USANA Under Fire – Short Sellers Hit Again?

USANA under Short Sellers attack


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On 11 May the website launched an all out attack on USANA through certified affiliate website Shortzilla, questioning the USANA MLM business model and the distributor to customer ratio with the next article:

USANA Health Sciences: Investors Need To Know The Truth About This MLM Company

We are initiating a short position in USANA Health Sciences (USNA) at an average price of $40 per share. Stop loss set at $44. We noted previously that we were watching Herbalife (HLF) after David Einhorn grilled the company regarding its breakdown of sales among its sales associates and actual paying customers.

Herbalife hemmed and hawed after being confronted with Einhorn's questions and our guess is that Einhorn is most certainly looking at HLF as his next target (it could be unveiled at the Ira Sohn conference next week).

Problem is that we see a lot of headline risk now with a short on HLF and are taking a back door approach by shorting USNA – one of HLF's competitors – and from what we can tell one that allegedly appears to be bending the rules even worse than HLF. Plus, while HLF got slaughtered on the Einhorn revelation – down 33% – USNA didn't take quite the beating.


USANA, like competitor Herbalife sells, nutritional supplements, foods and other healthcare products. The company does not sell direct to consumers and relies instead on associates to hawk its products.

New associates are required to purchase a starter kit for $29.95 from USANA and in order to start earning commissions are required to purchase from USANA at least 200 points worth of merchandise (a point is approximately $1.20, so roughly $240 just to start earning). This number is 400 points if you elect to open three business centers. Read more about the comp plan.

Like other MLMs, USANA associates are encouraged to aggressively recruit new associates, so that they can build their downline. I won't get into details here, but in my conversations with former USANA associates, the sales meetings at USANA are heavily focused on the recruiting as opposed to actual sales of the product.

In order to continue earning commissions, associates are required to purchase at least ~$120 (or 100 points) worth of product every four weeks – or $1,560 worth of product per year. If you opt to run three business centers, that number increases to required 200 points every four weeks.

In my opinion, the bottom rung associates attempt to stay alive by signing on new associates who are required to purchase overpriced product in order to collect commissions. The majority of revenue made by USANA and the majority of commissions paid (mainly to the top 1% of associates) comes from the hundreds of thousands of distributors who are all purchasing product in order to be commission eligible and participate in the business venture. If USANA removed the requirement to personally purchase any product in order to collect commission, the company would be worth a fraction of its current value.

Pyramid Scheme Or Legitimate Business?

Many have called the MLM business model a glorified pyramid scheme, and in all reality it's not too far from the truth. Back in the 70s, the FTC ruled that MLM company Amway was not an illegal pyramid scheme since the Amway system was based on retail sales to consumers.

In the ruling-the FTC noted that Amway was not a pyramid scheme due to several rules that were in place – including the 70% rule that Einhorn referenced on the HLF call. The bottom line regarding the 70% rule is that the distributor should not reorder unless product which has been previously purchased has been passed on to the ultimate users.

The 70% rule is a big deal in the MLM world and while it is not a statute it is inherently a part of most MLM programs. The rule in a nutshell is meant to try and prevent distributors from stocking up on inventory in order to boost or even achieve a level in order to earn commissions. But how many are actually enforcing it?

This is what made the Einhorn questioning so crucial – HLF couldn't give a straight answer on the percentages. This question-and non-answer is really a sign to us that HLF and the other MLM's are in trouble:


David Einhorn

So what is the percentage that is actually sold to consumers that are not distributors?

Desmond Walsh

So we don't have an exact percentage, David, because we don't have visibility to that level of detail.

So if Herbalife or any other MLM can't provide us with the percentages of what is being sold and to whom, could it be that the business is being kept alive because of all the new distributors that are added year after year?

First, we would like to define in the words of the FTC what exactly entails a pyramid scheme. According to Debra Valentine, former general counsel for the FTC, a pyramid scheme might look like this (key in on the highlighted text):


They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure. There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales. Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company's distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements. A lack of retail sales is also a red flag that a pyramid exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer examination, the sales occur only between people inside the pyramid structure or to new recruits joining the structure, not to consumers out in the general public.

