Natural Health Trends Corp. Announces Second Quarter Financial Results; Quarterly Net Sales up 48% over Prior Year

DALLAS, Aug 13, 2004 (BUSINESS WIRE) -- Natural Health Trends Corp. (NHLC), an international direct-selling company, announced today its financial results for its three and six months ended June 30, 2004.

Net sales for the second quarter and the first half of 2004 were approximately $17.7 million and $56.1 million, respectively. Net sales of approximately $17.7 million for the second quarter of 2004 were up 48%, compared to approximately $12.0 million for the same period in the prior year. An increase in the number of independent distributors and the launch of new products contributed to the Company's sales growth. Net loss for the second quarter of 2004 was approximately $(6.7) million, or $(1.24) per fully diluted share, compared to net income of approximately $947,000, or $0.17 per fully diluted share, for the second quarter of 2003. Net loss for the six months ended June 30, 2004 was approximately $(3.6) million or $(.72) per fully diluted share compared to net income of approximately $2.3 million or $.43 per fully diluted share for the prior period.

The financial results for the Company's Hong Kong subsidiary for the second quarter were adversely impacted by the broadcast of an investigative television program in the People's Republic of China on April 12, 2004. As previously disclosed, after thoroughly investigating the issues noted in the broadcast, the Company's Hong Kong subsidiary instituted intensive training and development sessions for its Hong Kong distributors with regard to applicable Chinese laws and appropriate business communications. The Company also elected to suspend product shipments to its Hong Kong distributors until they had completed the required training sessions. In addition, the Company's Hong Kong subsidiary extended the regular 14-day product return policy to 180 days for orders placed during the two weeks before, as well as two weeks after, the date of the airing of the Chinese television program.

As a consequence of these events, net sales for the second quarter were adversely impacted by approximately $13.9 million, comprised of the following: (i) order backlog at June 30, 2004 totaling approximately $6.6 million that were not shipped because certain distributors had not yet attended training sessions offered by the Company's Hong Kong subsidiary, (ii) sales were reduced by incremental product returns of approximately $1.9 million pertaining to the two week period before and after April 12th, and (iii) approximately $5.4 million of sales were deferred because of accounting implications of the newly implemented return policy. In addition, distributor commissions as a percentage of net sales increased significantly during the second quarter because the Company did not require the refund of commissions paid on certain returned products and commissions were paid on the $5.4 million of deferred sales.

Gross margin for the second quarter was 81% of net sales, compared to 86% for the comparable period a year ago. The decrease in gross margin was mainly attributable to product mix change and higher air freight to transport products overseas.

Distributor commissions of approximately $12.6 million were 71% of net sales, compared to 41% in the second quarter 2003. This substantial increase resulted from the Company electing not to seek the refund of the commissions paid to independent distributors of its Hong Kong subsidiary, even though products sold by such distributors were returned following the broadcast of the investigative television program in China on April 12, 2004. In addition, commissions were paid on the $5.4 million of deferred sales. (See Exhibit A to this press release for the financial impact to the Company as a result of the events in Hong Kong).

Selling, general and administrative expenses were approximately $9.8 million, compared to approximately $4.0 million in the second quarter a year ago. The most recent quarter included approximately $670,000 related to the special training and development sessions and professional fees associated with the events in Hong Kong. The remainder of the increase over 2003 relates to an increase in marketing activities in most of the countries in which the Company operates. Operating loss for the second quarter was approximately $(8.0) million. The net adverse effect on operating profit from the events in Hong Kong, summarized in Exhibit A, totaled approximately $9.2 million during the second quarter.

Mark Woodburn, President of Natural Health Trends Corp., said, "This quarter's results were complicated by the highly unusual events in Hong Kong. In addition to the sales deferral and extra expenses, our sales were adversely impacted shortly after the airing of the Chinese television program on April 12th. Average daily gross sales in Hong Kong went from an average of $285,000 per day in the first quarter to approximately $110,000 between April 12 and May 12."

Mr. Woodburn continued, "But, our average daily sales have since increased steadily since May 12 in Hong Kong and averaged approximately $169,000 per day for the second quarter. We are pleased with the results of the actions we implemented shortly after April 12th. The training and development sessions, extended return policy and other critical measures implemented by our Hong Kong subsidiary have successfully stabilized our distributor base. We hope this will avert future negative publicity for us in China. Despite the short-term financial hits from these corrective measures, we believe that we are poised to maintain a long-term and profitable relationship with our independent distributors in Hong Kong. We believe that the proactive steps taken during the second quarter have been well received and we look forward to commencing operations in China when the new direct selling laws are passed, and we obtain the necessary permits and licenses."

Natural Health Trends Corp. will host a conference call on Monday, August 16, 2004, at 8:30 am EDT to discuss the Company's second quarter and six-month financial results for the period ended June 30, 2004. Those who wish to participate in the conference call may telephone (888) 335-6674 approximately 15 minutes before the 8:30 am EDT starting time. A digital replay will be available approximately one and one half hours after the completion of the call on the Company's website,


Natural Health Trends Corp. is an international direct-selling company operating in more than 30 markets throughout Asia, North America and Eastern Europe. The Company markets premium quality personal care products under the Lexxus brand and markets its nutritional supplement products under the Kaire brand. Additional information can be found on the Company's website, and management encourages interested parties to register for updated corporate information via e-mail on the Company's homepage,

Statements in this press release that are not statements of historical or current fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "anticipates," "will," or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.

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