Vitamin Shoppe In Retail ‘Reinvention,’ Contract Manufacturing Correction

[Vitamin Shoppe Inc.] is reinventing itself at retail, including more shelf space for products in adjacent categories, while staying the course in contract manufacturing, a business dogged by problems since the firm entered the space.

CEO Colin Watts says the firm in June began working with consultants on what is expected to be a “year-long project to research, test, design and develop a bold new direction,” including month-long incentives for individual stores to push certain products.

Watts said Vitamin Shoppe’s confidence in its private label and contract manufacturing business stems partly from powder production it expects to start by the end of 2015 and from hiring Mike Beardall as president of the business.

The firm reported adjusted earnings per share of 57 cents as net income dropped 15.8% to $14.2 million for its fiscal 2015 second quarter. Retail sales increased 3.2% to $278 million while direct online sales declined 6% to $30.3 million in the April-June period. Revenues from its NutriForce Nutrition contract manufacturing subsidiary were $13.8 million.

Operating income was flat from retail at $51.6 million and from direct at $5.6 million, but the firm’s loss in operating income from manufacturing increased more than 73% to $1.5 million, according to its earnings statement.

The North Bergen, N.J.-based firm maintains full-year guidance of net sales increasing 5% to 7% and adjusted earnings per diluted share of $2.05 to $2.20.

Brenda Galgano, Vitamin Shoppe’s chief financial officer and executive vice president, said during a same-day earnings briefing with analysts that NutriForce Nutrition revenues were limited by “integration-related disruptions,” which have marked the business’s operations since Vitamin Shoppe added it by acquiring FDC Vitamins LLC in June 2014 (Also see "Vitamin Shoppe Builds Manufacturing Strength, Adds Sports Brands" - Pink Sheet, 10 Jun, 2014.).

“As we improve our sales and operation planning processes and are confident we can consistently deliver strong service levels, we will refocus efforts on not only accelerating manufacturing transition of our private brands but also re-growing the third-party business,” Galgano said.

‘Underinvested’ On Contract Manufacturing

Watts acknowledged in May, after joining the firm in March, that improving its contract manufacturing margins would require substantial changes. Those changes still are being made, he told analysts (Also see "Private Label: A Riddle Wrapped In A Mystery Inside An Enigma For Major Supplement Manufacturers" - Pink Sheet, 18 May, 2015.).

“If there's one area that we'd say we underinvested our time and our focus and now under Mike Beardall's leadership, we're putting more and more emphasis on, it's really in the whole sort of planning area, capacity planning,” he said.

FDC Vitamins operated NutriForce Nutrition as “kind of a short-cycle business,” a model that does not mesh with Vitamin Shoppe’s contract manufacturing strategy, Watts added. The “ability to really portfolio-plan and capacity-plan smartly so we get the most out of the capacity is absolutely critical.”

“As soon as we are certain that we are capable of delivering with assurances of that capacity, that's when we're going to start to have those conversations with customers moving forward,” he said.

‘Focus The Passion’

Also ongoing is “channeling the passion” that Watts has seen retail employees show in encouraging customers to donate to the Vitamin Angels charitable organization into communicating with customers about products, the CEO said.

He said Vitamin Shoppe is rolling out across its stores a program of “sort of month-long sprints” that provide “a meaningful short-term incentive … we think will help to focus the passion of these folks to drive the business itself.”

Some customer interactions will be on product categories adjacent to the vitamin, mineral and supplement space – meal-replacement bars, other functional foods and personal care products – in addition to more on-the-go packaging of existing products the firm plans to introduce. Vitamin Shoppe’s retail re-invention includes more shelf space for the adjacent categories and on-the-go products.

“Over the next year, you will see us continue to test and then broaden our focus on these growth adjacencies. Importantly, the size of our stores enables us to add new categories and optimize our assortment,” Watts said.

One change Vitamin Shoppe currently is not working on is franchising retail operations, though Watts told analysts the firm could be open to the change in the future.

“We certainly see benefit from the fact that we have a company-owned fleet and we have store employees that are directly linked into the Vitamin Shoppe,” he said.

The firm opened 13 stores and closed four during the quarter, bringing the total count to 734. Galgano said 900 stores remains the firm’s target.

“We still see good opportunity for 900 stores,” but with the reinvention work ongoing, “it's probably safe to say that we'll probably not quickly accelerate the rate of new store growth in early 2016,” she said.

In addition to adding Beardall, Vitamin Shoppe hired David Kastin as general counsel and senior vice president. Beardall joined the firm in June from contract manufacturer Capstone Nutrition, where he was president; Kastin moves from similar posts with Town Sports International Holdings Inc., an owner and operator of health and fitness clubs.