BLYTH INC BTH
October 24, 2011 - 10:11am EST by
hb190
2011 2012
Price: 56.31 EPS $0.00 $0.00
Shares Out. (in M): 8 P/E 0.0x 0.0x
Market Cap (in M): 467 P/FCF 0.0x 0.0x
Net Debt (in M): -109 EBIT 0 0
TEV: 367 TEV/EBIT 0.0x 0.0x

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Description

We love situations where there is a very large disconnect between what the market sees and reality. Blyth has no analyst coverage and is perceived to be a declining multi level marketing candle company. It isn’t. Our variant view conservatively values Blyth at 2x today’s price, with the potential to be a home-run, 10x+ investment. 

We started looking at BTH when we saw that CEO Bob Goergen bought $21mil of stock in the open market at $52 in July to increase his stake from 32% to 37% of the Company. Things like this tend to grab our attention, so we tried to understand why.

Goergen loves his own stock because he knows that, in addition to the Partylite candle business that has been Blyth’s historical cash cow, Blyth also owns a 57.5% stake in Visalus (with an option on 100%), whose BodyByVi Challenge is the fastest growing direct sales/MLM business in North America (ever).  Visalus promotes a 90 day “BodyByVi” Health Challenge focused around meal replacement shakes, vitamins, and energy drinks.  

The business has grown and continues to grow at a 20-30% monthly CAGR, going from ~$0.6mm/month in January 2010, to $30mm/month in September 2011.  It looks to be on a path to do well over $100mm this calendar Q4.  We have recently seen tweets about Visalus breaking records by doing $2mm in sales on some days (2 x 30 x 12 = a lot).  

While Visalus sales numbers are buried in the Blyth 10Q, it is actually quite easy to get a proxy for how the business is doing by following the Visalus founders and key distributors on Twitter/facebook. 

Number of people joining the Body By Vi Challenge in 2011: 

January: 14,439
February: 18,019
March: 25,816
April: 32,030
May: 36,619
June: 41,551
July: 49,515
August: 67,184
September: 81,147 

Numbers from BTH 10-Q:

Q1: $20mm, up from $3.6mm YoY
Q2: $40.6mm, up from $6.5mm YoY 

While these growth rates are obviously unsustainable, people in the industry say that current momentum is only building, with a very long growth runway. There is still very little mainstream awareness of the Visalus brand (superstars corporate executives from the largest direct marketing companies are being brought in to change that) and “whales” from other MLMs are only now starting to migrate to Visalus en masse, not to mention international growth that will start in 2012. 

We are very skeptical in general and absolutely hate paying for growth. BTH investors today are paying very little for Visalus and getting a free call option on its future, with both corporate and distributor sights set on breaking into the top tier of global direct selling/MLM businesses (Amway, Herbalife, Mary Kay, Avon, Nu Skin, MonaVie, etc) in the near future.   

Growth in Context

To provide context, Herbalife (HLF, $6.6bn EV) did $2.7bn in 2010 worldwide sales, 62% of which was weight management products, most of which is meal replacement shakes.  Of the $2.7bn, only $614mil was in North America.  Visalus is already on a runrate of over $400mm in North American sales, is planning international expansion for early 2012, and Wall Street has no idea.  Visalus is continuing to compound monthly at double digit % clips, and is aiming to hit $1bn in runrate North American sales by March/April 2012. After demonstrating huge success in the US/Canada, the plan is to launch international markets, with the support and experience of Blyth, which already does a lot of  business internationally.  

Mature MLM businesses typically generate EBIT margins of 15-20% (look at HLF, NUS, USNA, PPD), most of which turns into pretax cash flow, with very little maintenance capex.  It is very easy to see the earnings runway for Blyth if Visalus gets to $1bn in sales, with management hoping to do that in the near future in North America alone, and international growth being incremental to that.  Even if worldwide sales get to $1bn total (they target this in North America alone), a $150mil EBIT business that Blyth will own 100% of will be very valuable and will ultimately have to get valued in BTH stock as Visalus earnings are fully consolidated within Blyth.

Math Part 1 

So what are we paying for Visalus today?  Net of cash and investments, BTH is selling for $367mil.  BTH did LTM EBIT of $42.4mil, of which we think Visalus contributed $5-7mil as it was a much smaller business on average than it is today.  If ex-Visalus Blyth did $35mil of EBIT and is valued at 5x, we are paying 367 – 175 = $192mil for Blyth’s stake in Visalus.  In calendar Q1 2012, Blyth’s ownership in Visalus will increase to 73%. Therefore, we can think of an implied valuation for all of Visalus of $263mil.  We estimate that the payment to go from 57.5% to 73% will be in the ballpark of $30mm, which should be covered by cash generation at Partylite and Visalus over the next 2 quarters.  

What is the range of outcomes for Visalus, and is that worth $263mil?  At its current runrate of $400mil in sales and the low-end of peer EBIT margins at 15%, this is 4x EBIT.  4x would be considered cheap for a steady-state cash cow with very low capex.  However, Visalus is not in steady state and is 1) growing very quickly for a number of reasons, 2) has several key structural points of differentiation vs. peers and 3) has a much larger addressable market. The “Comps” section provides more data points with respect to how peers are valued. 

Structural Difference and Lollapalooza Effects

The pitches to distributors and to end customers have both been designed to be attractive in a weak economy…and to be very disruptive to the MLM industry as a whole, which has been confirmed to us by numerous distributors. In fact, CEO Ryan Blair, who came in as CEO in 2005, had to be convinced by the founders to get involved as he intuitively disliked the MLM business model. This explains why Visalus has been thoughtful and creative about solving the major problems with typical MLMs.  

Candles, supplements, and acai berry juice are discretionary; $1.87 for a meal replacement isn’t. This has contributed to Vi’s ability to thrive in a weak economy.  Many regular families we have spoken to treat the protein shakes as healthy, cheap meal replacements, which has made it easy for soccer moms around the country to promote them in their communities based on both nutritional and economic benefits. At $1.87 a pop people are actually saving money.  Given how poorly Americans eat on average, it is not surprising that many people are losing weight when consuming fewer calories.  

Only 4% of the population has either been previously involved in MLM or has a positive view of it. The remaining 96% therefore either know nothing or view it negatively. Visalus’s main product is the Body By Vi 90 Day Challenge. All MLM companies require their distributors to face an awkward selling situation, where a person would have to pitch friends on a generic business opportunity. Prior to the introduction of the Challenge, Visalus faced the same problem. The Challenge allows regular people to engage in normal, personal conversation about getting in shape, rather than a “selling opportunity.”  Importantly, when someone loses 15 pounds by replacing large meals with shakes, friends notice and ask “how did you lose weight?” which creates a much more natural selling opportunity. 

Visalus management is very focused on tailoring all aspects of the business to the 96%, rather than the 4% who typically churn in and out of other MLMs. So far this has proven very successful, as half of the top producers at Visalus today are actually new to direct sales, as are most end customers. One number we heard is that 83% of the people at the most recent national convention of 10,000 people were new to MLM, which says a lot about a structural difference between Visalus and other MLMs.

Also, key Visalus selling points are the ability for customers (not distributors) to get their product for free by introducing it to three customers.  Once Joe Smith starts to receive his products (food) for free, he is much more sticky and is likely to make sure that the 3 people he introduced to Visalus remain customers.  If one happens to leave, he is very incentivized to find a replacement in order to keep the food on “autoship” for free. For this reason, the distributor to customer ratio for Visalus is over 4:1, and customer product revenue per distributor is more than 2x that of even the best MLMs, at $428 per month and rising.  This creates a more lucrative opportunity to be a distributor, and is a self-fulfilling prophecy. This dynamic is very powerful, and is driving enormous momentum of “whales” and their sales organizations jumping ship to Visalus. 

The other innovation is the ability for regular people to quickly qualify for a free BMW (technically, a $600/month payment towards a lease or purchase). This is compelling because a lease is a real financial commitment, and everyone who qualifies (company is averaging 1 new qualifier every hour) is incentivized to keep the $600/month subsidy by continuing to produce for Visalus.  With 755 people qualifying for this BMW susbsidy per month (and growing), Visalus is meaningful to BMW’s North American sales of ~21k vehicles per month. Driving a shiny new BMW also allows Joe Smith to brag about how he got it, facilitating another sales opportunity as he describes either his transformation (body and/or lifestyle) to his network/friends. 

Although the above factors do not individually seem revolutionary, the buzz in the space is that Visalus is changing the game. These fundamental tweaks to the business model, coupled with very strong people at every level, are coming together in a lollapalooza to create the staggering growth rates we are seeing. For what it’s worth, distributors at the top of the pyramid think that they are still just scratching the surface of the opportunity. 

People

The owners of Visalus (the three founders, Blyth, and Ropart Asset Management) are hiring senior execs away from multi-billion dollar MLM companies because they are serious about creating something with sustainability, scale, and global infrastructure. 

