Herbalife Ltd. (HLF), Nu Skin Enterprises, Inc. (NUS): What to Make of Direct Selling?

The billionaire showdown is almost resonant to the Herbalife Ltd. (NYSE:HLF) fiasco that unfolded over the last couple of months. Bill Ackman still remains convinced that Herbalife’s business model is unsustainable, while Carl Icahn believes the contrary. Whether Herbalife Ltd. (NYSE:HLF) survives or not is another topic for debate, but I’m confident that for its part, Nu Skin Enterprises, Inc. (NYSE:NUS) has been beaten down for no reason and investors have a chance to capitalize on the opportunity.

Herbalife Ltd. (NYSE:HLF)Nu Skin isn’t an MLM?

Last year, Nu Skin Enterprises, Inc. (NYSE:NUS) ran into trouble when independent research by Citron claimed that the company operates illegally under an multilevel marketing (MLM) structure in China. The management stepped up and explained that it had procured all the necessary permissions and approvals from the Chinese authorities before beginning its operations in the country.

The report by Citron also claimed that the U.S. Food and Drug Administration rejected one of the company’s new products, and yet Nu Skin Enterprises, Inc. (NYSE:NUS) was going ahead with the distribution of the item. The management explained that its “new product” was pending approval, which gave Nu Skin little reason to expect a rejection.

Going by FTC’s definition:

Multi-level marketing (MLM) is a purported income opportunity, in which persons recruited into a pyramid of participants make on-going purchases of products and services, and recruit others to do the same, and they still others, etc. – in an endless chain of recruitment and personal consumption, in order to qualify for commissions and bonuses and to advance upward in the hierarchy of levels in the pyramid. Product purchases become the means of disguising or laundering investments in what is in fact a product-based pyramid scheme.”

Upon close reading, its not hard to figure out that Nu Skin Enterprises, Inc. (NYSE:NUS) is not classified as an MLM. The company does not have a pyramid structure based on commissions, and its distributors get their commissions on every sale — just like any other marketing company. Furthermore, unlike other direct selling companies, Nu Skin hires distributors to sell its products.

These distributors are entitled to healthcare and retirement packages, which are common in almost all marketing companies. This creates a sustainable growth trajectory, without having the need to aggressively expand.