Vitamin Shoppe Fits Product Innovation Into Ongoing Overhaul

The firm in May launches a Next Step weight management product formulated with a proprietorial natural spinach extract proven to promote a feeling of fullness and its first, ready-to-drink protein isolate beverage in a BodyTech product. It also looks to the probiotics space for additional products.

[Vitamin Shoppe Inc.] realizes that even as it makes progress on overhauling its retail environment and contract manufacturing, product innovation remains crucial to sustaining growth for the firm just as it does for the dietary supplement industry.

In addition to continuing the turnaround initiatives it launched in early 2015 after CEO Colin Watts came on board in 2014, the wellness and nutritional product manufacturer and retailer maintains a priority on product development.

It will launch line extensions for its Next Step weight management BodyTech sports nutrition brands in May and looks to the probiotics space for additional products. Next Step AppeFIT product is formulated with a proprietorial natural spinach extract to promote a feeling of fullness and the BodyTech product is the firm's first, ready-to-drink protein isolate beverage.

"The one thing that our channel really benefits from is when there's significant innovation, and we really haven't had a blockbuster innovation in the channel since [weight loss ingredient] Garcinia came out two years ago," Watts said during the firm's May 4 fiscal 2016 first-quarter earnings briefing.

With no reason "to come in to learn about something that's a brand new ingredient," some consumers stay away and look for other products to meet their wellness and nutritional needs, he added.

And probiotics could be the most promising platform for innovations that attract customers to stores or websites. The firm is receiving more probiotic products from other brands it stocks and is focusing more of its own-brand research on the space.

"I think a lot of people have talked about and we continue to see also very good trends on the probiotic front. … I think we're hearing more and more customers come in who are getting recommendations from a variety of different clinicians in that direction," Watts said.

Sales Flat, Traffic Down

The firm's net sales in the quarter were flat at $336.8 and fully-diluted earnings per share were 59 cents, down from 63 cents a year ago. It reported net income down 21.4% to $14.8m and around $3.3m in pre-tax costs, 8 cents per diluted share, related to its re-invention and other initiatives.

Same-store sales were down 1.9% with a 2.6% retail store decline partially offset by a 3.9% increase in online sales.

Chief Financial Officer Brenda Galgano said during the hearing that customers' average spending was flat but the number of customers slipped.

"The negative comp was primarily driven by traffic. Ticket was pretty generally flat to slightly positive year-over-year, so it's really traffic. And as we look to the comp guidance going forward, we really do think that the driver of the change in trends will be traffic and not as much ticket," she said.

It repurchased 1.7m shares of common stock, or 6% of the shares outstanding, for a total purchase price of $42.3m during the quarter. The firm opened nine stores in the quarter and closed one, and plans to open 30 during the year as part of its planned $40m capital expenditures. It also re-stated its full-year guidance of earnings per share at $2.25 to $2.45.

Market analysts allow that Vitamin Shoppe is early in its re-invention, but they also note the firm and others in the industry face challenges.

"While [Vitamin Shoppe] appears to be making progress on its strategy, it is still very early and, therefore, we remain cautious on the shares, particularly given the choppy 1Q comps and industry headwinds," according to a same-day research note by Deutsche Bank Market Research analysts.

Jefferies Equity Research Americas made a similar point: "While the company is working to reinvent itself, core operating results remain weak."

Jefferies analysts, like Watts, noted a lack of innovation-driven sales growth across the space. "We believe a dearth of fad diets and lack of new product innovation in the industry is part of this malaise," they said.

Linking Manufacturing And Marketing

Delivering probiotics and other innovations for its own brands also is behind changes in Vitamin Shoppe's [Nutri-Force Nutrition] manufacturing division. The changes partly focus on better linking the manufacturing and marketing offices to accelerate the cycle for bringing new products under its brands to market.

"We have a dedicated team now that we've never had historically," Watts said.

"It's going to take a little bit of time for the benefits of that restructuring and resourcing to kick in. But I think you're going to see, very end of this year, early next year, you're going to start to see some signs for where that's improving as well," the CEO added.

Vitamin Shoppe reported 7% growth in sales of its own brands during the January-March period and is emphasizing its brands more, including training for store staffs and increased use of sampling and promotions in stores.

The Secaucus, N.J.-based firm also is testing two additional categories for the "Protein Pantry" product segment it launched in 2015 with pancake mixes, nut butters and spreads, powdered peanut butter and other protein-infused products from brands including Buff Bake, D's Naturals, Mancakes and P28 Foods (Also see "Vitamin Shoppe Re-invention Evolves: Customer Segmentation, Category Spread" - HBW Insight, 29 Feb, 2016.).

SKU Trimming 'Methodically'

On the other hand, trimming the product selection in Vitamin Shoppe stores and on its website also is on the table. Its stock-keeping unit pattern has skewed toward adding rather than rationalizing product offerings.

"We have a very, very long tale and it's been the history of the company that we thought it was a strategic advantage to carry the tale. I think we realized … that we don't need to have as long a tale and we'll still have a very comprehensive assortment both in store and online," Watts said.

Pointing out the firm is "still in the very early stages of that step," he said the SKU-trimming will be done "as methodically as possible" and with support from some outside consultants. Changes are not likely until late 2016 or early 2017.

Vitamin Shoppe expects changes sooner, however, in its contract manufacturing business. In addition to making some of Vitamin Shoppe's own brands, Nutri-Force manufactures products on contract for other firms.

Watts said although Nutri-Force revenues were down 6% from the year-ago quarter, its production is increasing.

"We were going through a fairly substantial level of change with Nutri-Force over the first year since we acquired the business. We're now seeing the business settle in. We're getting more reliable in how the business is operating, and it's putting the team down there in a much better position to actually sell against their capacity," he said.

Vitamin Shoppe added the business in its 2014 acquisition of [FDC Vitamins LLC] to cut costs while growing revenues by making more of its own products and growing contract manufacturing revenues (Also see "Vitamin Shoppe Builds Manufacturing Strength, Adds Sports Brands" - Pink Sheet, 10 Jun, 2014.).

Galgano pointed out that Nutri-Force is making a little more than 30% of the firm's own brands and its sales to Vitamin Shoppe 2015 were around $35m, the same level predicted for 2016.