Below are some of the industry veterans who are running ViSalus: 

-  John Purdy, President and COO of Visalus as of February 2010, spent 15 years at Herbalife and 15 years at Amway, most recently as head of all International markets for Herbalife.
-  Janice Jackson, Chief Brand Officer at Visalus as of a month ago, was the Director of Marketing at Amway and Vorwerk & Co (JAFRA Cosmetics)
-  Audrey Sommerfeld, SVP of Marketing of Visalus, former VP of Global Marketing at Herbalife and was upper management at Neutrogena, Proctor & Gamble, J&J.
-  John Tolmie, CFO at Visalus, former head of North America Financial Operations for Allied Domecq
-  Other ViSalus Executives include a former head of Herbalife International Licensing Team, Herbalife Global Logistics, ACN Business Analyst, Herbalife Event Production Team, and Herbalife R&D members. 

At the distributor level, talent is moving to Visalus after recognizing its to-date growth and very large market opportunity. Large distributor “teams” are coming over from the top MLM companies to run with the Visalus opportunity and they all see it as a structurally more profitable and exciting opportunity than their existing MLM. They also see people with no prior MLM experience rising to the higher “Ambassador” levels at Visalus, and saying to themselves that even “newbies” are managing to build large sales organizations and make a lot of money.

“Smart Money” view on MLM 

While the MLM/direct selling business model has a stigma and visceral discomfort attached to it, smart money has continued to gravitate towards its generation of free cash flow with little or no capital requirements, and a highly variable cost model.

-       Berkshire Hathaway acquired Pampered Chef in 2002.  Pampered Chef is the largest direct seller of housewares in the U.S.  Buffett referred to it as an “absolutely wonderful business”
-       Herbalife (HLF) was acquired by Golden Gate Capital in 2002
-       Prepaid Legal (PPD) was acquired by MidOcean Partners in July 2011
-       Sequoia Capital funded Stella and Dot at $370mil valuation in January 2011.
-       Lia Sophia is owned and operated by the family of Victor Kiam (Remmington Razors and Lady Remmington) 

Blyth has been an aggressive, opportunistic repurchaser of stock (tender offers and open market) over the years, when its stock got cheap. Bob Goergen has only purchased stock in the open market once prior to this purchase in July 2011 – in January of 2009, Goergen purchased approximately $250,000 worth of stock at around $16. 

Goergen and his foundation are active philanthropists, giving many millions of dollars to the Arts, The University of Rochester and the Wharton School at the University of Pennsylvania where Goergen endowed the Goergen Entrepreneurial Management Program.   

Variant View

It is very hard for Wall Street to figure this out without any analyst coverage, no earnings calls, and the company not talking to investors.  We had to become distributors, attend a national event (http://bit.ly/qIc05w), and talk to the higher-level distributors to understand the growth drivers and the sustainability of that growth.  However, even at today’s runrate, Visalus earnings will become a significant contributor to Blyth and will force investors to revalue the company. 

What the market is missing, aside from the fact that Visalus exists, is that the Challenge concept has made Visalus structurally more profitable for distributors, with a much higher distributor-to-customer ratio and higher customer sales per distributor. This structural difference is key to understanding why Visalus has grown the way it has, and why industry “whales” are switching their teams from other MLMs to Visalus, 

Math Part 2 

So: where should BTH trade?  We assume that Visalus falls short of its $1bn goal and gets to a $800mil runrate sometime in 2012.  Keep in mind, that the international opportunity for successful MLM is much bigger than it is in North America (as evidenced by HLF doing $0.6bn in North America and $2.1bn int’l in 2010).  At 15% EBIT margins, this is a $120mil EBIT business that we think has significant growth potential.  At 8x EBIT, this is a ~$1bn EV business, of which BTH will own 73% early next year and 100% in 2013 (it will be paying 8x trailing EBITDA for these incremental step-ups).  At 73%, it is worth ~$700mil to Blyth, or $84 per BTH share.  To get to total BTH stock price, we add $84/share to $100mil in today’s cash/investments, and $175mil for the ex-Visalus operations, for a total of ~$33 for ex-Visalus BTH (which compares to $30-35 where BTH traded before Visalus), and get $117/share, more than 2x current.

This math assumes that Visalus falls far short of its estimates, and that it only trades 8x EBIT despite a very significant growth opportunity internationally.  John Purdy, the President and COO of Visalus, is the perfect guy to lead int’l expansion, having done it very successfully in Asia and Eastern Europe for Herbalife and Amway.  

If Visalus is successful in breaking into the top tier rank, it is very easy to pencil out a 10x scenario for BTH stock. We never bet on these outcomes but it is rare to see a very realistic runway for getting there without a miracle.  Given that Visalus already does roughly 65% of Herbalife’s sales in North America, it is perfectly conceivable that over the next 5-10 years it can become a similar-sized business internationally.  

Comps 

We never use comps to value businesses, but it is an interesting reference point in thinking about where Blyth could/would trade if the market was informed about stand-alone Visalus.  With a $400mil+ run-rate and growth rates much higher than any of the listed comps, we think that buying Visalus at under 0.7x runrate sales is a bargain.

  Name EV Sales EBITDA EV/Sales EV/EBITDA 1-year Revenue Growth
               
NYSE:AVP Avon Products Inc. 12,293 11,274 1,492 1.1x 8.2x 6.2%
BOVESPA:NATU3 Natura Cosmeticos S.A. 8,640 3,442 820 2.5x 10.5x 15.1%
NYSE:HLF Herbalife Ltd. 6,618 3,102 555 2.1x 11.9x 22.2%
NYSE:TUP Tupperware Brands Corporation 3,739 2,485 422 1.5x 8.9x 9.8%
NYSE:NUS Nu Skin Enterprises Inc. 2,782 1,605 266 1.7x 10.5x 9.6%
NYSE:USNA USANA Health Sciences Inc. 437 565 86 0.8x 5.1x 19.5%
OTCBB:LFVN Lifevantage Corporation 140 39 4 3.6x 35.9x 239.1%
               
  Mean       1.9x 13.0x  


LifeVantage, which is a smaller but rapidly growing company (though slower than Visalus) has a $140mm EV, trades roughly 3x runrate sales, yet sold about as much TTM as Visalus should do this month alone. 

Links 

To gain conviction, we encourage investors to dig deep and spend time really understanding what’s happening at Visalus. We were very skeptical at first but a lot of due diligence has convinced us that Visalus is actually changing the industry, which is why it has experienced unprecedented growth rates. 

To try the product or become a distributor, we would appreciate it if you ordered from our site (we signed up as distributors to understand the business): http://bscwinner.myvi.net. 

A set of videos that Blake Mallen, Chief Marketing Officer, of ViSalus recently conducted with a group of potential “whale” promoters from other networks:

http://nextgenerationofliving.com/instant-page-squeeze-11-2011-06-21-001315/visalus-dreamteam/

A snippet of what people closest to the business are saying in social media (while keeping in mind a big component of this is promotion):

 

Rich Pala (@richpala)
10/23/11 9:19 PM
March to a Billion! We will hit a billion by march. Fact :) 20k people in Kansas city
@NickSarnicola@BlakeMallen@RyanBlair

 NickSarnicola.com
Congrats to my brother Ryan Blair and Blake Mallen along side of all of our superstar leaders and Ambassadors and the ENTIRE Visalus community for our first ever $2,000,000 DAY yesterday!!!!
View Post · October 20 at 9:55am 

We have seen many more videos, tweets, and fb updates, and are happy to share in Q&A if people are interested.

Catalyst

Every quarter going forward BTH should report significant and growing contributions from Visalus, forcing the market to wake up to the story.
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    Description

    We love situations where there is a very large disconnect between what the market sees and reality. Blyth has no analyst coverage and is perceived to be a declining multi level marketing candle company. It isn’t. Our variant view conservatively values Blyth at 2x today’s price, with the potential to be a home-run, 10x+ investment. 

    We started looking at BTH when we saw that CEO Bob Goergen bought $21mil of stock in the open market at $52 in July to increase his stake from 32% to 37% of the Company. Things like this tend to grab our attention, so we tried to understand why.

    Goergen loves his own stock because he knows that, in addition to the Partylite candle business that has been Blyth’s historical cash cow, Blyth also owns a 57.5% stake in Visalus (with an option on 100%), whose BodyByVi Challenge is the fastest growing direct sales/MLM business in North America (ever).  Visalus promotes a 90 day “BodyByVi” Health Challenge focused around meal replacement shakes, vitamins, and energy drinks.  

    The business has grown and continues to grow at a 20-30% monthly CAGR, going from ~$0.6mm/month in January 2010, to $30mm/month in September 2011.  It looks to be on a path to do well over $100mm this calendar Q4.  We have recently seen tweets about Visalus breaking records by doing $2mm in sales on some days (2 x 30 x 12 = a lot).  

