NBTY Moves On From U.K. Health Food Retail Misadventure
This article was originally published in The Tan Sheet
Executive Summary
Less than four years after acquiring U.K. chain Julian Graves as a platform for European growth, NBTY absorbs a $20 mil. charge to get rid of the subsidiary, which had “continuing operating losses.” NBTY plans to refocus resources on Holland & Barrett and its other European supplement retailers.
[NBTY Inc.] washes its hands of U.K. health food seller Julian Graves Ltd., electing to refocus resources on its European retail units more in line with its core supplement business.
In an Aug. 7 filing with the Securities and Exchange Commission, NBTY says it absorbed a $20.1 million impairment charge during its fiscal third quarter as it moved the subsidiary into administration – the U.K. equivalent of bankruptcy.
Julian Graves, with 189 locations in Europe, was experiencing “continuing operating losses,” the filing says. Financial advisory firm Deloitte, acting as administrator for the business, will liquidate it if a buyer is not found.
The move marks the end of a disappointing excursion for NBTY outside the supplement arena. The Ronkonkoma, N.Y., company bought Julian Graves in September 2008 for $25 million, hoping its broad base of health and specialty food offerings – including confectionary, fruits and nuts – would provide a new platform for growth in Europe (Also see "U.K. Play Marks Another NBTY Move Felt By Ingredient Suppliers Everywhere" - Pink Sheet, 22 Sep, 2008.).
NBTY CEO Jeffrey Nagel
Photo courtesy of NBTY
“We looked at this business for a while and have taken a lot of actions to improve it,” said NBTY CEO Jeffrey Nagel during an Aug. 9 call with analysts. But “the tough competitive environment in the products it sells and certain rising input costs” finally convinced the company to cut its losses and move on.
The Carlyle Group acquired NBTY in 2010 and soon after brought Nagel on board to replace long-time CEO Scott Rudolph. Under private equity ownership, NBTY’s historically active pace of acquisitions has slowed; its last pickup was a $3.1 million deal in March 2011 for liquid vitamins manufacturer Vitarich Laboratories, which had been bound for liquidation auction (Also see "Vitarich Acquisition Expands NBTY’s Liquid Nutritionals Business" - Pink Sheet, 28 Mar, 2011.).
With Julian Graves out of the picture, NBTY plans to continue driving growth in its European supplement retailers: Holland & Barrett Retail Ltd. and franchises of [GNC Holdings Inc.] in the U.K.; Nature’s Way in Ireland; and De Tuinen in the Netherlands.
The firm’s European retail segment increased sales in the third quarter 1.6% over the year-ago period to $182.9 million, including a loss of 3.1 percentage points to foreign exchange effects. Income from operations in the segment dropped 38.1% to $19.3 million, but increased more than 26% excluding the Julian Graves impairment.
Private Label Still Lags
NBTY’s overall net sales rose 4.7% to $799.5 million in the April-June period. The wholesale business, NBTY’s largest segment, improved 4.7% to $480.1 million, though income from wholesale operations decreased 14.5% to $74 million.
As has been the case in recent years, NBTY said strong growth in contract manufacturing and branded products – which include Nature’s Bounty, Solgar and Sundown Naturals – was offset partially by volume and pricing pressure on its private-label supplements business, which cut into wholesale margins.
Nagel suggested NBTY will pare its private label retail customer base and serve only those accounts that provide sustainable profitability.
“We continue to view the private label business as an important one; it’s a valuable service that we can offer to key accounts,” he said. “But we are increasing the focus on providing the service to select customers with very strategic objectives, and we will continue to pursue operating efficiencies throughout the business that enable us to viably offer this service.”
As for the persistent struggles of private-label dietary supplements – which likewise have stymied Perrigo Co. PLC and Schiff Nutrition International Inc. – Nagel suggested the constant innovation and “freshness” of the branded products space makes it hard for private label to keep pace (Also see "Brand-Boosting Schiff Nutrition Sees Upside In Top-Selling Supplements" - Pink Sheet, 11 Jun, 2012.).
Preparing For Input Cost Spikes
NBTY reported net income of $41.2 million for the quarter, a year-over-year decline of 45.5%. This drop reflects the Julian Graves charge, a significantly higher provision for income taxes and rising ingredient costs.
Sports nutrition stands as one of NBTY’s most rapidly growing categories and increased sales 16.6% in the quarter (Also see "NBTY Pegs Sports Nutrition To Help Offset Private Label Slump" - Pink Sheet, 5 Dec, 2011.). However, whey protein powder, a significant input for the firm’s MET-Rx sports nutrition line, is the main contributor to inflation on NBTY’s cost side, Chief Financial Officer Michael Collins said on the call.
Nagel said the company has offset some impact of higher costs through retail price increases and long-term supplier relationships. Still, external factors such as the ongoing severe U.S. drought likely will wreak further havoc on the pricing of whey powder and vegetable oils.
“While you can’t call something like the whey spike or the corn spike at any given point in time, I think generally we look at an inflationary environment and we need to be prepared,” Nagel said.