The New Jersey-based retailer reported a $106 million goodwill write down in its latest earnings release. The accounting step contributed to a $3.72 per-share loss that exceeds the price of each share. The company’s stock price closed at $3.51 on Friday, which followed a 30% drop in the price in the minutes after the earnings report was released on Wednesday. Vitamin Shoppe’s share price hit an all-time high of $64.43 in February 2013, but has lost more than 90% of its value since then.
Extraordinary impairment charge
The $106 million goodwill and trade name impairment accounted for most of the loss. Most of the rest came from the closing of a distribution center, and the write off of inventory at the company’s NutriForce contract manufacturing arm, which is undergoing a restructuring.
An ‘impairment’ write down is a GAAP (Generally Accepted Accounting Practices) measure in which a company will reset the perceived book value of its business assets when something changes. In this case it is a reset of the value of the core business itself, which is now worth a fraction of what it was once pegged at.
Excluding that one exceptional measure and the other one-time costs, the company lost 3 cents per share, and reported comparable stores sales declines of 6.6%. Both CEO Colin Watts and CFO Brenda Galgano found hope in those numbers during an earnings call with analysts last week. The decline curve was starting to flatten out, they said, and a bit of the comp sales decline was impacted by the effect of hurricanes in areas where the company does business.
“Our sales results continue to be disappointing, but we are showing some sequential quarter to quarter improvement. Total comparable sales were down 6.6%, with an estimated 80 basis points of this decline due to the impact of hurricanes. Excluding that impact, comparable sales were a negative 5.8%. Our vitaminshoppe.com sales were down 5% in the quarter, an improvement from prior quarters, reflecting actions we took to improve customer acquisition and search engine optimization,” Galgano said.
Sports nutrition commoditization
Watts said sports nutrition seems to have become a race to the bottom. Certain categories, such as whey protein products, have become commoditized, and the consumers have become increasingly price conscious. So although many analysts foresee the increase of sports nutrition sales outpacing the growth of the overall dietary supplement market, it’s not a tide that floats all boats.
“It's the sports nutrition customer, it's the sports nutrition basket that's really defining the decline. In some cases, those are casual customers. In all cases or in the vast majority of cases, those customers are characterized by a much higher degree of price sensitivity than our average customer. They really shop prices in part because many times the things that they are going after are very expensive. Whey protein purchases and others is a very expensive thing. And so they are looking for best prices that they can find,” Watts said in the earnings call. The call was posted in transcript form on the site seekingalpha.com.
New store platform
Being bigger isn’t always better. Vitamin Shoppe now operates 785 stores, and as recently as 2014 was opening new stores at a clip of about 60 new stores a year. But when a retail chain that big suddenly finds itself with stores that no longer match the rapidly evolving retail landscape, all those outlets can become a burden. The company announced in the earnings call a plan to have 20 new ‘brand defining’ stores open by the end of the year. The new stores feature a kombucha bar that Watts said in test markets has been a traffic driver to the stores.
Watts also said the company has a three-part plan in place to stop the bleeding. Vitamin Shoppe will put more effort behind new customer acquisition, and place more emphasis on keeping those customers by among other things enrolling them in an auto delivery program. Also, the chain launched an initiative it calls Shop with Confidence, which is attempting to address the perception that Vitamin Shoppe is a high-priced place to buy supplements.
Watts also said that the company has taken steps to more fully integrate its online platforms with brick and mortar locations. One of the ways this has been done is to reward store managers for online sales associated with their stores. In the past, if a customer came in and received advice about what supplements to buy and then ultimately bought them on Vitamin Shoppe’s online outlet, the store itself didn’t benefit.
“The vast majority of our sales and the vast majority of the segment sales continue to come through bricks and mortar, not through online. But ultimately, customers want to shop where they want to shop and they are looking for where it's appropriate price and convenience,” Watts said. He said the company will unveil a more defined program next year to improve brick and mortar/online integration.