    While Visalus sales numbers are buried in the Blyth 10Q, it is actually quite easy to get a proxy for how the business is doing by following the Visalus founders and key distributors on Twitter/facebook. 

    Number of people joining the Body By Vi Challenge in 2011: 

    January: 14,439
    February: 18,019
    March: 25,816
    April: 32,030
    May: 36,619
    June: 41,551
    July: 49,515
    August: 67,184
    September: 81,147 

    Numbers from BTH 10-Q:

    Q1: $20mm, up from $3.6mm YoY
    Q2: $40.6mm, up from $6.5mm YoY 

    While these growth rates are obviously unsustainable, people in the industry say that current momentum is only building, with a very long growth runway. There is still very little mainstream awareness of the Visalus brand (superstars corporate executives from the largest direct marketing companies are being brought in to change that) and “whales” from other MLMs are only now starting to migrate to Visalus en masse, not to mention international growth that will start in 2012. 

    We are very skeptical in general and absolutely hate paying for growth. BTH investors today are paying very little for Visalus and getting a free call option on its future, with both corporate and distributor sights set on breaking into the top tier of global direct selling/MLM businesses (Amway, Herbalife, Mary Kay, Avon, Nu Skin, MonaVie, etc) in the near future.   

    Growth in Context

    To provide context, Herbalife (HLF, $6.6bn EV) did $2.7bn in 2010 worldwide sales, 62% of which was weight management products, most of which is meal replacement shakes.  Of the $2.7bn, only $614mil was in North America.  Visalus is already on a runrate of over $400mm in North American sales, is planning international expansion for early 2012, and Wall Street has no idea.  Visalus is continuing to compound monthly at double digit % clips, and is aiming to hit $1bn in runrate North American sales by March/April 2012. After demonstrating huge success in the US/Canada, the plan is to launch international markets, with the support and experience of Blyth, which already does a lot of  business internationally.  

    Mature MLM businesses typically generate EBIT margins of 15-20% (look at HLF, NUS, USNA, PPD), most of which turns into pretax cash flow, with very little maintenance capex.  It is very easy to see the earnings runway for Blyth if Visalus gets to $1bn in sales, with management hoping to do that in the near future in North America alone, and international growth being incremental to that.  Even if worldwide sales get to $1bn total (they target this in North America alone), a $150mil EBIT business that Blyth will own 100% of will be very valuable and will ultimately have to get valued in BTH stock as Visalus earnings are fully consolidated within Blyth.

    Math Part 1 

    So what are we paying for Visalus today?  Net of cash and investments, BTH is selling for $367mil.  BTH did LTM EBIT of $42.4mil, of which we think Visalus contributed $5-7mil as it was a much smaller business on average than it is today.  If ex-Visalus Blyth did $35mil of EBIT and is valued at 5x, we are paying 367 – 175 = $192mil for Blyth’s stake in Visalus.  In calendar Q1 2012, Blyth’s ownership in Visalus will increase to 73%. Therefore, we can think of an implied valuation for all of Visalus of $263mil.  We estimate that the payment to go from 57.5% to 73% will be in the ballpark of $30mm, which should be covered by cash generation at Partylite and Visalus over the next 2 quarters.  

    What is the range of outcomes for Visalus, and is that worth $263mil?  At its current runrate of $400mil in sales and the low-end of peer EBIT margins at 15%, this is 4x EBIT.  4x would be considered cheap for a steady-state cash cow with very low capex.  However, Visalus is not in steady state and is 1) growing very quickly for a number of reasons, 2) has several key structural points of differentiation vs. peers and 3) has a much larger addressable market. The “Comps” section provides more data points with respect to how peers are valued. 

    Structural Difference and Lollapalooza Effects

    The pitches to distributors and to end customers have both been designed to be attractive in a weak economy…and to be very disruptive to the MLM industry as a whole, which has been confirmed to us by numerous distributors. In fact, CEO Ryan Blair, who came in as CEO in 2005, had to be convinced by the founders to get involved as he intuitively disliked the MLM business model. This explains why Visalus has been thoughtful and creative about solving the major problems with typical MLMs.  

    Candles, supplements, and acai berry juice are discretionary; $1.87 for a meal replacement isn’t. This has contributed to Vi’s ability to thrive in a weak economy.  Many regular families we have spoken to treat the protein shakes as healthy, cheap meal replacements, which has made it easy for soccer moms around the country to promote them in their communities based on both nutritional and economic benefits. At $1.87 a pop people are actually saving money.  Given how poorly Americans eat on average, it is not surprising that many people are losing weight when consuming fewer calories.  

    Only 4% of the population has either been previously involved in MLM or has a positive view of it. The remaining 96% therefore either know nothing or view it negatively. Visalus’s main product is the Body By Vi 90 Day Challenge. All MLM companies require their distributors to face an awkward selling situation, where a person would have to pitch friends on a generic business opportunity. Prior to the introduction of the Challenge, Visalus faced the same problem. The Challenge allows regular people to engage in normal, personal conversation about getting in shape, rather than a “selling opportunity.”  Importantly, when someone loses 15 pounds by replacing large meals with shakes, friends notice and ask “how did you lose weight?” which creates a much more natural selling opportunity. 

    Visalus management is very focused on tailoring all aspects of the business to the 96%, rather than the 4% who typically churn in and out of other MLMs. So far this has proven very successful, as half of the top producers at Visalus today are actually new to direct sales, as are most end customers. One number we heard is that 83% of the people at the most recent national convention of 10,000 people were new to MLM, which says a lot about a structural difference between Visalus and other MLMs.

    Also, key Visalus selling points are the ability for customers (not distributors) to get their product for free by introducing it to three customers.  Once Joe Smith starts to receive his products (food) for free, he is much more sticky and is likely to make sure that the 3 people he introduced to Visalus remain customers.  If one happens to leave, he is very incentivized to find a replacement in order to keep the food on “autoship” for free. For this reason, the distributor to customer ratio for Visalus is over 4:1, and customer product revenue per distributor is more than 2x that of even the best MLMs, at $428 per month and rising.  This creates a more lucrative opportunity to be a distributor, and is a self-fulfilling prophecy. This dynamic is very powerful, and is driving enormous momentum of “whales” and their sales organizations jumping ship to Visalus. 

    The other innovation is the ability for regular people to quickly qualify for a free BMW (technically, a $600/month payment towards a lease or purchase). This is compelling because a lease is a real financial commitment, and everyone who qualifies (company is averaging 1 new qualifier every hour) is incentivized to keep the $600/month subsidy by continuing to produce for Visalus.  With 755 people qualifying for this BMW susbsidy per month (and growing), Visalus is meaningful to BMW’s North American sales of ~21k vehicles per month. Driving a shiny new BMW also allows Joe Smith to brag about how he got it, facilitating another sales opportunity as he describes either his transformation (body and/or lifestyle) to his network/friends. 

    Although the above factors do not individually seem revolutionary, the buzz in the space is that Visalus is changing the game. These fundamental tweaks to the business model, coupled with very strong people at every level, are coming together in a lollapalooza to create the staggering growth rates we are seeing. For what it’s worth, distributors at the top of the pyramid think that they are still just scratching the surface of the opportunity. 

    People

    The owners of Visalus (the three founders, Blyth, and Ropart Asset Management) are hiring senior execs away from multi-billion dollar MLM companies because they are serious about creating something with sustainability, scale, and global infrastructure. 

    Below are some of the industry veterans who are running ViSalus: 

    -  John Purdy, President and COO of Visalus as of February 2010, spent 15 years at Herbalife and 15 years at Amway, most recently as head of all International markets for Herbalife.
    -  Janice Jackson, Chief Brand Officer at Visalus as of a month ago, was the Director of Marketing at Amway and Vorwerk & Co (JAFRA Cosmetics)
    -  Audrey Sommerfeld, SVP of Marketing of Visalus, former VP of Global Marketing at Herbalife and was upper management at Neutrogena, Proctor & Gamble, J&J.
    -  John Tolmie, CFO at Visalus, former head of North America Financial Operations for Allied Domecq
    -  Other ViSalus Executives include a former head of Herbalife International Licensing Team, Herbalife Global Logistics, ACN Business Analyst, Herbalife Event Production Team, and Herbalife R&D members. 

    At the distributor level, talent is moving to Visalus after recognizing its to-date growth and very large market opportunity. Large distributor “teams” are coming over from the top MLM companies to run with the Visalus opportunity and they all see it as a structurally more profitable and exciting opportunity than their existing MLM. They also see people with no prior MLM experience rising to the higher “Ambassador” levels at Visalus, and saying to themselves that even “newbies” are managing to build large sales organizations and make a lot of money.

