March 25 (Bloomberg) -- Nu Skin Enterprises Inc. shares gained the most in eight months after the company agreed to pay fines to the Chinese government, signaling that an investigation into its sales practices could be nearing an end.
Nu Skin was fined $540,000 in China for selling items illegally and making product claims it couldn’t verify, according to a statement yesterday, about two months after the Chinese government announced the probe. Six employees were also fined $241,000 for unauthorized promotional activities.
The move sparked optimism that Nu Skin can now get back on track in the world’s second-largest economy, sending its stock up 18 percent to $88.66 in New York trading. The company, which offers skin and hair cleansers through independent sales representatives, has come under scrutiny as part of China’s clampdown on the direct-selling industry.
The fines “could indicate a path toward resuming normal activities in the market,” Mark Astrachan, an analyst with Stifel Nicolaus & Co. in New York, said in a note.
The stock gain marked the biggest one-day increase since July 2013. Shares of the Provo, Utah-based company had plunged 38 percent in January after the investigation became public.
“They’ve been waiting for several months to figure out what the government was going to do and during that time it really affected their stock price because people were worried that the fines would be huge or they would be stopped from selling in China,” said Ben Cavender, an analyst with China Market Research Group. “But I think given the company’s financials, this is not a lot of money.”
Nu Skin was penalized $524,000 after some individuals sold products that hadn’t been registered for direct sales, according to the statement. The company, which sells LifePak dietary supplements and facial scrubs, also was fined $16,000 over claims about products that lacked sufficient documentary support. Nu Skin said it’s taking steps to correct the issues raised in the review and isn’t aware of any other Chinese investigations.
“We remain committed to working cooperatively with the Chinese government to ensure the healthy, long-term growth of our business,” Dan Chard, president of global sales and operations, said in the statement.
The government started its investigation after a report in the state-owned People’s Daily newspaper claiming that the company operated a “suspected illegal pyramid scheme,” brainwashed trainees and sold more products than allowed. Chief Executive Officer M. Truman Hunt said at the time that Nu Skin is “absolutely not a pyramid scheme.”
Yesterday’s statement was released after the Shanghai Administration for Industry and Commerce said it confiscated 3.1 million yuan ($560,460) worth of illegally sold Nu Skin products. The confiscation was announced on the website of the State Administration for Industry and Commerce of China yesterday.
The penalty is a signal to all direct-selling companies operating in China that they need to ensure their staff are well trained and checks are in place to prevent unlawful behavior, said China Market Research Group’s Cavender, who is based in Shanghai.
“Direct selling is one of those segments that has always been under a watchful eye by the government,” he said. “They don’t want these companies abusing their position in the market.”
China banned door-to-door sales in 1998, saying it wanted to end “a decade of rampant pyramid sales abuses.” The country lifted the ban seven years later.
Nu Skin China has voluntarily suspended business promotion meetings and applications for new sales representatives, according to the statement. The company has a 40,000-person sales force in at least 19 of China’s 32 provinces and municipalities.
Mainland China accounted for 32 percent of Nu Skin’s sales last year and 60 percent of its growth between 2011 and 2013, said Astrachan, who has a hold rating on the shares.
China’s State Administration for Industry and Commerce plans to tighten rules on how direct-sales companies train sales personnel and introduce products, two people familiar with the matter said last month. The State Council said on Feb. 7 that the country should “severely” crack down on pyramid schemes and strictly regulate direct sales.
Nu Skin is revamping its training and supervision for sales representatives. The company said it will seek direction from the Chinese government on resuming normal business activities.
The market size of China’s direct-selling industry has more than doubled since 2008, rising to 88.9 billion yuan in 2013, according to Euromonitor. Amway Corp. -- an Ada, Michigan-based seller of vitamins, cosmetics and air purifiers -- led the market last year, with a 30 percent share. Nu Skin was fourth, with 6.6 percent, Euromonitor said.