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MusclePharm Bets on Increased Demand for Healthier and More Active Lifestyles

Posted
4/2/2013 8:27:00 AM
By: Trefis
Referenced Stocks:AMZN;GNC;MSLP;VITC;VSI

Submitted by John Smith as part of our contributors program .

The difference between young and old and women and men is slowly disappearing. Today, women go in combat, run faster and longer than many men, and take on sports performed in the past mostly by men including boxing, wrestling, rugby, and mixed martial arts. And we are continually improving our fitness. Seniors who have larger disposable income upon retirement and live healthier and longer can now start planning about getting six packs, going on whitewater rafting trips, and taking rock climbing. One company that facilitates this ability to stay in shape regardless of age and gender is MusclePharm ( MSLP ).

Overview of MusclePharm

MusclePharm was established in 2008 and in 2009 it had $1 million in revenues. In 2012, it recorded revenues of $78 million. While the company is not likely to increase its revenues 78 times or more in the next three years, this is a remarkable growth for any new business. According to a presentation filed with the SEC , MusclePharm plans to achieve the following goals in 2013:

Women and baby boomers

The nutrition supplement industry is experiencing a small renaissance with meal supplements, sports nutrition and herb/botanical showing the fastest growth. According to GNC ( GNC ), the national retailer of supplements, two of the largest growing customer groups for its products are women and baby boomers. Women are 50% of the traffic in GNC stores and they represent 40% of the amount spent. Similarly, baby boomers are looking into supplements as a preventative medicine for high blood pressure/cholesterol, digestion, brain and eye health, and loss of muscle and bone density. Overall the supplement industry worldwide is expected to reach about $92 billion in sales from $28 billion in 2007.

Supplements industry

MusclePharm can be compared to GNC, Vitamin Shoppe ( VSI ), and Vitacost ( VITC ). These three companies are major sellers of supplements and vitamins, each having different characteristics. For example, Vitacost is a value proposition that does business through its web site with no physical stores. Thus, its customers are not required to pay sales taxes at the point of purchase. GNC operates its own retail stores, has franchisees, and a small wholesaling business. And Vitamin Shoppe operates through 579 company owned stores and an online store primarily in the U.S. with small presence in Puerto Rico and Canada.

MusclePharm major products are mostly targeted towards muscle building, weight loss and general fitness with a daily nutritional supplement regimen. The company offers about twenty products formulated through a six-stage research process, which are sold at over 10,000 stores in the U.S. and more than 110 countries. The company selling channels include specialty retailers, supermarkets, drugstores, mass merchants, multi-level marketing organizations, online retailers, and mail-order companies. While the company was started as a provider of supplements to endurance athletes and bodybuilders, MusclePharm recently launched a brand targeted specifically to women, FitMiss, and it also offers Assault energy shots for convenience stores.

MusclePharm is almost exclusively focused on fitness and healthy lifestyle. For comparison, sports and diet comprised 43% and 12%, respectively of GNC 2012 domestic revenues. Similarly, specialty supplements and sports nutrition comprised 52.7% of Vitamin Shoppe 2012 revenues. Vitacost does not break its sales by product line but it does mention that sports nutrition is one of its fastest growing areas. Each company has been able to grow its revenues significantly in the past few years. MusclePharm revenues in 2010 were $4 million and increased nearly twenty fold to $78 million in 2012. GNC, Vitamin Shoppe, and Vitacost revenues in 2012 reached $2.4 billion, $951 million and $331 million, respectively. This represented an increase of 33.4%, 26.6% and 45.5% from 2010 sales levels for GNC, Vitamin Shoppe and Vitacost, respectively. It is interesting to note that Vitacost has the fastest growth after MusclePharm and similar to MusclePharm had recorded a negative operating income for the past three years.

MusclePharm operates out of a 30,000 square headquarter/medical/sports facility. It does not have a brick and mortar stores like GNC and Vitamin Shoppe and it sells a limited number of products compared to thousands of products sold on Vitacost web site. Due to these two main reasons, MusclePharm has had no choice but to spend disproportionately large amounts to its sales on endorsements, sponsorships, and brand extensions. This has contributed to the relatively low margins at MusclePharm. However, marketing expenses should decline as a proportion of sales as the company continues to grow revenues.

Conclusion

MusclePharm is a relatively young company that operates in an industry that is expected to exhibit healthy growth rates due to an increased demand for healthier and more active lifestyle across genders and age groups. MusclePharm has been able to develop a number of first-class products that have contributed to a sales growth far outpacing that of the nutrition supplement industry in general. It continues to test its products for safety, how it can improve them, and how it can develop completely new products. In the short-term, MusclePharm is well positioned to achieve its 2013 goals (discussed above). And longer-term, it could reach economies of scale similar to those of its larger competitors including GNC, Vitamin Shoppe and Vitacost.