    “Smart Money” view on MLM 

    While the MLM/direct selling business model has a stigma and visceral discomfort attached to it, smart money has continued to gravitate towards its generation of free cash flow with little or no capital requirements, and a highly variable cost model.

    -       Berkshire Hathaway acquired Pampered Chef in 2002.  Pampered Chef is the largest direct seller of housewares in the U.S.  Buffett referred to it as an “absolutely wonderful business”
    -       Herbalife (HLF) was acquired by Golden Gate Capital in 2002
    -       Prepaid Legal (PPD) was acquired by MidOcean Partners in July 2011
    -       Sequoia Capital funded Stella and Dot at $370mil valuation in January 2011.
    -       Lia Sophia is owned and operated by the family of Victor Kiam (Remmington Razors and Lady Remmington) 

    Blyth has been an aggressive, opportunistic repurchaser of stock (tender offers and open market) over the years, when its stock got cheap. Bob Goergen has only purchased stock in the open market once prior to this purchase in July 2011 – in January of 2009, Goergen purchased approximately $250,000 worth of stock at around $16. 

    Goergen and his foundation are active philanthropists, giving many millions of dollars to the Arts, The University of Rochester and the Wharton School at the University of Pennsylvania where Goergen endowed the Goergen Entrepreneurial Management Program.   

    Variant View

    It is very hard for Wall Street to figure this out without any analyst coverage, no earnings calls, and the company not talking to investors.  We had to become distributors, attend a national event (http://bit.ly/qIc05w), and talk to the higher-level distributors to understand the growth drivers and the sustainability of that growth.  However, even at today’s runrate, Visalus earnings will become a significant contributor to Blyth and will force investors to revalue the company. 

    What the market is missing, aside from the fact that Visalus exists, is that the Challenge concept has made Visalus structurally more profitable for distributors, with a much higher distributor-to-customer ratio and higher customer sales per distributor. This structural difference is key to understanding why Visalus has grown the way it has, and why industry “whales” are switching their teams from other MLMs to Visalus, 

    Math Part 2 

    So: where should BTH trade?  We assume that Visalus falls short of its $1bn goal and gets to a $800mil runrate sometime in 2012.  Keep in mind, that the international opportunity for successful MLM is much bigger than it is in North America (as evidenced by HLF doing $0.6bn in North America and $2.1bn int’l in 2010).  At 15% EBIT margins, this is a $120mil EBIT business that we think has significant growth potential.  At 8x EBIT, this is a ~$1bn EV business, of which BTH will own 73% early next year and 100% in 2013 (it will be paying 8x trailing EBITDA for these incremental step-ups).  At 73%, it is worth ~$700mil to Blyth, or $84 per BTH share.  To get to total BTH stock price, we add $84/share to $100mil in today’s cash/investments, and $175mil for the ex-Visalus operations, for a total of ~$33 for ex-Visalus BTH (which compares to $30-35 where BTH traded before Visalus), and get $117/share, more than 2x current.

    This math assumes that Visalus falls far short of its estimates, and that it only trades 8x EBIT despite a very significant growth opportunity internationally.  John Purdy, the President and COO of Visalus, is the perfect guy to lead int’l expansion, having done it very successfully in Asia and Eastern Europe for Herbalife and Amway.  

    If Visalus is successful in breaking into the top tier rank, it is very easy to pencil out a 10x scenario for BTH stock. We never bet on these outcomes but it is rare to see a very realistic runway for getting there without a miracle.  Given that Visalus already does roughly 65% of Herbalife’s sales in North America, it is perfectly conceivable that over the next 5-10 years it can become a similar-sized business internationally.  

    Comps 

    We never use comps to value businesses, but it is an interesting reference point in thinking about where Blyth could/would trade if the market was informed about stand-alone Visalus.  With a $400mil+ run-rate and growth rates much higher than any of the listed comps, we think that buying Visalus at under 0.7x runrate sales is a bargain.

      Name EV Sales EBITDA EV/Sales EV/EBITDA 1-year Revenue Growth
                   
    NYSE:AVP Avon Products Inc. 12,293 11,274 1,492 1.1x 8.2x 6.2%
    BOVESPA:NATU3 Natura Cosmeticos S.A. 8,640 3,442 820 2.5x 10.5x 15.1%
    NYSE:HLF Herbalife Ltd. 6,618 3,102 555 2.1x 11.9x 22.2%
    NYSE:TUP Tupperware Brands Corporation 3,739 2,485 422 1.5x 8.9x 9.8%
    NYSE:NUS Nu Skin Enterprises Inc. 2,782 1,605 266 1.7x 10.5x 9.6%
    NYSE:USNA USANA Health Sciences Inc. 437 565 86 0.8x 5.1x 19.5%
    OTCBB:LFVN Lifevantage Corporation 140 39 4 3.6x 35.9x 239.1%
                   
      Mean       1.9x 13.0x  


    LifeVantage, which is a smaller but rapidly growing company (though slower than Visalus) has a $140mm EV, trades roughly 3x runrate sales, yet sold about as much TTM as Visalus should do this month alone. 

    Links 

    To gain conviction, we encourage investors to dig deep and spend time really understanding what’s happening at Visalus. We were very skeptical at first but a lot of due diligence has convinced us that Visalus is actually changing the industry, which is why it has experienced unprecedented growth rates. 

    To try the product or become a distributor, we would appreciate it if you ordered from our site (we signed up as distributors to understand the business): http://bscwinner.myvi.net. 

    A set of videos that Blake Mallen, Chief Marketing Officer, of ViSalus recently conducted with a group of potential “whale” promoters from other networks:

    http://nextgenerationofliving.com/instant-page-squeeze-11-2011-06-21-001315/visalus-dreamteam/

    A snippet of what people closest to the business are saying in social media (while keeping in mind a big component of this is promotion):

     

    Rich Pala (@richpala)
    10/23/11 9:19 PM
    March to a Billion! We will hit a billion by march. Fact :) 20k people in Kansas city
    @NickSarnicola@BlakeMallen@RyanBlair

     NickSarnicola.com
    Congrats to my brother Ryan Blair and Blake Mallen along side of all of our superstar leaders and Ambassadors and the ENTIRE Visalus community for our first ever $2,000,000 DAY yesterday!!!!
    View Post · October 20 at 9:55am 

    We have seen many more videos, tweets, and fb updates, and are happy to share in Q&A if people are interested.

    Catalyst

    Every quarter going forward BTH should report significant and growing contributions from Visalus, forcing the market to wake up to the story.

    Messages


    SubjectRE: Visalus legitimacy?
    Entry10/25/2011 10:19 AM
    Memberzzz007
    Cuyler,
     
    The first link you posted is pretty thin stuff...nothing specific about Blair/Visalus, just a boilerplate screed against MLM firms.  This kind of MLM hysteria is pretty easy to find in connection with virtually every MLM business in history.  It's this kind of skepticism over the legitimacy/sustainability of the MLM model that has led to historically poor public market multiples for the businesses.  As HB rightly points out, though, private buyers have often been willing to recognize incremental value where the public markets do not.
     
    I watched the Blake Mallen videos, and thought that his review of the company's history was pretty instructive (and sobering).  He mentioned in passing that in late 2008, as the world went into meltdown mode, monthly sales for the original Visalus formulation dropped off by something like 2/3 over the course of a couple of months.  That's pretty scary stuff, and is a good reminder that these businesses can collapse just as quickly as they grow.  I guess the bull argument would be that at that time, the Visalus product was much higher price point, and therefore much more subject to consumer cuts in discretionary expenditures.  I'd probably take a more conservative view, though, that any vitamin supplement is a highly discretionary purchase, and demand can evaporate pretty quickly.
     
    zzz

    SubjectRE: Visalus legitimacy?
    Entry10/25/2011 10:43 AM
    Memberconway968
    Searching "Ryan Blair scam" and "Visalus scam" yields many things (as does the search for Herbalife scam, amazon scam, netflix scam, etc).  When you click through on many of the Visalus scam links, they link to people selling other products.   From my perspective, as someone who has been using the product as part of my diligence, I don't think it is a scam.
     
    The channel undoubtedly has some inventory stored in it, but not much.  Distributors do not order product in order to sell to their customers, but rather customers order product and have it shipped directly.  
     
    There is risk that Visalus does not last for the long-term, but two points there: 1) that is not something that can be assessed very successfully at this point in the ramp and 2) to the degree that the suite of products is very similar to herbalife, but with a more effective selling hook (the 90 day challenge), it seems likely they could be long-term. 
     

