 2025 and 10.1% for the six months, primarily driven by the successful integration and contribution of the Hiya acquisition.
• The Hiya direct-to-consumer segment provides a diversified growth channel outside of traditional direct selling, contributing $33.9 million in Q2 2025 net sales.
• Average spend per customer in the direct selling segment increased by 4.7% in Asia Pacific and 9.0% in Americas and Europe during Q2 2025, partially offsetting customer declines.
• Gross margin in the direct selling business improved by 10 basis points in Q2 2025 and 50 basis points for the six months, attributed to commercial team reorganization, favorable market sales mix, modest price increases, and lower freight costs.
• The effective income tax rate decreased to 44.5% in Q2 2025 from 48.4% in Q2 2024, primarily due to a favorable change in market mix of pre-tax income.
• The company maintains strong liquidity, with $151.3 million in cash and cash equivalents, and a new $75.0 million revolving credit facility (expandable to $200.0 million) with no outstanding balance as of June 28, 2025.
• The China subsidiary remitted $69.4 million in profits to the United States during the first six months of 2025, demonstrating strong cash generation from that region.

Negatives

• Net earnings attributable to USANA decreased by 7.4% in Q2 2025 and 29.3% for the six months, primarily due to amortization costs of acquired intangible assets, lower net interest income, and lower net sales in the direct selling segment.
• Diluted EPS decreased to $0.52 in Q2 2025 from $0.54 in Q2 2024, and to $1.01 for the six months from $1.40 in the prior year.
• The core direct selling segment experienced a 5.7% decline in net sales in Q2 2025 and a 6.4% decline for the six months, indicating challenges in the primary business model.
• Active customers in the direct selling segment decreased significantly by 10.7% year-over-year, reflecting a challenging economic and operating environment and difficulty attracting new customers.
• The inclusion of Hiya, despite boosting top-line revenue, unfavorably impacted consolidated gross profit by approximately 250 basis points in Q2 2025 due to its lower gross margins.
• Selling, general and administrative expenses increased significantly, both in absolute terms and as a percentage of net sales, partly due to Hiya's higher expense mix and increased employee-related costs in the direct selling segment.
• Brand Partner incentives as a percentage of direct selling segment net sales increased, attributed to an unfavorable shift in market mix and higher accruals for incentive trips and awards.

Risks

• Dependence on the direct selling business model and the activities of independent Brand Partners to grow the direct selling business.
• Dependence on acquired direct-to-consumer businesses (Hiya and Rise) to grow business outside of direct selling channels.
• Challenges in investing in R&D, innovating, and increasing the cadence of new product releases.
• Extensive regulation of the direct selling business model and uncertainties regarding interpretation and enforcement of anti-pyramiding laws in the United States, China, and other markets.
• Risks associated with operating the direct selling business in China through BabyCare Holdings, Ltd., including general operational risks, direct selling regulations, data privacy, and changes in the Chinese economy.
• Potential negative impact from export control and trade sanctions laws and regulations.
• The Brand Partner compensation plan, or changes to it, may be viewed negatively by some Brand Partners or fail to achieve desired objectives.
• Product liability claims, litigation, or other liabilities related to products or manufacturing.
• Challenges with planned expansion into new international markets, including delays in sales commencement or regulatory compliance.
• Adverse macroeconomic conditions, including inflationary pressures, slower economic growth or recession, and disruptions to the supply chain.
• Impact of political events, natural disasters, pandemics (including COVID-19), epidemics, or other health crises on economic conditions and consumer behavior.
• Changes in the legal and regulatory environment, including environmental, health and safety regulations, data security and privacy, trade policies, tariffs, taxation, and transfer pricing regulations.
• Geo-political tensions or conflicts, such as those involving Russia and Ukraine, and Israel and Palestine, and disputes among other countries.
• Volatile fluctuations in the value of foreign currencies against the U.S. dollar.
• Noncompliance with data privacy or security laws, or security breaches involving confidential information.
• Shortages of raw materials, disruptions in contract manufacturers' businesses, and significant price increases of key raw materials.
• Ability to maintain compliance with debt covenants in the credit facility agreement.
• Litigation, tax, and legal compliance risks and costs.
• Information technology system failures, data security breaches, network disruptions, and cybersecurity attacks.
• Acquisition, divestiture, and investment-related risks, including those associated with the Hiya and Rise acquisitions.
• Human capital risks, including the ability to attract or retain Brand Partner leaders, and loss of key management personnel or employees.
• Ability to adequately protect and enforce intellectual property and proprietary technology.
• Ability to effectively utilize or develop artificial intelligence technology.

Future Outlook

The company anticipates continued challenges in attracting new customers in its direct selling segment due to the current economic and operating environment. While the Hiya acquisition is expected to provide a diversified growth layer, its lower margins will continue to impact consolidated profitability. The company is evaluating the impact of the recently signed 'One Big Beautiful Bill Act' on tax reporting but does not expect a significant financial impact at this time. Management believes current liquidity and cash flow from operations, supplemented by the new credit facility, will be sufficient for ordinary business needs, while also exploring potential acquisitions, investments, and share repurchases.

