Our “gross profit” consists of net sales less “cost of sales,” which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products as well as shipping and handling costs, including duties, tariffs, and similar expenses.
While certain Members may profit from their activities by reselling our products for amounts greater than the prices they pay us, Members that develop, retain, and manage other Members may earn additional compensation for those activities, which we refer to as “Royalty overrides.” Royalty overrides are a significant operating expense and consist of:
•royalty overrides and production bonuses;
•the Mark Hughes bonus payable to some of our most senior Members; and
•other discretionary incentive bonuses to qualifying Members.
Royalty overrides are compensation to Members for the development, retention and improved productivity of their sales organizations and are paid to several levels of Members on each sale. Royalty overrides are compensation for services rendered to us and, as such, are recorded as an operating expense.
In China, our independent service providers are compensated for marketing, sales support, and other services instead of the distributor allowances and royalty overrides utilized in our global Marketing Plan. The majority of service fees to China independent service providers are included in selling, general, and administrative expenses.
Because of local country regulatory constraints, we may be required to modify our Member incentive plans as described above. We also pay reduced royalty overrides with respect to certain products worldwide. Consequently, the total Royalty override percentage may vary over time.
Our “contribution margins” consist of net sales less cost of sales, Royalty overrides, and service fees to our independent service providers in China, for the purposes of segment reporting specifically, as discussed further below and described in our Note 6, Segment Information, to the Condensed Consolidated Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
“Selling, general, and administrative expenses” represent our operating expenses, which include labor and benefits, service fees to China independent service providers, sales events, professional fees, travel and entertainment, Member promotions, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses, and other miscellaneous operating expenses.
Our “other operating income” consists of government grant income related to China.
Most of our sales to Members outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on gross profit and can generate foreign currency losses on intercompany transactions. Foreign currency exchange rates can fluctuate significantly. From time to time, we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in Part I, Item 3, Quantitative and Qualitative Disclosures about Market Risk, of this Quarterly Report on Form 10-Q.
Summary Financial Results
Net sales were $1,221.7 million for the three months ended March 31, 2025. Net sales decreased $42.6 million, or 3.4%, for the three months ended March 31, 2025, as compared to the same period in 2024. In local currency, net sales increased 1.4% for the three months ended March 31, 2025, as compared to the same period in 2024. The 3.4% decrease in net sales for the three months ended March 31, 2025 was primarily driven by a 4.8% unfavorable impact of fluctuations in foreign currency exchange rates and a 2.3% decrease in sales volume, partially offset by a 3.7% favorable impact of price increases.
Net income was $50.4 million, or $0.49 per diluted share, for the three months ended March 31, 2025. Net income increased $26.1 million, or 107.4%, for the three months ended March 31, 2025 as compared to the same period in 2024. The increase in net income for the three months ended March 31, 2025 was mainly due to $60.3 million lower selling, general, and administrative expenses driven by lower labor and benefits costs (see Selling, General, and Administrative Expenses below for further discussion), and $13.4 million lower royalty overrides driven by lower net sales, partially offset by $22.8 million lower gross profit driven by lower net sales, $14.1 million higher interest expense, net, and $10.7 million higher income taxes.