So, now that we have a better understanding of a pyramid scheme, let's take a closer look at some of the numbers at USANA:

  • As of year end 2011, USANA had 222,000 active associates and 64,000 preferred customers (ones that are solely buying product and not earning commissions)
  • 90% of 2011 sales were from the associates
  • Associates (we're assuming that all associates are only running one business center) are required to make a minimum purchase every four weeks of roughly $120 in order to continue receiving commissions
  • $120 * 13 * 220,000 associates = $346 million in sales just on these required monthly purchases
  • Total Sales for 2011 – $581 million. Meaning that 60% of overall sales are just from the monthly minimum requirement – 60%

Let's get back to that definition of a pyramid scheme:


Inventory loading occurs when a company's incentive program forces recruits to buy more products than they could ever sell, often at inflated prices. If this occurs throughout the company's distribution system, the people at the top of the pyramid reap substantial profits, even though little or no product moves to market. The people at the bottom make excessive payments for inventory that simply accumulates in their basements.

This is indeed alarming, and exactly what Einhorn was getting at on that HLF call. These associates are keeping the boat afloat for USANA and for the top tier associates, who are reaping the profits for the failed endeavors of the new and current associates who are losing money.

And let's not forget the statement from the FTC about sales often at inflated prices. We intend to provide some further research into the excessive costs of USANA's vitamins, shakes, nutrition bars, etc. Here's the price list for USANA's products.

As an example of the ludicrous prices being charged, check out the Peanut Butter Nutrition Crunch Bars, which for a pack of 14 bars retails for $34.74, or nearly $2.50 per bar. The bars which are 39 grams contain 150 calories, 10 grams of protein, and 14 grams of sugar.

A larger 68 gram Clif Bar Crunchy Peanut Butter Bar can be purchased at Wal-Mart for less than $1 per bar. If we adjust the nutritional values for the ClifBar to those of the USANA bar based on size, the Clif Bar has 140 calories, 6 grams of protein, and 12 grams of sugar. Bit less protein, but lower sugar.

Therefore the USANA bar is nearly 150% overpriced (and 40% smaller than a very comparable Clif Bar) . And this is just one example. 150% seems to be a normal markup for the products, which are not unique or proprietary. I've heard some USANA fans throw out this crazy analogy:


Well you pay $5 for a box of Girl Scout cookies, and those can be purchased at the grocery store for $2/box.

Very true, but when purchasing Girl Scout Cookies I'm supporting a charity, not a for-profit Multi Level Marketing company.

The Truth

Let's talk a bit about Associate Turnover at USANA for a moment, something that USANA has failed to provide at any point in any of its SEC filings or conference calls. With the help of USANA Watchdog, we are providing a chart which shows that associate turnover is likely greater than 80%.

The data compared the number of low level associates – Sharers and Believers who also make up the largest portion of overall associates. (This information was taken from USANA reports in 2005 and 2006 – the last time it was made available). In 2005, there were 28,244 Sharers and Believers with on average roughly 50% expected to be promoted to at least a Builder (the next highest level associate). In 2006, we should have seen at least 14,122 new promotions, yet there were only 2,619 promotions, meaning that 81.5% of the initial Sharers and Builders likely dropped out of the program.

(Click to enlarge)

Let's also discuss the Five Customer Rule which is part of USANA's policies and procedures. Again a big thanks to USANA Watchdog who alerted us to this information. They have a great writeup on the Five Customer Rule. According to USANA:


Associates must develop or service at least five customers every four-week rolling period.

OK, so this means that the 222,000 active associates must be selling to 1.1 million retail customers. (minus 64,000 preferred customers – ones who are just buying product and not earning commissions).

Big problem is that USANA does not actually verify this. In the policies and procedures, they state:


Associates must retain all retail sales receipts for a period of two years and furnish them to USANA at the company's request. Records documenting the purchases of Associates' Preferred Customers will be maintained by USANA.

