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Vitamin Shoppe Inc (VSI) Falls…Is the New GNC Holdings Inc (GNC) Gold Card Program to Blame?

In Vitamin Shoppe Inc (NYSE:VSI)’s fourth quarter, however, gross margins advanced about 140 basis points year-over-year to 34.9% (adjusted for the extra selling week). Management noted that the firm is benefitting from occupancy leverage, but we don’t like the long-term trajectory of industry-wide gross margins. Management agrees, saying:

As previously discussed, longer-term, we expect product margin to be flat as initiative to improve gross margin are offset by product mix and channel shifts in our business that are unfavorable to gross margin.

SG&A costs were up 100 basis points as a percentage of revenue to 27.4%, though management cited start-up expenses in Canada and Super Supplement integration costs as the main driver behind the inflation. We’re a bit puzzled by the Super Supplements acquisition, as we do not think the firm should have bought a second-tier online retailer when it could leverage its own brand to create a superior online infrastructure.

Vitamin Shoppe generated $48 million in free cash flow during 2012, down slightly from the $52 million it generated in 2011. Capital expenditures are expected to be $45-$50 million in 2013, so we are not expecting the firm to generate robust free cash flow this year. Though we are a bit surprised by the dramatic sell off in the shares, the industry’s structure leaves much to be desired. We’re steering clear of Vitamin Shoppe in the portfolio of our Best Ideas Newsletter.

The article Vitamin Shoppe Falls…Is the New GNC Gold Card Program to Blame? originally appeared on and is written by RJ Towner.

and is written by RJ Towner

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