    SubjectRE: Help me with your numbers
    Entry10/25/2011 01:10 PM
    Memberhb190
    armaya,
     
    from Blyth press releases:
     
    Q3: EBIT 5.7 on sales of 215.5
    Q4: EBIT 31.6 on sales of 303.3
    Q1: EBIT of 3 on sales of 185.5
    Q2: EBIT of 3.4 on sales of 185.5
     
    LTM EBIT: 43.7 on sales of 889.8

    SubjectRE: Visalus legitimacy?
    Entry10/25/2011 01:15 PM
    Memberhb190

    Here’s what I omitted from the Variant View section: http://www.workathomenoscams.com/2010/03/23/is-avon-a-scam/

    http://jeffwisuri.com/herbalife-scam-can-it-be-true/          

    http://joinmikecallahan.com/the-amway-scam-and-how-to-avoid-it/

    It looks like Visalus, Avon, Herbalife, and Amway are all monumental scams. At least we are in good company: I can show you $30bn+ of public company equity in similar “scams”. If you click on the links you will see that it is actually distributors promoting product because a lot of people are skeptical and google “is amway a scam” when they approached about being distributors.

    Clearly data like “channel” inventory is not published, but we have heard that very criticism of other MLMs from whales who are coming over to Visalus.  The key distinction is that product is not sold to distributors … it is shipped to customers directly.  There is literally no incentive to “stuff the garage with product” as apparently happens with a model where distributors must buy product from the company and THEN try to sell it to customers. Visalus doesn’t work that way. The product is actually being consumed.

    The additional hook for customers is that they receive product for free if they refer others to the Challenge, which is why this is more sticky and the metrics are much better than other MLMs.  While the “three for free” is effective with customers, the BMW is a great hook for distributors as the prospect of getting that $600 BMW monthly subsidy yanked away is a big incentive to keep generating sales.  But it is certainly not worth ordering $10k of product to get a $600 month subsidy, so that’s not reason to “over-buy” the product.

    Also, Bob Goergen is not new to the MLM space. While we don’t have “channel” data, he does … and he invested a lot of money that he didn’t need to invest to own even more of his company. He has seen the full cycle of an MLM, and he understands the potential pitfalls as well as the inflection points in the MLM business cycle. This was neither a whimsical nor a perfunctory insider buy.

    If you speak with industry trade press publishers, who have a good sense for the entire industry, you will also learn that Visalus is thought to be the rising star in the industry, having passed a lot of the implosion points that normally happen with MLM’s growing this rapidly (products on backorder, not getting checks out on time, leaders wanting more for themselves, etc.). 

    If you look at the hiring of senior management within Visalus, you will have a hard time coming out with the view that this business is definitely *not* being built for short-term cash flow. Goergen/Blyth know this industry well and are looking at Visalus as a very large opportunity, which is why they are attracting real management from the largest MLM’s (John Purdy, Audrey Sommerfeld, Janice Jackson). These guys are very well known in the industry had all done their diligence on Visalus before joining.

    On the point of sustainability, the jury is obviously still out on what the future looks like for Visalus. However, 300 MLM’s start every month, and only one or two a decade reach the level that Visalus has reached today. No one has done it as quickly as they have. This, coupled with the momentum of whales jumping ship and international expansion around the corner, gives us a lot of comfort that it is not about to implode anytime soon. We also don’t need Visalus to overtake Herbalife to do extraordinarily well in the stock.


    SubjectRE: RE: RE: Visalus legitimacy?
    Entry10/25/2011 01:18 PM
    Memberconway968
    Product is shipped direct to consumer, so there is no channel in the sense of a conventional distrubtor model.  Promoters buy product to use themselves and to give away as samples.   Do you consider that product to be "in the channel" while it sits around in promoter houses?  Do you consider the shake mix sitting in a customer's kitchen cabinet to be "in the channel?"  Because the product is shipped direct to consumer, there is not a possibility of the conventional stuffed channel dynamic.  If sales tank, it will be because of losing customers and promoters.
     
    Although there is a nutraceutical element to Visalus, I don't think that is the best way to characterize the product offering and it does not explain the growth of Visalus in this economy.  The company has positioned itself as a health, wellness, and fitness company promoting a 90-day challenge that features money-saving meal replacement shakes.  That is the positioning that is behind the growth.  
     
    I do not know how many MLMs have compared themselves to Herbalife, but I would guess hundreds if not thousands.  But how many of those companies ever did 35mm+ in monthly sales, which is what Visalus will do this month?  Not too many.  And Visalus is doing that sales level with metrics that are the envy of the industry: 4 customers for every promoter, 10 month average customer stay, and annual revenue per promoter/distributor of over $5k.
     
    Check here to see how revenues per distributor compare to Herbalife and others: http://www.businessforhome.org/2011/06/average-revenue-per-distributor-2010/
     
        

    SubjectRE: RE: RE: Visalus legitimacy?
    Entry10/25/2011 03:37 PM
    Memberconway968
    I have no issue with anyone passing on the stock because they can't get comfortable with the volatility of the business model, but I do take issue with the notion that you can assess the "intrinsic value" of their product.  
     
    My first objection is to the assumption that you are more capable of judging what is good for an individual consumer than that consumer is for himself.  By implication, anyone who buys a product that you personally think is of little value becomes a dupe buying something of little "intrinsic value."  Maybe that consumer has information that you don't.  Maybe he knows that he is borderline diabetic and needs to lose weight.  Maybe he knows that he has tried a bunch of diets and failed on them.  And maybe he knows that his best friend, who shared a similar history of obesity and failed diets, has had tremendous success on Visalus.  Is not the mundane personal information that influences purchase decisions relevant?  Is there such a thing as "intrinsic value," or is value always relative to each individual's cirucmstances? 80k people who joined the Challenge in September, most joining as customers and not promoters.  It would be arrogant to ignore their assessment of the value, considering they are the ones with skin in the game.
     
    As a value investor, what is your assessment of the "intrinsic value" of a bottle of Coke?  Let's see, we have 20 cents worth of sugar water that tastes good but makes you fat.  Where do we put the intrinsic value of that?  Yet, I would say that KO has been a pretty good business.  Consumers see value in Coke.  Same goes for Visalus.  
     
    Secondly, I would make the argument that, while you can complain about the price, the Visalus kits convey a good bit of value.  The core product here is a 200 calorie diet shake that you are supposed to use to replace up to 2 meals a day.  It is not that different than Ultra Slim Fast, and I have not heard Slim Fast referred to as "snake oil."  If you stick to the shakes, you will lose weight.  It is established science that calorie reduction leads to weight loss; we do not need studies.  The reason diets fail is compliance, not a lack of knowledge about the effects of calorie reduction.  The Challenge helps with compliance by creating social and financial incentives to succeed.  Literally millions of pounds have been lost on the Challenge.  Losing weight has tremendous health benefits.  The shakes are cheaper than real meals.  So you lose weight and save money?  Sounds to me like a better deal than Coca-Cola.
     
     
     
     

    SubjectRE: RE: RE: RE: RE: Visalus legitimacy?
    Entry10/25/2011 04:37 PM
    Memberrjm59
    Have there ever been fads (even those that seemed far less potentially sustainable) than this that wall st didn't have enough crazy people to bid up the price to high levels at least for a while before it 'netflixed'? While I'm hardly comfortable with what this looks like in 5 years (though would be very happy if they went out of business because obesity went obsolete because of gene therapy) it does seem like the next couple years could look good. That said - even thugh they haven't promoted this to wall street, why did the stock double this year?

    SubjectRE: RE: RE: RE: RE: Visalus legitimacy?
    Entry10/25/2011 04:38 PM
    Memberzzz007
    BTH probably isn't something I'd invest in, because the potential volatility of the business model isn't something that helps me sleep at night.  That volatility can work to the upside, and it can work to the downside.
     
    But I have to agree with Conway that arguing about the product's intrinsic value is a fool's errand.  The intrinsic value is a function of the present value of the future cash flows, and that doesn't have anything to do with whether you think the product has a redeeming social value.  Saying that Coke "tastes great" and is "refreshing" is nothing more than an opinion.  I don't think it tastes great, and when I see some lardass drinking a large Coke with their Big Mac all I can think about is the fact that their diabetes are going to raise my health premiums down the line.

    SubjectRE: Visalus legitimacy?
    Entry10/25/2011 09:10 PM
    Memberhb190
    One unfortunate thing about VIC is that some members feel entitled to comment even though they know literally *nothing* about the product.
     
    Visalus is not a neutraceutical.  It is a low-calorie protein shake similar to any sold at GNC, and consuming protein shakes at under $2/meal instead of 1000 calories in a big mac actually does shed pounds. 
     
    The product is also, technically, the 90 Day Challenge, which might seem like a nuanced distinction but is actually important when it comes to promoting it.

    SubjectRE: Margins
    Entry10/26/2011 10:54 AM
    Memberconway968
    On that video, I believe Blake was talking about below industry margins when it came to selling expense (i.e. commissions), which is what was of interest to the group.  Visalus pays 55% of revenues as commissions and other salesforce perks, which is on the high side of the industry.  
     
