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2QFY24 EPS and EBITDA Exceed Expectations on Better-Than-Expected Margins

2QFY24 (December) ongoing EPS was $0.10 versus ($0.07) in 2QFY23 and ahead of our $0.04 estimate. Ongoing EBITDA was $3.1MM in the quarter, well above the $0.8MM in 2QFY23 and ahead of our $2.5MM estimate. EBITDA margins of 6.0% exceeded our 4.6% estimate. Sales in 2QFY24 declined 3.8% to $51.6MM, below our estimate for a 1.6% increase to $54.6MM. Excluding currency, sales declined 3.4% versus our estimate for a 2.6% increase. Sales in the US, the company’s largest market (accounting for 72.1% of total sales in the quarter), declined 2.0% versus our estimate for 7.2% growth. However, our estimate may have been a bit optimistic given the difficult comparison of 15.4% growth in the year-ago quarter due to the highly successful launch of its Liquid Collagen product over the summer of 2022. On a two-year stack, growth in the US was 13.1% in F2Q, an acceleration from 7.6% in the F1Q. Total Active Accounts in F2Q were 131k (down 12.1%), below our 138k estimate (down 7.4%) and a sequential decline from the 137k reported in F1Q. As has been the recent pattern, the decline in Active Accounts was mostly offset by higher Revenue per Active Account, which increased 9.4% in the quarter. Gross margin improved 50 bps to 78.6% in the quarter, although it was below our 79.6% estimate. However, this was the first Y/Y improvement in quarterly gross margin since 4QFY20, so we are highly encouraged by the recent trend reversal. Ongoing operating income was $1.4MM in the quarter versus ($0.9MM) in the year-ago quarter. Ongoing operating margin of 2.7% was ahead of our 1.1% estimate, as lower-than-expected gross margin was more than offset by lower commissions and incentive expenses as a % of sales of 42.1% versus our estimate of 45.0%. Management cited higher-than-normal non-commissionable revenue in the quarter for the lower percentage. Ongoing SG&A expenses were 33.8% of sales, about in line with our 33.5% estimate and below the 35.8% reported in the year-ago quarter. Below the operating income line, we calculate that more favorable interest and other expenses and a lower-than-expected effective tax rate may have added a penny each to EPS in the quarter. The company reduced its FY24 sales outlook to $207-213MM from $216-226MM previously. It maintained its ongoing EBITDA outlook of $16-18MM and raised its ongoing EPS outlook to $0.57-0.67 from $0.52-0.62 previously, mostly due to a slight reduction in its effective tax rate and in expected stock compensation expense.