Slow pace of innovation hurts sales as Vitamin Shoppe battles industry headwinds, CEO says

By Hank Schultz contact

- Last updated on GMT

Related tags: Vitamin shoppe, Dietary supplement

Slow pace of innovation hurts sales as Vitamin Shoppe battles industry headwinds, CEO says
The Vitamin Shoppe CEO Colin Watts said a slow pace of innovation in the supplements industry has hurt the company, which has relied on a rapid pace of new product launches to keep its shelves fresh. The company reported third quarter earnings that were more or less in line with analysts’ expectations but that represented only very weak sales growth.

Watts, who has been CEO of the supplements retailing giants since March having succeeded Tony Truesdale, said the company has dealt with a number of factors that have depressed results, chief of which is ongoing supplements industry headwinds. The industry overall has hit a soft patch, Watts said, which he attributed to two factors, of which the dearth of innovation is one.

“I think the issue that we are facing this year is, as opposed to even last year, the rate of new ingredients, new products, new forms that are coming into the market are less than we've seen in the past. And so when there isn't a lot of new in this category in particular, especially the retailer ends up taking a little bit earlier of a hit in that front, because the customer just doesn't have a reason to come in and see something new that's going on,”​ Watts told analysts on an earnings call that was posted in transcript form on the site seekingalpha.com​.

Watts also said negative media coverage that has focused on issues of equivocal studies and declining consumer trust, has played a role, too.  Vitamin Shoppe is moving forward with aggressive quality control improvements, he added.  Earlier this year the company entered into agreements with the attorneys general of Oregon and Vermont concerning the ingredient BMPEA.

Watts took the unusual step of publicly acknowledging during the earnings call of the most recent interaction with Rosenblum, who had questioned the presence of the ingredient picamilon in some of the products sold by Vitamin Shoppe.

“Once we received official word that the FDA had taken a position about picamilon not being recognized as a dietary supplement, we moved swiftly to withdraw any picamilon-containing product, all of which were third-party manufactured, from our stores and our website,” ​Watts said. 

“And one of the things we are working very, very hard is to make sure we maintain a high quality standard and continue to rebuild trust with customers and move forward,”​ he added.

Understanding the consumer

Watts said the company had incurred some unusual costs during the quarter relating to detailed consumer research it had undertaken to better understand its core consumers with an eye toward streamlining the company’s dizzying array of brands as the company moves forward with its “reinvention plan.” The company will continue to stand for offering a plethora of choices on the shelf, but wanted to better understand where that could be too much of a good thing, he said.

“I think we take a lot of pride in the fact that we have always been the place that has been a destination for assortment. Both online and in-store, and I think we intend to continue to hold a bit of that leadership role as we move forward,” ​he said.

“That being said, we certainly feel that there are efficiencies that can be had. I will use that an often overused term, I think we believe and our merchandising team believes strongly there's an opportunity to curate our assortment more aggressively because we see a lot of new people who come into the category that are a bit overwhelmed by the amount of choice that they face when they walk into not just our stores but the category overall,”​ Watts said.

Ultimately, Watts said, he wants the company to be in a better position to generate demand out of its own resources, rather than being at the mercy of the category as a whole.  Part of that will be driving innovation out of its fairly newly acquire Nutri-Force contract manufacturing subsidiary, whose integration is proving to be more difficult that originally anticipated.

“I expect as we go into 2016 and beyond, part of the main reason for this customer reinvention work that we're doing is to make sure that we can build out and put more investment behind some of the demand generation capabilities that are within our own control, so we are a little less reliant on some of the vagaries of how the category overall is playing one way or another,”​ he said.

Earnings details

For the quarter, total net sales increased 1.6% to $313.9 million compared to $308.9 million in the same period of the prior year. Reported fully-diluted earnings per share in third quarter 2015 were $0.48, compared with $0.40 in third quarter 2014. Excluding non-operating items in both periods, adjusted EPS was $0.52 and $0.47, respectively.

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