    On COGS, I think 20% is a good assumption for early stage, moving toward 15% as they gain scale and re-negotiate third party arrangements.  The COGS is all handled on an outsourced basis.
     
    So that leaves 25-30% to pay for overhead and profits.  To give an idea of how the margin picture is changing, the amount left for OH/profit for Q2 was about $10mm, most of which appears to have been spent on OH (not surprising, given the growth).  The amount left for OH / profits for Q3 should be about $22.5mm.  While Visalus is definitely investing in the business, including new corporate level talent and prep work for international expansion, there should be plenty of room for margin expansion.
     
    Given the pace of growth at the business, margins for 2012 are hard to project but I believe that 15% is achievable and perhaps even conservative.  2013 and beyond, I would expect the opportunity for Visalus to outperform traditional MLM margins if they can maintain their best-in-MLM metrics mentioned elsewhere.
     
    Here is a final point: the company founders are getting cashed out of their remaining 27.3% stake in the company  based upon 2012 EBITDA, so there is an incentive to make margins work. 

    Subjectfor what it is worth
    Entry10/26/2011 12:41 PM
    Memberheffer504
    i am drinking a shake right now and it tastes like crap.  plus it was $50 for a 1 1/2 pound bag of protein powder that i think would be $15-20 at a GNC. 
     
    we have no position in the stock, though i don't see why it wouldn't go up before it went down.  good luck, just remember to sell it before it crashes...
     

    SubjectRE: RE: RE: Margins
    Entry10/26/2011 01:06 PM
    Memberconway968
    Your assumption that gross margin is the same as Partylite is directly contradicted by the company in its 2010 10-K:
     
    The gross profit margin increased from 54.8% in fiscal 2010 to 55.5% in fiscal 2011 principally due to the sharp increase in sales for ViSalus, which carries a higher gross margin than our other businesses, lower product costs and price increases at the Miles Kimball Company, as well as reduced distribution and restructuring costs at Midwest-CBK associated with the combination of these two businesses, partially offset by higher commodity costs across all business units.
     
    I do agree that, as of Q2 results, the company is unlikely to have achieved scale to get to 15% COGS and may still be in the mid to high 20s, but I do not see any support for using a 40% company wide number that is clearly weighed down by the money-losing Multi-channel segment contributing a quarter of revenues.  
     
    A true MLM business like Visalus, USNA, and HLF does not make sense on day 1 if you assume a 40% COGS and a 55% selling expense.  If COGS was 40%, Visalus would not exist.
     
     

    SubjectRE: for what it is worth
    Entry10/26/2011 01:19 PM
    Memberconway968
    I happen to like the taste of the shakes and the office is down over 30 lbs on them, but my wife thinks they suck, too, so I will not ascribe ill motives to those who are not fans. 
     
    I agree completely with comment that it is a $50 bag of protein powder and GNC sells similar bags for $15-20.  GNC's gross margins are 36%, so that would be consistent with a COGS of around 20% for Visalus.  
     
    The difference with GNC is the social experience and the financial incentives.  Both provide motiviation, which in itself is valuable to the dieter and is a big part of the value added by WTW.

    SubjectRE: for what it is worth
    Entry10/26/2011 02:24 PM
    Memberhb190
    heffer, are you comparing the taste to any other protein shake, or talking about it in an aboslute sense?
     
    I drink the shakes and think they are very comparable to any other protein I've ever tried (and I've tried most).

    SubjectRE: RE: for what it is worth
    Entry10/26/2011 02:30 PM
    Memberheffer504
    absolute sense
     
    do all protein shakes have that much aspartame in it?
     
    if you drink a lot of protein shakes that is one thing, i don't, and i would not be able to stick with these for a month...

    SubjectRE: RE: RE: RE: RE: Margins
    Entry10/26/2011 02:30 PM
    Memberhb190
    mjw, no one knows exactly what margins are, but the argument is that a) in steady state there is no structural reason why they should be significantly different from peers with a similar product mix, and b) the street is simply not aware that Blyth is pregnant with this very quickly growing business.
     
    The catalyst we see is that as Visalus has to run through the P&L in a significant way in 2012, with even more of the earnings being consolidated after the step-up to 73%.  As pointed out here, the founders are *very* incentivized for 2012 to be a very strong year. 

    SubjectRE: innovations
    Entry11/01/2011 10:51 PM
    Memberconway968
    Visalus has a great track record of innovations.  Here are a few of the best:
    -- 3 for free / disappearing autoship: the number one reason customers and distributors drop out of MLM is that they are losing money, i.e. their commissions are less than their product costs (and all MLMs require you to buy product in order to distirbute).  Visalus eliminated this reason for dropping out by giving away the product free if you sign up 3 other customers.  I think this feature was originally targeted at struggling promoters, but has become very popular with customers. 
    -- The "waiting room:" When  Visalus promoter A signs up another new promoter B, the company gives the  promoter A a 45 day period during which he can place B anywhere in the pyramid that he wants.  Because promoter A is paid the same 5% commish on the whole pyramid below him(not quite true, but a fair simplification), A is indifferent as to where the new promoter is place.  This gives rise to the "contest dynamic"  A runs a "contest" within his downline: for example, whoever makes the most sales in the next week gets B placed below him in the pyramid.  This creates a serious incentive to hussle. It is also not possible in most competing MLMs because their payouts are so dependent upon the particular structure of the pyramid that they can't afford to wait 45 days to figure out that structure.
    -- Early BMW plan: this is part of a broader effort to make the pyramid plan less top heavy than most and to create a powerful Day 1 incentive that is within reach.  Upon joining Visalus, promoters are encouraged to build their BMW on line, print out the specs, and hang it on the mirror.  The BMW is achievable in less than a month with a strong start.  Since the BMW bonus is a car allowance and is dependent upon continual sales, it creates an ongoing incentive for promoters to stay engaged (or have their car repossessed :)).  The cars also become the talk of the neighborhood for middle class promoters.
     
    So that's a flavor for the types of innovations.  As far as their effectiveness, the proof is in the sales results.  Can they be copied?  Yes, they are being copied every day.  Search the net and you'll see all kinds of copy cats.  The important thing to appreciate is that, from a promoter perspective, it's all about the payout and the ease of sale.  Visalus has a payout of 55% which is nearly best in industry, and has the products, buzz, and momentum that makes selling easy.  So copiers have not and will not steal the good promoters. 
     
     

    SubjectNew guidance implications
    Entry12/08/2011 10:19 AM
    Memberheffer504
    Hb190,
     
    Does the new guidance imply a faster decline in ParyLite than expected?
    In other words, why is the stock down so much today when it sounds as though Visalus is doing quite well?
     
    Thanks

    SubjectRE: New guidance implications
    Entry12/08/2011 02:21 PM
    Memberconway968
    The Visalus sales were 73.2mm vs 40.6mm last quarter.  In trying to understand why the stock is weak, I would guess that this number may have been slightly light relative to what some people were expecting based on comments from the founders on youtube, facebook, etc.  But 80% QoQ growth still seems pretty remarkable. Distributors were up 85%.

    Every quarter where management's estimate of the value of Visalus grows substantially, it will trigger a substantial non-cash charge related to phantom equity units that have been granted to members of management team.  This charge was 7.3mm in Q3.

    Backing out this charge and assuming a 35% tax rate, Visalus EBIT was 8.3mm, or 11.3% margin.  That is in line with my expectations, but may be disappointing to some people.  I expect EBIT margins to approach 15-20% as revenues increase, but don't have a strong view on how quickly that will happen.  The company is investing a lot in the infrastructure and the international strategy, so it's not surprising that margins are below steady-state and may remain so for a few quarters.

    The cash from ops guidance for the year was reduced from 45mm to 35mm, despite earnings guidance being maintained, because of cash used to pay tax settlements.  The company has on the order of $30mm in disputed tax assessments, against which it has taken an undisclosed reserve.  There appears to be no material earnings impact to these settlements, which would indicate it was reserved.

    Reiterating earnings guidance at the same time as changing the fiscal year to end in Dec rather than January is implicitly guiding up as they are saying that, replacing January 2011 (in which Visalus should do EBIT in excess of 3mm, possibly well in excess) with results from January 2010 (which have little Visalus EBIT) does not cause them to adjust downward their prior guidance.

    Using the revised cash from ops guidance and including the 12mm seller note they hold, cash and equivs balance at year-end should be roughly 265mm vs 100mm in debt for 165mm in net cash. After adjusting for the buyout of 15% more Visalus at 8x calendar 2011 ebitda, the net cash will be more like 125mm.

    That leaves a 375mm EV for the 72.5% Visalus stake and the other BTH businesses (PartyLite, catalog sales, wholesale / Sterno).  As of the quarter, Visalus was running at 300mm in revs and 33mm of ebit, and those numbers are clearly growing rapidly in the near-term, particularly when we get to the diet season.

