NBTY Targets Unleashing Growth From Private Label Drag
This article was originally published in The Tan Sheet
Executive Summary
“Where we have opportunities to hold on to” private label business, “we'll hold on to it, but not at any cost,” says President and CEO Steve Cahillane. “Due to private label margins” becomes common refrain in NBTY’s income downturn.
[NBTY Inc.]’s private label business has regressed from pinching its gross margins to strangling its growth, the dietary supplement manufacturer and retailer’s executives explain, saying they want to lower their reliance on store brand operations.
“We'll look to manage as effectively as possible our private label business, and where we have opportunities to hold on to that business, we'll hold on to it, but not at any cost,” President and CEO Steve Cahillane said during NBTY’s recent fiscal 2015 first-quarter earnings call.
The business owned by the Carlyle Group did not spare details in its Feb. 11 earnings report to explain that margins from its private label business are an anchor dragging down its overall growth.
Chief Financial Officer and Senior VP Dipak Golechha said first-quarter sales were flat at $826 million but total gross profit slipped 1% to $381 million, “due to private label margins.”
Meanwhile, the wholesale segment decreased 2% to $495 million for the October-December period, “as private label and contract manufacturing declines of 9% offset increases in the branded businesses,” Golechha said.
And, wholesale operations income dropped 22% to $65, “primarily due to the continued decrease in private label sales,” he said.
NBTY’s net sales for the quarter were flat, down 0.2%, at $825.8 million, but net income dropped 46% to $24.3 million.
More Becomes Less
NBTY’s sensitivity to lower-revenue private label operations started after its 2008 acquisition of Leiner Healthcare Products substantially increased the part of its business that provides store brand products for retailers. Executives in 2009 said they did not expect NBTY's gross margins to exceed 50% again, largely because the percentage of its total revenues from private label sales had nearly doubled since its acquisition of Leiner (Also see "NBTY Cites Lower Margins As The Cost Of Higher Private-Label Sales" - Pink Sheet, 16 Nov, 2009.).
In 2011, under the first CEO Carlyle appointed after acquiring NBTY in 2010, the Ronkonkoma, N.Y.-based firm turned to growing sports nutrition and other branded product sales to offset lower-than-expected private label revenues (Also see "NBTY Pegs Sports Nutrition To Help Offset Private Label Slump" - Pink Sheet, 5 Dec, 2011.).
Cahillane, asked during the earnings briefing about the size of NBTY’s private label business, said it accounts for around 20% of the wholesale business and around 10% to 12% of the overall business. The firm needs to grow its other businesses to offset the lower revenues private label generates, said the CEO appointed in August 2014.
“We're not looking to make it a smaller proportion of our business, but if we execute against our plans and grow out branded business the way that we want to grow our branded business, you would see that decline as a proportion of our overall business over time,” Cahillane explained .
The CEO also said taking on additional private label business depends on the revenues a contract would generate, even with competition growing in manufacturing store brand supplements (Also see "H.I.G.’s Capstone Puts Customers First With Custom Formulations" - Pink Sheet, 14 Nov, 2014.).
“We will certainly turn away the opportunity to provide private label if the return is not appropriate for our business … If there is somebody else willing and able to provide that, then we wish them well,” Cahillane said.
“Certainly, for us, we don't want to lose contracts with valuable partners and customers out there, but only to the extent that it makes sense for both parties. It's got to be a win-win and of course the primary driver for us would be margin.”
NBTY reported “very strong” sell-through in the quarter for its U.S. brands, Nature's Bounty up 10% and Sundown up 9%. However, a decline in in-store traffic led to a 4.7% drop in North American retail sales to $53.9 million in the quarter.
European retail sales grew 8.3% in local currency to $213.6 million, and overall international growth and a 10% increase in total orders drove growth in its direct response/e-commerce business 4.6% to $63.1 million.
Golechha noted NBTY has launched vitamins linked to the “Star Wars” film series, hoping to match its “huge success” with “Disney Frozen” children’s products linked to the popular film.