Business Overview

Natural Health Trends Corp. (NASDAQ:NHTC) is an international direct-selling and e-commerce company that sells personal care, wellness, and "quality of life" products under the "NHT Global" brand. The company has an active physical presence in markets across the Americas, Greater China, Southeast Asia, South Korea, Japan, India, and Europe, as well as operations in Russia and Kazakhstan.

Natural Health Trends has built a global footprint by leveraging its member-based direct selling model. The company's wholly-owned subsidiaries sell products through a network of independent members who earn commissions on their personal sales as well as sales generated by their downline. As of June 30, 2023, the company was conducting business through 31,110 active members, down from 32,410 at the end of 2022 and 36,730 a year earlier.

The company's priority is to focus its resources on its most promising markets, which it considers to be Greater China and countries where its existing members have the connections to recruit prospects and sell its products, such as Southeast Asia, India, South America, and Europe. Approximately 93% of Natural Health Trends' net sales are generated from subsidiaries located outside the Americas, with sales from its Hong Kong subsidiary representing 81% of net sales in the latest fiscal quarter.

Financials

For the full year 2023, Natural Health Trends reported annual net income of $568,000 on revenue of $43,924,000. The company's annual operating cash flow was -$4,278,000, while its annual free cash flow was -$4,324,000.

In the second quarter of 2023, the company generated net sales of $10,475,000, essentially flat compared to the $10,511,000 reported in the same period a year ago. Gross profit for the quarter was $7,776,000, with a gross margin of 74.2% compared to 74.6% in the prior-year quarter. The slight decline in gross margin was primarily attributable to higher costs related to the company's Premium Noni Juice product.

Commissions expense, the company's largest operating expense, was 40.1% of net sales in the second quarter of 2023, down from 42.9% in the same quarter of 2022. This improvement was due to lower weekly commissions earned outside of the Hong Kong business as well as lower supplemental commissions recognized during the period. Selling, general, and administrative expenses declined to $3,811,000 in the second quarter of 2023 from $4,080,000 in the prior-year quarter.

As a result of these factors, Natural Health Trends reported net income of $173,000, or $0.02 per diluted share, in the second quarter of 2023, compared to a net loss of $219,000, or $0.02 per diluted share, in the same quarter of 2022.

Segmental Performance

Natural Health Trends reports its results across three operating segments: the Primary Reporting Segment, China, and Russia and Kazakhstan.

The Primary Reporting Segment, which includes the company's Hong Kong operations and accounts for the majority of its business, generated net sales of $10,023,000 in the second quarter of 2023, down 1.1% from the prior-year period. This modest decline was primarily due to timing differences in the two quarters associated with the company's promotion of sales incentives and subsequent receipt of related orders. Hong Kong net sales, which are substantially derived from the sale of products shipped to members residing in China, increased 2% year-over-year to $8,468,000.

The China segment reported net sales of $336,000 in the second quarter of 2023, up 36% from the same period in 2022. The Russia and Kazakhstan segment generated net sales of $116,000, down 7.2% year-over-year.

Liquidity

As of June 30, 2023, Natural Health Trends had $48.7 million in cash, cash equivalents, and marketable securities, down from $54.4 million at the end of the first quarter due to the company's required tax installment payment of $4 million and its quarterly dividend payment.

The company used $3.6 million in operating activities during the second quarter of 2023, compared to $2.6 million in the prior-year period. Excluding the required annual tax installment payments related to the 2017 U.S. Tax Cuts and Jobs Act, the company's cash flows from operations were positive for the second consecutive quarter and improved $1.3 million over the comparable six-month period last year.

Returning capital to shareholders remains a top priority for Natural Health Trends. The company declared another quarterly cash dividend of $0.20 per share, payable on August 23, 2023, to shareholders of record as of August 13, 2023.

Outlook

In the company's latest earnings release, management noted that the downturn in consumer spending continues to be a headwind for the business, and its members face a tougher sales environment. However, the company has implemented targeted programs to attract and retain customers, which have helped to mitigate the impact.

Looking ahead, Natural Health Trends remains focused on executing strategies that drive business growth and enhance shareholder value. The company is planning to launch a new category of product in North America, an at-home testing kit called Bio Essence wellness panel, which measures 17 health biomarkers and provides customers with a data-driven approach to identifying the company's products that may best support their wellness journey.

Risks and Challenges

Risks to the company's business include its heavy reliance on the Hong Kong market, which accounted for 81% of net sales in the latest quarter. The company's Hong Kong operations have been adversely affected by recent political and social developments in the region, as well as the impact of the COVID-19 pandemic and related government control measures. Additionally, Natural Health Trends' business in China is subject to compliance with a myriad of applicable laws and regulations, and any actual or alleged violations could have a material adverse impact on the company.

Conclusion

Despite the challenging market conditions, Natural Health Trends has demonstrated resilience in navigating the headwinds. The company's focus on its most promising markets, cost management initiatives, and new product launches are encouraging signs. However, the company's heavy reliance on the Hong Kong market and the regulatory risks in China remain key concerns. Investors should closely monitor the company's ability to stabilize its member base, expand its geographic footprint, and manage its costs effectively in the face of the ongoing macroeconomic pressures.