From USANA Watchdog:


USANA could not possibly be enforcing the five customer rule because they do not even know how many retail customers the associates have. USANA does not even know the retail customer's names. USANA has no record of associate's retail sales because they don't keep record of it in their database. I believe it is because the retail customers do not even exist.

The following is from USANA's 2007 first quarter preliminary conference call on April 4, 2007:


USANA Q1 Preliminary Earnings Call

Time into conference call – 1:10:47 to 11:11:38

Dave Wentz: … To say that 14% of our sales is to customers is completely ridiculous and misconstruing the facts and it doesn't also include all of the retail sales that our distributors make on after we get the products to them that we don't have the names. They keep their retail customer lists to themselves and they own those retail customers so to speak, and service them by providing the products directly to them and the company does not know who they are, does not have contact with them. So completely misconstrued allegations.

Doug Lane with Avondale Partners: There's a component of users of USANA products that you don't even have in your database. Those are the retail customers of your distributors, correct?

Gil Fuller & Dave Wentz: Absolutely correct.

My question is this: How does a company that is supposedly in the business of selling a group of retail products not know who or how many retail customers it has? This will likely never be answered by USANA because they know the real truth. The majority of USANA's retail customers are in fact its own associates. The ones that are required each and every month to re-order between $120-$240 worth of products just to continue receiving any commissions.

Are these the hallmarks of a legitimate or ethical business? Not to mention that all of USANA's products are completely overpriced (click here to see the price list) with nothing offered that would be considered unique or proprietary.

There's more to come on this one as we are prepared to offer more and more details on USANA's business and what we see as major concerns. The big note and big risk that we must mention is the short interest for USANA – it's huge as nearly 32% of outstanding shares were short as of April 13th. That's a big number – one that we normally would stay away from. But given what we see as a company that could eventually be labeled a fraud we are willing to take the risk. Be aware that there is a big risk for a short squeeze if any little piece of positive news hits.

Also, there is a huge amount of insider ownership – founder Myron Wentz owns greater than 50% of the company. Plus, the company has increased its share repurchase of late, which could prop up shares in the near term. We're not scared. We think that it's time that investors know the truth about USANA.

Disclosure Shortzilla: I am short USANA.

The original article can be found here

Get more information, facts and figures about USANA, click here for the USANA overview.

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Comments (14)

  1. First reaction is Bas****’s, typical crap questioning MLM, so what if it’s built around mostly selling to members, it is the choice of the members. It just goes to show the lack of ethics these ruthless traders in the markets have. Great at destroying lives for the purpose of lining their own pockets, they see MLM as legitimate targets. HOWEVER there will soon I believe be an accounting for many MLM Companies as I feel there is too much greed built in to pay over inflated compensation plans, it wont be long before the MLM World will be hated as much as the “Dirty Bankers” as those who cream of society at the expense of society, so wake up MLM, get your prices, qualifications and commissions at a more realistic level, what happened to good old “Par to Market” Value built in. Be warned tough times are coming for MLM unless they adjust to running less greedy and more ethical operations.

  2. The disclosure at the end of the article ”Disclosure Shortzilla: I am short USANA”
    take of all the credibility of this articles. It is a well know strategy in money market that when you take a position on
    a particular stock that you will then writte article to push and influence people to sel or buy a stock depending on your position.
    In that case they take a short position they will bring up what ever they can find negative to scare people and make them sell so they get
    there order fill.