    PartyLite US trends are improving with distributor count now flat YoY vs down 6% last quarter.  EBIT for PartyLite appears to be almost flat YoY for the quarter.  PartyLite has done in the order of 35mm in LTM ebit and, if not stablized, appears to be stabilizing.  This makes the 175mm valuation used for ex-Visalus ops in the BTH write-up appear conservative.

    Using that conservative number, that leads to 200mm implied for 72.5% of Visalus or 275mm implied for the whole Visalus, or 0.9x revenues that grew 80% QoQ and are likely to grow at an extremely high rate after New Year's.

    SubjectRE: RE: New guidance implications
    Entry12/13/2011 11:51 AM
    MemberSiren81
    Thanks conway - can you walk through how you got to that 11.3mm EBIT number? thanks...

    SubjectViSalus Option
    Entry12/13/2011 01:20 PM
    MemberSiren81

    Can someone please explain the formula for the price to acquire the remaining VisSalus equity? How is the $163.2mm number from the 10-Q derived?  Thanks…


    SubjectRE: RE: RE: New guidance implications
    Entry12/13/2011 04:09 PM
    MemberSiren81
    Sry, what my question should have said was the $8.3mm EBIT or 11.3% margin...

    SubjectRE: RE: RE: RE: New guidance implications
    Entry12/13/2011 09:41 PM
    Memberconway968
    Sure.
     
    Net earnings attributable to noncontrolling interest was $271k for the quarter.  That represents earnings on 42.5% of Visalus.  Total earnings = 0.271 / 0.425 = 638k.  Key assumption is 35% tax rate, which hasn't been verified.  Obviously, the higher the tax rate, the higher the implicit ebit to generate 638k in earnings.  638k / (1- 0.35) = 982k  EBIT + 7.3mm Visalus equity incentive comp charge (per press release, discussed below) = 8.3mm adjusted EBIT. 
     
    The Visalus equity incentive comp charge may have surprised the market, but it is clear from the financials that this charge will be significant each of the coming quarters.  The charge is NOT based on any new equity grants at Visalus.  It is a mark-to-market charge on phantom equity units previously granted to key Visalus personnel.  It is totally separate from the staged buy-out.  The mark to market is based upon the company's estimate of Visalus's value, and the magnitude of the charge is indicative of the value creation at Visalus, even using management's conservative (and undisclosed)valuation methodology.  I believe this charge winds up in Accrued Expenses, which has grown by an amount slightly in excess of the charge.  
     
    As in the case of other holding companies, it makes good sense for Blyth to compensate the Visalus team with phantom Visalus equity that is non-dilutive but incentivizes the team to maximize the metrics that, in the eyes of Blyth, most drive value.  The GAAP accounting impact is unfortunate.  It is analogous to company having to take a charge after a quarter where the stock price appreciates b/c stock comp granted in previous quarters is now more valuable. 

    SubjectRE: RE: RE: RE: RE: New guidance implications
    Entry12/14/2011 12:55 PM
    MemberSiren81

    Got it, thanks… Do you know how the buy-out of the remaining Visalus equity works?


    SubjectProduct sustainability
    Entry12/15/2011 04:04 PM
    MemberSiren81

    The main issue I have is how can you know what the growth / sustainability of this product is given the inherent churn (NurtiSystem sales avg customer use is 10wks) / fickle consumer trends. To put another way, how can I know this is not Atkins, South Beach Diet, Tae Bo, etc? Indeed, just given the nature of this diet trend & the company’s very rapid growth it would seem as if the most likely outcome is that it sales permanetly decline following fast growth. Perhaps it is inappropriate to compare with  Herbalife, AVP, Tupperware, Pampered Chef etc. which have long operating histories and sell products that would seem to have consistent demand since Visalus has neither of those qualities?

    I realize that the product is legitimate and the company is putting together a solid sales / management infrastructure , but that doesn’t really address the question of demand sustainability. Tae Bo didn’t fail b/c it doesn’t work or b/c of poor sales/mgmt. People just moved on… any thoughts are appreciated.


    SubjectRE: RE: RE: RE: RE: RE: New guidance implications
    Entry12/19/2011 01:51 PM
    Memberconway968
    My understanding is that the remaining buyout will happen in two phases.  The first phase should close around March / April of 2012, after Visalus C2011 results are finalized.  Blyth will buy 15.2% of equity at 8x 2011 EBITDA.  The second stage is in March / April of 2013, is priced at 8x 2012 EBITDA, and is the remaining 27.3% of Visalus. 

    SubjectRE: Product sustainability
    Entry12/22/2011 11:56 AM
    Memberconway968
    Yes, sustainability is an interesting question.
     
    One thing I would point out is that HLF's recent success has been driven by the decision several years ago to morph into a weight-loss company (along with anti-aging).  They now do 60% of their sales in health foods, including 30% or $1B in sales of their own meal replacement shake, Formula 1, that is comparable to the Vi-shake.  So HLF's recent success is largely attributable to a target market that is very similar to Visalus's. 
     
    Another thing to point out is that diet shakes have demonstrated impressive longevity.  Look at Unilever's Slimfast brand, which has been around for decades.  I attribute the longevity to the convenience and efficacy of meal-replacement shakes, along with their affordability.  Even HLF and Visalus, with their large gross margins, only charge $1.50-2.00 per shake.
     
    Successful Visalus reps find ways to extend the customer experiences by rolling from one 90 day challenge to another and gradually changing the goals as people become more fit.  Customers move from weight loss challenges to fitness or strength-oriented challenges.  Many of these reps are in the fitness industry as trainers, etc., which helps. 
     
    Interestingly, neither Visalus nor HLF markets the shakes as diet products.  For HLF, they are marketed more broadly as nutrition, health, and wellness products.  For Visalus, there is the Challenge messaging.  The goal for both is to retain customers beyond a traditional diet window.  HLF has shown good success at this over multiple years and Visalus is off to a strong start.
     
    A final point is that Visalus, like HLF and the other top MLMs, will be adding and reinventing product over time to sell through their network.  An example would be the recent line of energy drinks they've begun selling.  I'm sure there will be hits and misses on this front...
     
     

    SubjectRE: Visalus revenue discrepancies
    Entry01/27/2012 10:44 AM
    Memberconway968
    I disagree the stock was up on the 231mm revenue number.  The stock was up b/c the three founders took payment in restricted BTH stock and are now much better aligned with BTH shareholders for the long-term.  This is a weird kind of cultish people business, and BTH needs the founders to be happy and motivated.
     
    That said, I will take a stab at the revenue discrepancy issue, but these are my own thoughts un-confirmed by the company.
     
    You are correct that the monthly numbers that the founders report to the distributor base do not match (and overstate) the GAAP revenues.  My guess is that these numbers are not intended to be GAAP numbers, but rather to reflect the sales number on which commissions have been paid, since that is what most concerns the commission-receiving distributor base.  
     
    There are at least two material differences between commission and GAAP revenues: 
    a) timing-- GAAP revs are booked upon shipments vs commission revs being booked on orders.  This business involves a frantic rush to book orders at every month-end (the contesting dynamic, etc.), and October was especially frantic after the introduction of Go and Pro drinks at the Atlanta conference. In fact, "October" was extended a day or two for commission purposes.  
    b) net vs gross with regard to "3 for free"-- any customer or promoter that signs up 3 friends gets his product for free.  When this occurs, commissions are still paid to the folks higher in the pyramid.  Because commissions are paid on free product, it would make sense to count free product in revenues whereas one cannot count product given away as revs for GAAP.
     
     So where does that leave us in terms of the recent release?  Is the 231mm to be taken as GAAP revenues for 2011?  I do not know.  The 34mm mentioned for 2010 sales does correspond to the 33.7mm of 2010 Visalus sales reported in the 10-k, which would seem to indicate that it is indeed a GAAP number.  But you can never tell with these guys.  I agree that, if it is a GAAP number, that would imply roughly 45mm per month for Nov and Dec, which seems high given that Dec is a terrible month for both MLMs and diet companies.  Perhaps the orders vs shipments issue in Oct pushed a lot of sales into Nov.  Or perhaps we will see that the GAAP number is not 231mm.  Is just hard to tell.
     
    More broadly, it makes no sense to trade this stock based upon the variance between monthly YouTube reported revenues (which can safely be ignored for financial analysis) and the GAAP quarterly revenues.  It makes sense to take the GAAP numbers, adjust in whatever way you deem appropriate, and perform your financial analysis.  The GAAP revenues may disappoint someone who is modeling YouTube revenues, but the stock is very cheap on the GAAP numbers, even taking the conservative assumptions of slowing US growth (which has to happen at some point) and modest international expansion (although the goal is for HUGE international expansion, such that North America becomes the minority of sales over the coming years).
     
