Turnaround Lagging, Vitamin Shoppe Heeds Hedge Fund Direction

Shah Capital Management, with 17.7% of Vitamin Shopper shares, and Vintage Capital Management , which owns 14.8%, will appoint three of five replacements to Vitamin Shoppe's board and will have a say in the other two. Vitamin Shoppe also will sell its under-performing contract manufacturing unit and tender, subject to ratification by Shah and Vintage, up to $25m of its common stock at a per-share price not to exceed $5.

Two hedge funds that acquired a third of [Vitamin Shoppe Inc.] shares over the past year hold great sway over the firm's future under an agreement it offered the investors as its attempted business turnaround continues to struggle.

The nutritional, health and wellness manufacturer and retailer also announced on April 23 that it will sell its contract manufacturing business, a drag on earnings since acquiring it four years ago.

Additionally, Vitamin Shoppe will commence a tender offer, subject to ratification by hedge funds gaining board seats, for up to $25m of its common stock at a per-share price not to exceed $5. Any of the $25m unspent in the tender will go toward to repurchasing a portion of the firm's 2.25% convertible senior notes due in December 2020 at a price reflecting a discount of 26% or more to the notes’ principal amount, according to the cooperation agreement. Vitamin Shoppe recently repurchased $45.4m in aggregate principle amount of its 2.25% convertible senior notes due December 2020.

Shah Capital Management Inc., with 17.7% of Vitamin Shopper shares, and Vintage Capital Management LLC, which owns 14.8%, will appoint three of five replacements to the firm's board and have a say in appointing on the other two, another. according to an April 20 Securities & Exchange Commission filing.

Vitamin Shoppe's SEC filing lays out details of a cooperation agreement between it and the investment firms, which began amassing significant shares in the firm in early 2017. Shah Capital and Vintage Capital agreed to vote all their shares in favor of all director nominees at the 2018 and 2019 shareholder meetings and not to make public comments or solicit offers or bids on potential merger and acquisition moves by the firm, including buying all the firms' shares and taking it private, according to the SEC filing.

The two investment firms also agreed not to cooperate with each other to acquire additional shares and take over Vitamin Shoppe's management.

However, those restrictions on attempts by Shah Capital and Vintage Capital to influence the firm's management end before Vitamin Shoppe's 2020 shareholder meeting.

Shah Capital's representatives are Himanshu Shah, the Raleigh, N.C., firm's president, and Sing Wang, a principal in the firm. Vintage Capital Management LLC, designated as a Vitamin Shoppe director Melvin Keating, a member of the Orlando, Fla., firm's advisory board and previously CEO of Alimco Financial Corp.

Of the two additional replacements to the board, one would be proposed by the Vitamin Shoppe and be "reasonably acceptable" to Shah Capital and Vintage and the other would be agreed to by the firms and the investors.

The members will be appointed to the board within five days of the agreement and two independent directors likely will be added at a later date, with all five standing for election at the firm’s 2018 annual meeting of stockholders scheduled to occur before June 30, Vitamin Shoppe said.

The directors will replace four current board members who will not stand for reelection during the meeting, in addition to outgoing director and CEO Collin Watt; the firm did not identify departing board members. The five members who continue with the board, the three investors' representatives and the two replacements appointed by Vitamin Shoppe will comprise the board until Watt's successor as CEOis appointed and the board will return to 11 members. 

Vitamin Shoppe’s stock price slipped 9% to $3.90 when it reported its fourth-quarter results but has since climbed steadily 24% to close at $4.85 on April 23.  

Vitamin Shoppe's investor-driven board change comes two months after the largest US nutritional, health and wellness firm, [GNC Holdings Inc.] got a new largest shareholder, joint venture partner and board voting bloc in Chinese firm Harbin Pharmaceutical Group Co. Ltd. GNC in February announced that Harbin Pharmaceutical will invest approximately $300m in GNC, becoming the single largest shareholder, and the two firms will form a JV for manufacturing, marketing and distributing GNC-branded products in China. With the investment, GNC's board expanded from six to 11 members, comprising GNC Chairman and CEO Ken Martindale, five appointed by both Hayao and five by GNC.  (Also see "GNC's New Partner Brings China Access And Funding, Takes Board Seats" - HBW Insight, 14 Feb, 2018.)