  3. I’m surprised we haven’t seen a lot more of this in the past. The short selling of these companies is done on the assumption that investors will run scared when questions of a company’s legitimacy are brought into question. As long as short selling is commonplace, publicly traded MLM companies are susceptible to this practice. The questions asked in the article regarding how many retail customers a company has could only be asked of an MLM. Coca Cola would never be asked this question, nor would Kraft Foods or Nestlé. These companies could never be expected to know that figure, as they operate through “normal” channels. MLMs are (supposedly) supposed to know this due to customer number rules and legislation.
    And the accusation that a multi billion dollar business is kept alive by new distributors being added each year is also a nonsense. New distributors implies more new customers. Car manufacturers expand their businesses by adding new customers all the time, as previous customers choose a different marque the next time they buy. They open and/or expand in developing countries to ensure a growing customer base. This requires new dealerships who invest millions in their premises as part of the franchise requirement. The business model is basically the same, but these questions aren’t asked of BMW or Ford.
    Unfortunately, there is little an MLM can do once a big short seller like Einhorn gets them in their sights. They really are easy pickings. It’s important that the companies stick to their guns and don’t let it affect strategy or influence decisions.
    These scavengers will move onto the next sector when they’ve squeezed out all the profit they can from direct sellers.

    1. Short selling is one of the major triggers of Lehman Brothers’ demise and the ensuing US Financial crisis. Short selling should be banned for economic reasons and should be outlawed. Anyone who later on insists on short selling should be charged with economic sabotage.

  4. I believe these short sellers are asking legitimate questions and we should use this to discus a very important issue: if MLM companies would know and disclose the ratio between actual “sales to consumers” and “total sales” many of us would be shocked…. In many cases it would be shocking low. There is a lot of companies out there where the majority of sales is being generated by distributors buying the product (often on “required” autoship) to qualify for income. Many of these distributors stop buying the product themselves as soon as they quit their distributorship. Meaning that those products are either too expensive or not good enough.

    Many mlm companies focus too much on recruiting and not enough on actual sales to consumers. The create pure $$$ hype and have products/prices that would never survive in the “real” world.

    Please lets be honest to ourselves and look into our own teams/companies and evaluate the above. And find ways to improve these ratios. We are in a great industry, but too many products being moved into the market only because of the attached income opportunity instead of the quality and uniqueness of the products, is not real marketing.

    1. My friend Eric, that is a very blurred conclusion. Just because distributors are the ones buying the products it doesnt mean it’s a bad thing.

      Truth be told and for those who write these things about MLM. Why does MLM make a lot of sense for a company manufacturing products?

      1.Less cost for marketing (less or zero advertising)
      2.Less cost down the line of the supply chain
      3. With less marketing cost the company can focus more money on improving product quality

      Why does an MLM model benefit consumers (whether they are signed up as reps or just plain buyers of products from reps)

      1.They’ll get better education about the products – instead of a tv or magazine ad (or plain product insert) educating them about benefits and product usage, a person they trust spends time with them one-on-one to discuss these things.

      2. Since the company spends more money on developing the product (due to less marketing cost) the consumer buys QUALITY.

      Now why is most MLM sales coming from those that are reps already? Is it because of commission qualification? I guess one has to understand the ff:

      1. People sign up to an MLM companies even if they are just plain consumers. They sign up because they want to get products at wholesale price and they want easier delivery of products to their homes (i.e., autoship)

      2. MLM Reps are the ones who BEST know the benefits of the products (since they are the ones most educated about the products). Thus they are the NUMBER 1 customers. It’s stupid to be selling something that you yourself aren’t consuming and do not believe in.

      3. For the above 2 reasons, MLM reps do not necessarily buy products just to qualify for commission checks. How can those “know it all” people determine if the company’s revenues which come from reps themselves (majority of a MLM company’s sales) aren’t due to reason 1 and 2? Why do they assume that it’s because these reps just want to qualify for a check? That’s a stupid conclusion made by somebody obviously uneducated about MLM and is living in the stone age.

  5. Good article!
    It proofs to me I joined the right company, as we don’t sell any products, just the service of making money though Forex trading.
    No autoship, no hidden costs, equal opportunity for all participants and an excellent compensationplan.

  6. Anyone with half a brain knows that all mlm companies are glorified buyer’s clubs. This is not a shocking thing, it is not a bad thing, it is just reality. There is nothing intrinsically wrong with a buyer’s club – participants are given the right to recruit and purchase the products at a lower price than a non participant. What’s wrong with that? Not a damn thing.

