Nu Skin Falls as China Vows to Probe Pyramid Suspicions

Nu Skin Enterprises Inc. plunged the most in more than nine years after the Chinese government said it would investigate the seller of skin-care and nutritional products following a People’s Daily newspaper report calling it a “suspected illegal pyramid scheme.”

The company fell 26 percent to $84.80 at the close yesterday in New York, the largest decline since October 2004, adding to the 16 percent drop the day before. Direct sellers Herbalife Ltd. and Usana Health Sciences Inc. also fell.

Nu Skin got more than half its revenue in the three months ended in September from Greater China, where state-run media last year accused foreign companies including Starbucks Corp., Samsung Electronics Co. and Apple Inc. of sometimes operating against consumers’ interests. Violations of direct-sales and marketing regulations will be handled in accordance with laws, Shen Danyang, a commerce ministry spokesman, said yesterday in response to a question about the People’s Daily Nu Skin story.

“We are absolutely not a pyramid scheme,” Nu Skin Chief Executive Officer M. Truman Hunt said yesterday in a telephone interview. “The newspaper account was not the result of a government-sponsored review or investigation of our business.”

Herbalife, a Cayman Islands-based seller of nutrition products, fell 9.8 percent to $71.63 yesterday. Salt Lake City-based Usana, which sells personal-care and weight-management products, dropped 10 percent to $59.06.

Recommendation Cut

Scott Van Winkle, an analyst at Canaccord Genuity Inc., yesterday 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.

About 30 percent of the company’s $2.16 billion in sales came from mainland China in the first nine months of 2013, Hunt said. As of July, Nu Skin had licenses to operate its direct-selling network in 19 of the country’s 32 provinces and municipalities.

The company reported $464.6 million in sales from Greater China in the three months ended September, more than 50 percent of total revenue for the period, according to data compiled by Bloomberg.

“We have initiated our own province-by-province business review and will invite relevant regulators to provide guidance” in China, Nu Skin said in a statement yesterday. “There will likely be a negative impact on China revenue, but it is too early to know whether our previous guidance will be affected.”

Allegations, Apology

Last year, the government-controlled media accused Starbucks of charging too much and said Samsung smartphones don’t work properly, adding to mounting obstacles companies based outside the country face in doing business there.

Apple Chief Executive Officer Tim Cook apologized to Chinese consumers in April after two weeks of being lambasted by state-run media for arrogance and poor customer service.

In its report, 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.”

Some “confused” Nu Skin sales leaders in China may have used marketing materials from neighboring countries that are not allowed in China, Hunt said. Nu Skin operates under special rules in the China, where direct selling is heavily regulated, he said. The company will work to make sure China officials are satisfied with its operations.

Government Interaction

Nu Skin interacts with government officials regularly and had no indication of any concerns prior to the article, Hunt said. Hunt said he hasn’t traveled to China to discuss the inquiry and has left communications to the company’s China managers.

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.