Management Comments

• The addition of Hiya was the primary catalyst to year-over-year growth in consolidated net sales while the direct selling segment experienced modest declines during the quarter.
• A challenging economic and operating environment contributed to a decrease in active Customers in the direct selling segment, which was a key factor in the lower year-over-year performance, partially offset by an increase in average spend per customer.
• Several items contributed to lower year-over-year net earnings during the current year quarter including amortization costs of acquired intangible assets as well as lower net interest income attributable to deploying cash reserves related to the acquisition of Hiya. Lower net sales in the direct selling segment also contributed to lower year-over-year net earnings.
• To demonstrate our commitment to our sales leaders, we are refining the terminology to reference our sales leaders from 'Associates' to 'Brand Partners.' The term Brand Partner reflects a more strategic, collaborative relationship, and better represents the crucial role these individuals play in the sustainable long-term growth of the business.
• Hiya's subscription model also provides important data on customer preferences and behaviors, which enables personalized offerings, efficient marketing and data-driven innovation insights.
• Maintaining a capital structure that emphasizes sufficient liquidity and adaptability in the prevailing economic climate is our top priority.
• We actively assess potential acquisition opportunities and investments in complementary ventures.
• We believe our current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future.
• At this time, the Company does not expect The Act [One Big Beautiful Bill Act] to have a significant impact on the Company’s financial reporting.

Industry Context

The direct selling industry continues to face headwinds from challenging economic conditions and evolving consumer behaviors, impacting customer acquisition and retention. USANA's core direct selling segment reflects these broader trends with declining active customer counts. The acquisition of Hiya Health Products, a direct-to-consumer children's health brand, represents a strategic move to diversify revenue streams and tap into the growing direct-to-consumer and specialized health product markets, which often feature subscription models for recurring revenue. This diversification aims to mitigate reliance on the traditional direct selling model, which is experiencing contraction.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or global benchmarks for direct comparison of financial results or operational metrics.
• USANA's decline in active direct selling customers (10.7% year-over-year) suggests a struggle in customer acquisition and retention within its core business, which may be worse than some direct selling peers who have successfully adapted to digital transformation or diversified more effectively.
• The acquisition of Hiya and its direct-to-consumer subscription model aligns with a broader industry trend of companies seeking more stable, recurring revenue streams and direct engagement with consumers, moving beyond traditional multi-level marketing structures.
• The lower gross margins and higher SG&A expenses associated with the Hiya segment indicate a different operational cost structure compared to USANA's traditional direct selling model, which is common when integrating businesses with different distribution channels (e.g., direct-to-consumer often involves higher marketing spend).

Corporate Governance

Legal Proceedings

• The company is involved in various lawsuits, claims, and other legal matters that arise in the ordinary course of business, including those involving products, intellectual property, supplier relationships, distributors, competitor relationships, and employees.
• Management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on the company's financial condition, liquidity, or results of operations.

Stakeholder Impact

• **Shareholders**: Negative impact due to significant declines in net earnings and diluted EPS, despite revenue growth. Share repurchases may provide some support but are offset by operational challenges.
• **Brand Partners**: The direct selling segment experienced a decline in active customers, indicating challenges in their ability to grow their businesses. The change in terminology to 'Brand Partners' aims to foster a more collaborative relationship.
• **Customers**: The direct selling segment saw a decrease in active customers, but an increase in average spend per customer, suggesting that existing customers are purchasing more. The Hiya acquisition expands product offerings, particularly for children's health.
• **Employees**: Increased employee-related costs were noted in the selling, general and administrative expenses, potentially indicating investments in human capital or higher compensation.
• **Creditors**: The new credit agreement provides a substantial revolving credit facility, indicating continued access to capital, but introduces new debt covenants that the company must adhere to.

Next Steps

• Continue integration of Hiya's controls and processes into the company's control environment, with full incorporation into internal control assessment by the end of 2025.
• Evaluate the financial impact of the 'One Big Beautiful Bill Act' and related tax planning opportunities.
• Actively assess potential acquisition opportunities and investments in complementary ventures.
• Continue share repurchases under the existing plan, with $34.0 million remaining authorized.

Key Dates

Recommendation

While USANA's top-line revenue growth is positive, driven by the Hiya acquisition, the significant decline in net earnings and EPS, coupled with a substantial contraction in the core direct selling active customer base, presents a challenging outlook. The Hiya acquisition diversifies the business but introduces lower margins, impacting overall profitability. The company's ability to attract and retain customers in its primary segment remains a key concern. The ongoing share repurchase program and new credit facility provide some financial flexibility, but the underlying operational weakness in the core business warrants caution. A 'hold' recommendation is appropriate as investors should monitor whether the company can stabilize and grow its direct selling segment while effectively integrating and leveraging the Hiya acquisition to improve overall profitability.

Keywords

Direct Selling, Nutritional Supplements, Personal Care, Wellness Products, Multi-level Marketing, Health Sciences, Hiya Health, Children's Health, Dietary Supplements, Global Sales, SEC Filing, Quarterly Report