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Vitamin Shoppe Sees Healthy Sales, Earnings Results

By: Investor's Business Daily
Posted: 7/6/2012 2:19:00 PM
Referenced Stocks: GNC;VSI

The medical industry long ago moved to a specialized business model, where patients see different doctors for different needs rather than depend on a single physician to check out all of their parts.

The health and nutrition industry has followed that lead. It wasn't that long ago that consumers who wanted vitamins or health foods were usually stuck with whatever they could find at the local drug or grocery store.

No more. A rising number of organic groceries and health food stores now compete with traditional supermarkets for grocery dollars. Similarly, traditional pharmacies are seeing competition from the growing number of stores that specialize in vitamins and nutritional supplements.

Vitamin Shoppe ( VSI ) operates more than 500 of those stores nationwide. It might end up doubling that number before its expansion plans are through.

Analysts figure there's plenty of demand to justify that growth strategy, thanks to an ever more discerning class of consumers.

"There's been a shift toward specialized retail channels, and Vitamin Shoppe benefits from that," said Damian Witkowski, analyst at Gabelli & Co.

Expert Opinion

"If you work out regularly, watch your diet, care about your health and want to learn more about vitamins, you want to go get an expert opinion," he added. "Vitamin Shoppe offers that. Grocery stores and other retailers don't have that kind of expertise."

In addition to vitamins, Vitamin Shoppe sells herbs, homeopathic drugs, minerals, specialty supplements, sports nutrition, weight management and other products. It sells through retail, Internet and mail order catalogue channels.

As of Jan. 28, it had 533 stores in 40 states and Puerto Rico.

Vitamin Shoppe mainly competes against Pittsburgh-basedGNC Holdings ( GNC ), a much larger global operation with locations in 48 countries. GNC boasts more than 4,800 retail locations in the U.S., including more than 1,000 franchise and 1,200 Rite Aid store-within-a-store locations.

Witkowski estimates the vitamins and supplements market in the U.S. at about $27 billion and growing.

Vitamin Shoppe and GNC have both benefited from an increased focus on health and nutrition.

"The market has been growing consistently for many years as more consumers show an interest in sports nutrition and health," Witkowski said.

Wall Street has taken note. GNC's stock, which debuted in April 2011, hit a record high of 41.95 on April 27 and currently trades near 39. Vitamin Shoppe shares touched an all-time high of 55.35 on Friday.

Much of Vitamin Shoppe's attraction to investors is its consistent financial growth, experts say. The company almost always delivers double-digit or better revenue and earnings gains.

Its sales have grown an average of 12% a year over the last five years. EPS have averaged 60% growth over the same period.

The company posted first-quarter earnings of 61 cents a share, up 30% from the prior year and 4 cents above consensus views. Revenue rose 14% to $248.1 million, also above estimates.

Same-store sales climbed 9.6% from a year earlier, while e-commerce sales grew 15%.

The operating margin rate rose 96 basis points from the prior year to 12.3%.

"The company was able to leverage space and supply chain costs (so that) relatively modest gains on the top line were magnified on the bottom line," Zacks Equity Research noted in a recent report.

Commenting on Vitamin Shoppe's Q1 results, JPMorgan analyst Christopher Horvers said in a note that a "stepped-up media presence" contributed to gains in foot traffic from new and existing customers during the quarter.

"Vitamin Shoppe saw strong performances in all categories, including consistently good sales in sports nutrition, homeopathic and specialty supplements, and strength in weight management and meal replacement as well as on the go drinks and natural proteins," Horvers said.

Strength in these categories helped offset deceleration in commodity products, such as multivitamins, he added.

Vitamin Shoppe's stock price shot up 21% over a two-session period following its first-quarter results, establishing a then-record closing high of 54.07 on May 9. Shares have continued to push higher since then.

Earnings Growth

Analysts surveyed by Thomson Reuters expect Vitamin Shoppe to grow annual earnings 17% this year and 18% in 2013.

Despite the company's name, vitamins contribute only 13% of its overall sales. Sports nutrition and specialty products each generate a little less than 30% of the total. Herbs and botanicals provide 20% of sales, with the rest coming from meal supplements, minerals and other products.

About 25% of Vitamin Shoppe products are higher-margin proprietary brands, such as Vitamin Shoppe, Body Tech and True Athlete.

All of Vitamin Shoppe's stores are located in the U.S. Although the company has plans to move into Canada next year with a couple of stores, analysts figure it still has plenty of room to grow in the U.S. before it needs to make a bigger move internationally.

"They are exploring a smaller store concept which will expand their potential in the U.S.," Witkowski said. "They talk about having about 900 stores over time in the U.S., which I think is still a little conservative."