Vitamin Shoppe Hones Innovation As Tip Of Spear For Growth
This article was originally published in The Tan Sheet
Executive Summary
“We're not seeing as many new and unique products as we were four years or five years ago,” CEO Tony Truesdale says. The manufacturer and retailer is adding health and wellness devices to its stores and continues with plans to open 60 stores in both 2014 and 2015.
Dietary supplement manufacturers and marketers are running short on innovation to spur sales growth while the industry faces no shortage of impediments to continued growth, says Vitamin Shoppe President and CEO Tony Truesdale.
“We're not seeing as many new and unique products as we were four years or five years ago,” Truesdale said during Vitamin Shoppe’s fiscal 2014 third-quarter earnings briefing with analysts on Nov. 4.
“I think manufacturers have got to start the work to develop new ingredients and get those ingredients tested and get the studies done on those ingredients and then bring that to market,” he added.
Noting studies questioning the value of multivitamins and omega fish oils and Congress’ criticism of supplement products advertised with unsubstantiated claims, he said the industry in the past two years has “seen more probably negative media than we've seen in quite some time.”
“On top of that, there's not been a lot of product innovation in the category, so the combination I think of those two things has dampened the sales a bit from what I've historically seen from 2006 to the last, say, 24 months or so. That would be my point of view.”
The North Bergen, N.J.-based firm, meanwhile, is “going to evolve to more than just pills and powders,” added Truesdale, who announced in September he plans to retire in June 2015 (Also see "Executive Decisions Roundup" - Pink Sheet, 11 Sep, 2014.).
Vitamin Shoppe is adding health and wellness devices, including the Tommie Copper line of sports compression clothing in addition to electronics for monitoring exercise. Truesdale said the chain’s stores have space for “merchandising flexibility to get into some of these categories.”
“There's a bunch of things we're testing. … we're learning a lot along the way and I think you wake up in 24 months and you'll see some unique categories at Vitamin Shoppe that other retailers don't participate in,”he added.
The firm also is learning along the way about spending on digital advertising, which did not produce expected results during the July-September period.
After some of the firm’s earlier moves to increase its digital advertising spend and expand its digital footprint paid off, “we took a bigger gamble based on some test results,” Truesdale said.
“We didn't get the sales results, so we've dialed that back. We're trying to learn some more. We're trying to figure out what works best for this category and which dollars are best spent,” he added.
Chief Financial Officer and Executive VP Brenda Galgano said selling, general and administrative expenses increased $10 million from the year-ago quarter to $77 million and from 24.6% to 24.8% as a percentage of sales partly due to higher advertising costs.
Stay The Course On Expansion
Vitamin Shoppe maintains its plan to open 60 stores in 2014 and another 60 in 2015, though analysts on the call questioned why the firm is not tempering its expansion.
“The potential for this business at the current 3,000 square feet is 900 stores and we've got 700 stores. So, I think there's still good sites,” Truesdale said.
“We still think it's prudent to open some stores. We're not accelerating that, but certainly not dialing it back dramatically,” he added.
The firm’s preliminary guidance for 2015 also forecasts total comparable sales growth, including e-commerce, at 3% to 5% for the year.
Vitamin Shoppe also is expanding its plant-based protein powders with chocolate and vanilla flavors before the end of the year. “Our own brand products continue to gain traction in key categories such as sports nutrition, and given the success we have seen with other upscale plant products, we are expanding the line,” the CEO said.
Galgano also said after the firm repurchased 201,000 of its common shares for a total cost of $7.8 million in the quarter, it entered a $50 million accelerated share repurchase program, part of its board-approved $100 million share repurchase program, expected to be completed by January 2015.
The firm’s total sales grew 13.4% to $308.9 million – nearly $5.7 million off analysts’ consensus forecast – as e-commerce sales increased 10.5% to $31.3 million and retail revenue grew 6.7% to $260.3 million.
However, net income dropped 25.2% to $12.2 million and reported fully-diluted earnings per share in quarter were 40 cents – 5 cents off analysts’ forecast – compared with 53 cents in the year-ago period. The firm incurred an estimated 7 cents per-share cost during the quarter related to the acquisition of Nutri-Force Nutrition, which was the source of around $20 million in revenue, “in line with our expectations,” Galgano said.
Vitamin Shoppe added manufacturing to its capabilities by acquiring Miami Lakes, Fla.-based FDC Vitamins LLC, which provided contract manufacturing and marketed sports nutrition products under the name Nutri-Force, for $85 million (Also see "Vitamin Shoppe Builds Manufacturing Strength, Adds Sports Brands" - Pink Sheet, 10 Jun, 2014.).