    I think it high time that stupid anti pyramid laws are changed to reflect this reality.

  7. I am not surprised. This will be the final verdict for 99% of MLM companies as any building built on weak foundation can not last long.
    All product based companies force reps to buy overprices unnecessary products.
    Anyone interested in learning more about company which is sure to be part of remaining 1% should contact me.

  8. What a load of balony. It is amazing how corporate keeps trying to hit MLM companies. I wonder which company doesn’t need new customers to expand or even maintain their sales levels? Can’t think of any!

    The essential difference between distributors and customers is that distributors get a discount on their purchases. Do any “legitimate” companies have preferred customers, special offers for referrals, or discount cards? What a joke to question legitimacy on this basis.

    As for stopping buying the product if they cease to earn income, what’s wrong with that? If I don’t receive my regular cornflakes every month, it is just possible I will see another brand on the shelf and make a switch. We do this every day. Loyalty programs work and are used in just about every successful business.

    When will the mainstream stop bashing MLM and realise it is just another business model where ordinary people can actually participate in the profits without investing $1m to get in like Maccas!!

  9. This is a perfect example of smart people attempting to explain what Network Marketing is and still fail to hit the point. Obviously they don’t understand how MLM business really happens. They just make judgments based on what they perceive and the testimonies of people who failed at MLM. Anyone who failed at something miserably would say bad things about it. For example, one that didn’t do well in school would always blame the school system, the teachers, etc as to why they failed. The same happens in MLM.

    I believe people who still question MLM as a legitimate business model have low IQ or they are just afraid of the inevitable truth – a lot of their jobs (I presume these people who attempt to interpret MLM and say bad things are wanting to be needed with their opinions) would vanish. I was attacked before by financial planners claiming that MLM is a total scam and promotes consumerism (vs what they teach which is save money, which isnt bad but kind of slow). These financial planners in my view are so scared of MLM because they feel that when all people get rich (which is what MLM can do) their services won’t be needed.

  10. There’s some fundamental flaws in Shortzilla’s calculations. They assume each active associate is purchasing $120 worth of products each month in order to receive commissions.


    (1) big assumption they’re all doing this. In fact (a) the 2011 annual report says only 35% of sales is via there autoship program, which puts a huge question mark over Shortzilla’s assumptions. (b) from what I understand, commissions aren’t paid out until you reach 40 points and qualify as a “sharer”. Unless qualified there is *no* incentive to be purchasing these products for commissions. Shortzilla’s own figures from 2005 show that only 21% of “active associates” are qualifing as “sharers & believers”, yet they assume that the other 79% are buying products monthly to earn bonuses they don’t actually earn.

    (2) that $120 figure is from the US compensation plan. 60% of USANA’s revenues come from outside North America

    (3) USANA’s biggest single market is China, which has a completely different compensation mechanism.

    Not to mention the simple flaw of assuming an associate cannot be a consumer. They can be, something the FTC and similar bodies around the world have made clear. Not that it should need to be made clear.

  11. This is a pretty ignorant article from a “short seller” (only disclosed at the end). A disclosure that that I am a successful USANA associate before you read this). I will use facts, not opinion on some quick product comparisons. A quick explanation/analogy is that they are comparing Gold to Silver or Bronze and expecting the same cost… But let’s get to facts to back that up.

    Fish Oil – look at DHA/EPA quantity and ratio.. Also look at quality of the product – pharmaceutical grade double molecular distillation… 3 products compared below that are nearly the SAME from a quality and formulation perspective.
    * USANA BiOmega – $19.95 plus shipping
    * Nordic Naturals Ultimate Omega (advertised heavily on radio)- $27.95 plus shipping is the cost and you can adjust that to about $26-27 to get from a 30 day supply to a 28-day supply of USANA. So 30% more than USANA approximately if you use the $26.. (that said? you can sign-up for autoship every quarter and save 15% much like USANA? but of course you can pay more for this product and it?s ?legal? but USANA is ?overpriced?!!!! Lol)
    * Lovaza (“prescription” and advertised heavily) – $120 co-pay ($210 retail). Reduce that to $50 after your copay to adjust for additional concentration and 2x tablets. So $50 compared to $30 and $20 but this is completely “legit” since your doctor prescribes it, your insurance company pays $90+ and you pay the rest?. Insanity!!!

