The debate on Herbalife Ltd. (NYSE:HLF)’s earnings model has raised question marks on a number of other business models. Herebalife is believed to record earnings for selling to its distributors who are supposedly not able to make the sales for which the revenue is recorded. Criticism has gone as far as calling some models ‘Ponzi Schemes.’ Companies with direct-selling models have also particularly come under market-wide scrutiny. One such company is Tupperware Brands Corporation NYSE:TUP) .
In case you followed my blog space, I covered Tupperware Brands three months ago when the stock was trading in the $58-$59 range, giving it a strong-buy rating as a long-term buy-and-hold candidate. During this period, the stock has touched new highs of $79.94, never seen before by the share holders since its IPO sixteen years ago.
Tupperware’s CEO Rick Goings put a full stop to all questions when he boldly called the business a ‘cash generating machine’ and justified it with the 72% step-up in dividends from $0.36 to $0.62 which, he said, will not have been announced if the management wasn’t sure of continuing it. Tupperware was initially a manufacturer and distributor of food-storage containers but recently moved on to include food-preparation products in its portfolio. The management decided to diversify the company further by transcending to a completely different industry of beauty and personal care products. Tupperware has been selling through dealerships, but unlike other companies, a good part of its revenue comes from the famous tupperware parties. The company uses grassroots level marketing and reaches out to its ultimate buyers directly. Over 2.8 million of its representatives around the world independently sell the brand.
Tupperware Brands presently generates revenue of a little less than 30% from its food-storage segment. The rest comes from its beauty segment. Hence that segment deserves a greater focus. One of its closest competitors in the beauty segment, Avon Products, Inc. (NYSE:AVP), which has also historically had a high dividend yield and employs a similar direct-selling model, has been facing serious troubles. The company abandoned some of its international markets and also laid off a portion of its sales force. In order to survive, Avon also discounted its products to expand its target market.
Although, Tupperware faced difficulties in its beauty segment, I believe the company is much stronger than Avon and is an apt candidate for the long haul, for three simple reasons.
1. The company holds seven different beauty brands. The management understands that discounting luxury items affects their brand value. Unlike Avon, Tupperware avoids discounting, even through troubled times.
2. The diverse nature of the company’s business (from food-storage containers to food-preparation products to beauty and personal care) makes it a less risky bet than its competitor.
3. Finally, its growing strength in emerging markets is incredible. Most of its revenues come from regions of present and future high growth. In the latest quarter, emerging markets accounted for 60% of its total sales revenue, up by 11% from the previous quater.
Strong as BRICs
Of the emerging markets, the BRICs (Brazil, Russia, India, China) deserve special focus. BRIC economies are expected to grow at a much higher pace in the next 10-15 years than the developed markets of the US, the UK, Japan, Germany, France and Italy. This is primarily because of their demographics. BRICs have a much younger population as opposed to the aging population of developed markets. Although, the developed economies have a much higher per capita income, yet the improving conditions of the middle class in BRICs have led them to have a higher annual spending. This is evident from Tupperware’s business.