Vitamin Shoppe sales rise, but promotional costs rise faster
The need to resort to promotions came as something of a surprise, said CEO Colin Watts. The company responded quickly to a challenge from its competitors but the overall strategy was something of a failure.
“During the second quarter competitive environment is more promotional than we had anticipated. Our biggest specialty competitor increased promotional activity both online and at retail significantly compared to the level of 2015,” Watts said.
“Our promotional response to the competitive environment both online and at retail which drove top line growth had a negative impact on our product margins. I want to emphasize that we are not happy with the returns on these promotions and plan to return to a more normalized promotional strategy going forward,” he added. Watts’ remarks were taken from a transcript posted on the site seekingalpha.com.
Sports nutrition dampens results
The company’s core vitamin and mineral supplement categories continued to perform well, as did probiotics, Watts said. But surprisingly, sports nutrition has been a drag on the company’s returns. Watts attributed this to an ongoing lack of innovation and stiff competition in the category, with a large number of players trying to get a slice of the protein pie. Vitamin Shoppe’s experience points to the possibility that after many quarters of rapid growth the protein product market might be approaching saturation, with competitors resorting to cut-throat promotions to maintain market share. One way out of this dead end is through innovation, a move away from an emphasis on single protein products toward formulas that have additional ingredients and are meant for a broader spectrum of occasions, Watts said.
“Importantly for the first time in many quarters, we are seeing indications of an increase in innovation particularly in the pre- and post- workout categories that we think will benefit our customers in the coming months,” Watts said.
“And so I think what we are seeing now is that there is a lot of both current incumbents that are recognizing that a way to diversify their overall line is to focus a little less on the straight-up sports protein and start to think about the full system of pre and post. While encouraging, it is still early and we are forecasting the sports nutrition category to be a net drag for the remainder of the year,” Watts said.
Vitamin Shoppe has also struggled to incorporate its acquisition of Nutri-Force, a Florida-based contract manufacturer for which it paid $85 million in 2014. The division has been performing below expectations, Watts said, and lost a number of key customers. Replacement customers were acquired, he said, but at the expense of price considerations. Also, the move to bring Vitamin Shoppe’s manufacturing in house at the plant is proceeding more slowly than forecast.
“At this point Nutri-Force is supplying approximately 30% to 35% of our private brand business. And we had estimated originally that we would be producing 40% or plus,” said CFO Brenda Galgano.
Earnings details
Vitamin Shoppe’s total net sales in the second quarter were $332.7 million, 3.2% higher than the same period of the prior year. Reported fully-diluted earnings per share in second quarter 2016 were $0.44, compared with $0.48 in second quarter 2015. Results in second quarter 2016 include approximately $3.4 million (pre-tax), or $0.12 per diluted share, of costs related to certain strategic initiatives. Excluding these items in both periods, adjusted EPS was $0.55 and $0.57, in second quarter 2016 and second quarter 2015, respectively.