Shah Capital Influences Avon, Too

Shah Capital and Vintage Capital are among the institutional investors that own around 89% of Vitamin Shoppe shares. Other hedge funds that have bought or increased their stakes over the past year include Macquarie Group Ltd., Lazard Asset Management LLC, Crossmark Global Holdings Inc., Crossmark Global Holdings Inc., Pinebridge Investments L.P. and Stone Ridge Asset Management LLC.

Shah Capital also has been active in attempting to influence the direction of cosmetics and personal care product direct seller

[Avon Products Inc.], according to the firm. In January, it joined Barington Capital Group L.P. and NuOrion Partners, which collectively own around 3.5% of Avon stock, sent a letter to the Avon board calling for a financial advisor to explore all strategic alternatives, including a sale of all or parts of the company.

Avon in February appointed Unilever PLC executive Jan Zijderveld CEO. In 30 years at Unilever, Zijderveld started as a foods brand manager in New Zealand and was president of the Anglo-Dutch firm's European business before moving to Avon. (Also see "Unilever Exec Takes Avon's Reins, Says 'Business As Usual' Not An Option" - HBW Insight, 5 Feb, 2018.)

And in March, Avon agreed to cede a board seat to the activist investors. James Mitarotonda of Barington Capital was to get a board seat in exchange for an agreement to support management. Barington, NuOrion and Shah Capital agreed to support the board’s nominees rather than nominate their own as they had told Avon they intended to do, according to Shah Capital.

Nutri-Force For Sale

In its latest quarterly earnings briefing, Vitamin Shoppe announced Watts will depart after the “retail re-invention” he launched when he joined the company in 2015 failed to drive growth. (Also see "Vitamin Shoppe CEO's Consumer Engagement Fails To Engage Growth, Board Disengages Him From Helm" - HBW Insight, 27 Feb, 2018.)

The retail changes he guided included revamping store layouts to engage customers with brands, health and nutrition information and sales staff. He also implemented the Spark subscription-delivery program featuring exclusive deals and information, restructuring the firm’s loyalty program and developing an omni-channel plan that incorporated e-commerce into its messaging and promotions to consumers.

Vitamin Shoppe reported 2017fourth-quarter total sales down 11.8% to $268.8m and net loss increasing to $17.6m from $11.6m in the prior-year period. For the fill year, net sales fell 8.5% to $1.2bn for a net loss of $252.2m after reporting net income of nearly $25m in 2016. The firm reported it was considering divesting its Nutri-Force Nutrition contract manufacturing business, which has been a struggle for the retailer since it acquired the Miami Lakes, Fla.-based business in 2014 for $85m. (Also see "Vitamin Shoppe Builds Manufacturing Strength, Adds Sports Brands" - Pink Sheet, 10 Jun, 2014.)

Early in his tenure with the Vitamin Shoppe, Watts noted that Nutri-Force operated as a “short-cycle business” a model that didn’t mesh with the retailer’s own contract manufacturing strategy. The company announced that Michael Beardall, Nutri-Force president beginning in 2015, decided in December 2017 to leave the firm at the end of the year.

Nutri-Force could be on the block at a good time with an uptick in vitamin merger and acquisition activity as larger consumer health companies seek to invest in categories that are part of the self-care movement and as many act on benefits of US tax reform.

On April 19, Procter & Gamble Co. announced an agreement to purchase Merck KGAA's consumer health business, which includes a range of vitamin and dietary supplement brands for women’s health, energy and mobility, including Bion, Cebion and Seven Seas. (Also see "P&G Adds Merck's Brands, Expands Consumer Health Categories, Footprint" - HBW Insight, 19 Apr, 2018.)

In March, [Clorox Co.] expanded its footprint in the nutritional sector with its $700m purchase of Nutranext LLC, a manufacturer and marketer of multivitamins business with brands including Rainbow Light and Natural Vitality.

From the editors of The Tan Sheet.