    So why is it that Nordic Naturals which uses primarily radio advertising and a traditional business model and Lovaza which is marketed by GlaxoKlineSmith attacked as a ?pyramaid scheme??.?????? Those are 30-150% more in cost than USANA???? If those have nearly the same formulation and same quality, how are they selling something “unique and proprietary” for so much more money…???? That said, those would be the only other 2 brands I would buy because I know better, but for $29.95 to own my own USANA business and buy the product at $20 instead of $26-50 I’m doing ok. Plus when I recommend it to people and they buy the product online I make money…

    Do the same for Essentials multi-vitamin which is the core of USANA?s business – $42.50 vs. similar quality and formulation with Douglas Labs Preventative X@- $52+… Both are pharmaceutical grade manufactured supplements with very similar formulations (note the pharmaceutical grade is “unique and proprietary” since less than half of 1% can claimthat, . Shouldn?t Douglas be attacked as a ?Pyramid scheme?. There’s also a “prescription” supplement for $40 after co-pay that is no different formulation than a $10 walgreens but that’s legit…? Get real! Oh, and USANA has a patented technology called Olivol which would make it a step above the Preventative X (olive extract tablets sell for $13–20 a bottle by itself…).

    Snack Bars (maybe 5-10% of USANA?s business) – if you really want to get into that, you’re comparing a $2 USANA bar to a crappy Cliff Bar at $0.99 (?less than a dollar? by a whole penny!!!!). Interesting thing is that if you comparative shop and look at formulation, etc. and not grams, etc. comparable quality bars like Paleo Bars are $3+a bar. Most bars on the market sell for$1.75-$2 which is right where USANA is playing. Again, compare a Mercedes to a Kia and you’d expect a price difference. Maybe since the Kia car weighs more than the Mercedes but Mercedes cost more it is a pyramid scheme. Idiot.

    All that said, they pick on 5 customer vs associate ratio etc. That’s about as outdated as the 1970’s guideline that produced that. With technology today it is literally only $29.95 to be a USANA associate. Whether or not you want to make this a successful business or career, it’s super easy to just pay that to be an associate and not a regular retail customer. $29.95 additional for the chance to make money even just if you refer people. That?s literally the difference between a preferred customer and associate. Should USANA charge an unnecessary amount like a $1000+ franchising fee or something to discourage people from being an associate so their numbers are better?? It?s 2012 people?.

    At the end of the day, we as associates are paid to educate people on the difference of products and get them setup to buy and a price less than what they pay in the market for a comparable or even inferior product. It’s very legitimate and the people that bash MLM are just people that tend to have failed at MLM! I was a 6-figure income earner in the pyramid scheme called corporate America. I learned this is a very professional way to make money and see it as one of the fairest compensation setups out there. I was able to get denied a request to be laid off 3 times in the last 2 years (getting raises twice after volunteering to be laid off), and then being able to quit entirely after I got denied a 3rd time in layoffs.

    So, this will probably get deleted because it is fact but for people ignorant enough to listen to a failed distributor and Short Seller at USANA Watchdog, good luck to you! Way to research your facts!!!!

  12. The commodities market has a huge rate of loss for most investors…based on how your feel about Usana being a scam..I guess the commodities market is a scam…
    I bet if we knew what you do we could find some area of loss other would experience and we could call you a scam….
    Here is the bottom line…if what you say it true why hasn’t the government shut them down..(unless of course they are in on it…)
    Do us a favor and find something else to bitch about and let those that look at some opportunity do so with out the negative stuff you are saying….in other mind your business and we’ll mind ours!!

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