Nu Skin Enterprises Inc. shares plunged Thursday on concerns over an investigation by Chinese authorities' into its business practices in the country, a major source of its revenue.
The official Xinhua news agency said Thursday that China's State Administration for Industry and Commerce had ordered an investigation into Nu Skin. The move comes a day after the state-run People's Daily published a story that likened Nu Skin's coaching methods for salespeople to "brain washing" and suggesting that it is a pyramid scheme.
Xinhua quoted a spokesman for the industry and commerce office saying that authorities will take legal action if the "investigation results show the media reports were factual."
Nu Skin, based in Provo, Utah, sells skin care and nutritional products through a direct-selling model around the globe.
The company said Thursday that it is aware Chinese regulators have initiated an investigation and said it will continue to communicate openly with regulators to address any questions. Nu Skin also said that it has begun its own province-by-province business review and plans to reinforce its training and education efforts, given the rapid expansion of its salesforce in China over the past year.
"As we work through this evolving situation and remain focused on long-term growth, there will likely be a negative impact on China revenue, but it is too early to know whether our previous guidance will be affected," Nu Skin said in a statement.
On Wednesday, the company vehemently defended itself against the allegations in the People's Daily article. It said the story contained "inaccuracies and exaggerations that are not representative of Nu Skin's business in China."
The company said the People's Daily reporters did not verify any of the information with Nu Skin. It also said in a statement that the company is "dedicated to operating in full compliance with applicable regulations as interpreted and enforced by the government of China." Nu Skin has worked in the country for 11 years
Despite its defense, shares of Nu Skin fell nearly 16 percent Wednesday in high volume. Nu Skin shares plunged 33 percent to $75.50 by early afternoon. Trading in the shares was halted four times, once for pending news and three times for high volatility.
Canaccord Genuity analyst Scott Van Winkle cut his rating on the company's stock to "Hold" from "Buy" on Thursday and decreased his target price to $104 from $140 on concerns about risk in China. The analyst said in a research note that the country represents roughly one-third of the company's revenue for 2013 by his estimates, making any upset in that market significant enough to hurt its performance and stock value.
"While we found yesterday's article to be the type of complaint multi-level marketers often face, we believe that any government investigation in China opens questions that we can't forecast," he said in his note. "Even with laws to provide a path, we don't believe that anyone can predict the Chinese government in this instance."
The company is not the first to be hard hit by pyramid scheme accusations.
Nutritional supplement maker Herbalife Ltd.'s shares lost about 40 percent of their value in the days after hedge fund manager William Ackman accused it in 2012 of operating a pyramid scheme, in which a company makes most of its money by recruiting new salespeople, rather than on the products that they sell.
Herbalife has repeatedly denied the claims and rival investor Carl Icahn has disagreed as well, taking his fight against Ackman public and increasing his stake in the company.
The company's stock price later recovered and as of Wednesday's close, its shares are up 76 percent in the past 12 months. But its stock took a hit Thursday as well by association, falling 9 percent to $72.08 in afternoon trading.
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Original headline: Nu Skin plunges as China investigates business
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