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

GNC Holdings Inc(NYSE:GNC)Health supplement retailer Vitamin Shoppe Inc (NYSE:VSI) announced fourth quarter results recently. Revenue grew only 2% on a reported basis to $218 million, but the company was lapping a 14 week quarter in the prior year. Therefore, on a comparable basis, we think sales grew closer to 10% year-over-year, though the number was still slightly below expectations. Earnings, excluding certain items including the integration costs of Super Supplements and the impact of Sandy, were $0.40 per share, in line with consensus expectations and 29% higher than the same period a year ago.

Same-store sales growth was fairly solid, in our view, up 5.2% year-over-year in spite of a 1.6 percentage point drag from Hurricane Sandy. This lagged competitor GNC Holdings Inc (NYSE:GNC), which reported same-store sales growth of 7.1% during the fourth quarter. Many seem to think that GNC’s new Gold Card program that provides consumers with discounts every day is eating into Vitamin Shoppe Inc (NYSE:VSI)’s sales growth. To some extent, we agree. GNC Holdings Inc (NYSE:GNC) has proven to have a sticky customer base, and it has a larger network of supplement stores.

However, we at Valuentum think the real game changer for GNC Holdings Inc (NYSE:GNC) and Vitamin Shoppe is online competition. As regular supplement users become more educated on the supplements themselves, we believe they tend to search online for the lowest cost rather than looking for in-store convenience and expertise. Not surprisingly,, Inc. (NASDAQ:AMZN) has vendors selling supplements in its marketplace. Again, it’s no surprise that Amazon also has among the lowest prices. Upstart, which has several millions of loyal fans, also provides strong competition in the space. The company has consistently low prices, and it rarely increases product prices out-of-step with market price inflation.

A price comparison on Optimum Nutrition’s Gold Standard Whey Protein reveals the following:

5 LB 100% Whey Protein from ON Price “List” Price Shipping? Total Cost $52.99 $     74.95 $   7.94 $    60.93 $52.99 $     82.45 $     – $    52.99 $54.99 $     92.99 $   1.00 $    55.99 $52.99 $     99.49 $     – $    52.99

Source: Valuentum, company websites

To compete, GNC Holdings Inc (NYSE:GNC) and Vitamin Shoppe Inc (NYSE:VSI) will have to continue to charge lower prices to match those of Amazon. Although is slightly costlier than competitors, buyers also get several free supplement samples and other free items when ordering (so the above may not be apples-to-apples in terms of complete value add). also has about 300,000 more “likes” on Facebook Inc (NASDAQ:FB) , indicating its popularity with younger consumers that are highly likely to spend a significant amount of money on supplements now and in the future. Still, price transparency and Amazon’s presence will keep margins in check for the industry, in our view.

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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