     

    SubjectRE: RE: RE: Visalus revenue discrepancies
    Entry01/27/2012 01:31 PM
    Memberconway968
    I would agree that 93mm in revenues for the last two months would be reason for a pop.  The reasons I attributed the movement more to the restricted stock issuance are that a) the aligned incentives is huge good news that alone justifies the 12% increase b) the 93mm number is so strong that you have to put a decent probability that it is due to some reporting weirdness.   For your typical public company, you would simply call IR and ask for a clarification, but, of course, this is Blyth :)

    SubjectAttempting to Clarify the Confusion
    Entry03/07/2012 05:24 PM
    Memberdiesel844

    Based on comments on this and other BTH threads, it seems like there is some confusion among the investor community about BTH’s mid January press release, so I wanted to try to clarify a few things based on our understanding. Welcome any feedback.

     

    As confusing and counterintuitive as it is, ALL of Blyth’s reported numbers for Visalus have always been for calendar quarters (ending March, June, September and December) even though Blyth reports quarters for its fiscal year ending January (ending April, July, October and January).  This is confirmed in the footnotes ofBlyth’s Ks and Qs. So in mid-January, when BTH reported that Visalus generated $231m in sales for 2011, it is for the calendar year of January to December 2011.  In addition, the $73m, $41m, and $20m that have previously been reported for Visalus in prior Qs are for the 3 months ending September, June, and March, respectively. So to reiterate, even though BTH historically reported for its January fiscal year (until the recently announced change), the reported Visalus numbers have ALWAYS been reported on a calendar year basis. This is confusing and we think that’s the reason that BTH wants to change the corporate fiscal year to a calendar year.

     

    With this understanding, the first key takeaway is that Visalus sales trends remain quite strong. Given that Visalus produced $231m in CY 2011 sales, you can back into $97m of Visalus sales in 4Q11. This implies Visalus 4Q11 sales grew 33% sequentially vs. 3Q11. This is in-line with the seasonality that Visalus had in 4Q10 and so we view that positively. Late November and December are notoriously weak months for direct selling and even more so for weight loss companies and so the right way to analyze sales trends is to adjust for seasonality. For comparison purposes, in 4Q 2010, Visalus grew 31% sequentially vs. 3Q10. Back then, the company was still in the nascent stages of its rapid growth momentum and so to us, the fact that sequential growth has remained comparable in 3Q11/4Q11 is quite remarkable given the law of large numbers. Importantly, Visalus recently posted that ~100k new people joined the challenge in January and 114k in February. The momentum continues to appear quite good since those numbers were 81k and 87k in September and October (the company didn’t post November and December, but presumably they were down if normal seasonal trends held true).

     

    Our second key observation from the mid-January filing was that Visalus EBITDA margin (ex 1 time items) was 13% for 2011 (which probably means that OPM was around 11% for 2011 and 13%+ in 4Q11). You can figure out the EBITDA margin by taking the acquisition payment of $34.6m, scaling that by BTH’s purchase of an incremental 14.2% of Visalus, using the 8x EBITDA acquisition multiple that BTH has to pay for Visalus, and then dividing that by the $231m of Visalus sales in 2011. The math is: ($34.6m/14.2%/8x)/$231m. The same math for 2010 suggests Visalus’ EBITDA margin was 6% and thus expanded by 700 basis points in 2011.  Given the strong sales momentum that Visalus maintained throughout 2011 and that continues in early 2012, it seems possible/likely that 2012 margins will expand further as the company continues to leverage its costs. 


    SubjectRE: RE: Attempting to Clarify the Confusion
    Entry03/08/2012 08:27 AM
    Memberdiesel844
    Devo791, I think your February revenue estimate is too low.
     
     

    Subject2012 FCF guidance
    Entry03/14/2012 09:25 AM
    Memberdiesel844

    2012 FCF guidance is nearly $7/sh. Year end net cash of $16/sh. Stock is trading at about 8x forward FCF ex-the cash.


    SubjectRE: einhorn on HLF
    Entry05/01/2012 04:22 PM
    Memberconway968
    I know nothing about Einhorn's thesis beyond having read the HLF transcript.  Perhaps others know more.  I don't know HLF that well, but will provide some BTH comments that may be relevant to read-throughs.

    Einhorn seemed to focus on an aspect of the business model that does not apply to Visalus: HLF appears to have incentives such that it is always better to be a distributor than an ordinary customer, even if one is only buying product for himself.  This is not true for Visalus.  Customers cannot get better pricing on Visalus products by becoming a promoter.  Pricing is the same, and the "3 for free" referral program is open to both customers and promoters.  Because becoming a promoter costs extra money, there is really no reason for a Visalus customer to convert to a promoter other than an expectation of making commissions.  That is why, out of the roughly 1mm people on the Challenge, my understanding is that only roughly 100k of them are promoters.

    A related difference to keep in mind when comparing HLF to Visalus is the distribution model.  HLF sells to distributors at discount and books revenues at the wholesale price.  Those distributors sell and deliver product to the customer, keeping the difference between retail and wholesale price.  Visalus books all its sales at retail prices, delivers all products directly to the end customer, and pays promoters out of the selling expense line item.  So Visalus promoters are not "distributors" in any meaningful sense.  They are salespeople.

    The final thing to point out-- just in case the short thesis is headed toward the legality of MLMs-- is that Visalus seems to be well within the FTC guidelines for a legal MLM.  The FTC has stated that MLMs are illegal pyramid schemes if the products sold are only incidental to the right to participate in a money-making venture.  Because Visalus has many more customers than promoters and because there are thousands of well-documented product success stories, Visalus seems to be on firm legal ground.

    SubjectQuestions
    Entry08/20/2012 09:55 PM
    Membercnm3d
    1) Why is Nick Sarnicola (one of the founders) over 50% of ViSalus sales? According to a January 2010 press release, he only joined the distributor ranks then. http://www.prweb.com/releases/2010/01/prweb3436074.htm  How is one guy's pyramid over half of sales?
     
    2) While the company says customers order directly from ViSalus corporate, distributors are in fact encouraged to take on product for customers. ViSalus has an entire set of rules on taking product retail to sell wholesale. That product can be purchased and counted towards your monthly revenue goals to remain "active." Why does anyone here think that is not happening?
     
    3) If the company really makes all of it's money from consumer sales, why does the CMO and founder Blake Mullen specifically state that distributors can expect the majority of their paycheck to come from signing up new associates: http://www.prweb.com/releases/2010/01/prweb3436074.htm . Isn't paying distributors more money for signing up new members than for selling product specifically one the criteria the FTC screens for in pyramid schemes?
     
    4) ViSalus pays First Order Bonsuses, which encourage distributors to sell excess inventory to new associates. ViSalus pays a 20% commission on those sales regardless of size, whereas regular product sales must meet $1,000 to reach the 20% threshold and that $1,000 is subject to the $200 minimum. The FTC specifically cites "inventory loading", where initial customers are encouraged to take on too much inventory for the benefit of those up the chain, as a prohibited activity.
     
    5) How do you get comfortable with the customer numbers? ViSalus defines a reported customer as anyone who has purchased from ViSalus in the past 12 months. If you average ViSalus's customers per Q (or H) and assume $500 in additional revenue per incremental promoter (cost of an ESS... an admittedly crude adjustment), it looks like the average customer spend $60-$125 per month (numbers are lumpy). HOWEVER, most of the customers probably order for less than 6 months, conservatively. Diet products are notoriously faddish and people join and drop quickly. This means the average monthly order per customer is, according to these numbers, somewhere between $120-$250 conservatively. This seems an awfully high number for diet and energy drinks. I'd like to mention that MLM's are notorious for not keeping accurate records of in-network vs. out of network sales. Further, if less than 50% of the sales are not sold out of network, the FTC is likely to consider it a pyramid scheme. (I'm also likely understating the new distributor revenue affect, as average purchase is probably greater than $500 and distributor churn is likely high.)
     
     
    And finally... for those that signed up to be distributors, how much money did you make? :)

    SubjectRE: Questions
    Entry08/20/2012 10:29 PM
    Membercnm3d
    I should clarify question 5 actually. I get that ViSalus prices products between say $50-$300 (http://visalus.com/docs/corporate/D1053US_BBVCustomerApp.pdf). What I doubt that there are one million Americans paying ~$175 for a period of 6 months to buy ViSalus. I think there are far fewer real customers and most of their revenues are coming from distributors, who often buy up additional units at first to make their numbers look better. ViSalus has a special incentive program for this; it's called their Rising Star Program for Associates who make Director in their first month. 
     

    Subjectyour thoughts?
    Entry09/24/2012 10:53 AM
    Memberotto695
    hb190-- accounting for th build in cash since your write-up almost one year ago, we're pretty close to being back to the price of your writeup.  Just wondering your thoughts on this name at this point?
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