NBTY Trims US Retail Profile While Exiting Contract Manufacturing

The Vitamin World deal jettisons one of NBTY's slower-performing businesses after the firm previously began exiting the low-margin contract manufacturing sector. The acquisition by a Centre Lane Partners unit is the second private equity move in the supplement space in two weeks.

[NBTY Inc.] sheds its Vitamin World Inc. US retail chain as private equity interest in the dietary supplement arena spreads with a Centre Lane Partners LLC affiliate paying $25m for the 380-store and online business.

The deal announced Feb. 2 jettisons one of NBTY's slower-performing businesses after the manufacturer and marketer previously said it will leave the low-margin contract manufacturing business. Before being acquired by the Carlyle Group in 2010, NBTY already was wrestling with a drag on its earnings from contract manufacturing, which increased significantly as a part of the firm's business with its 2008 acquisition of bankrupt Leiner Healthcare Products.

According to a same-day Securities and Exchange Commission filing by Ronkonkoma, N.Y.-based NBTY, Centre Lane's VWRE Holdings Inc. affiliate is acquiring Vitamin World for an aggregate consideration of around $25m in cash and a promissory note.

NBTY also will receive a 10-year warrant entitling it to purchase a lump sum of VWRE common stock representing 10% of its fully diluted equity at the closing of the transaction.

The acquisition by VWRE Holdings is the second private equity move in the supplement space in two weeks, coming on the heels of Swander Pace Capital's Jan. 25 acquisition of manufacturer and marketer [Swanson Health Products Inc.] Swander also acquired Captek Softgel International Inc., which makes vitamin, mineral and supplement softgels, from Prairie Capital and Skyline Global Partners in December .

NBTY's place on Carlyle's list of holdings is the result of the largest private-equity play in the supplement market so far; Carlyle paid $4bn to take NBTY private in 2010 and made the firm a subsidiary of its Alphabet Holding Company Inc. business.

New York-based Centre Lane says it focuses on investing in North American middle market companies across a range of industries, targeting companies with revenues between $20m and $500m that "have leading market positions and sustainable competitive advantages in their respective niches."

Manufacturing A Drag On Revenues

With Vitamin World, which has stores around the US including Guam, Puerto Rico and the Virgin Islands, VWRE enters a market led by [GNC Holdings Inc.]'s retail chain with more than 9,000 domestic and international stores.

GNC in October said it had more-than 6,700 US retail locations, including 1,062 franchise and 2,319 Rite Aid store-within-a-store locations, and franchise operations in more than 50 countries.

Pittsburgh-based GNC reported its fiscal 2015 third-quarter retail sales from company-owned stores were flat, down 0.3%, at $486m, though operating income from retail sales, including e-commerce, was down to $55.4 million from $90 million in the prior-year quarter and the sector's part of the firm's overall revenue was down to 11.4% from 18.7%.

GNC reported revenues for its manufacturing/wholesale segment, which includes contract manufacturing, were flat for the quarter at $62.6 million. The firm expects flat revenues from contract manufacturing as it works on reinvigorating the business as a growth driver (Also see "Private Label: A Riddle Wrapped In A Mystery Inside An Enigma For Major Supplement Manufacturers" - Pink Sheet, 18 May, 2015.).

The second-largest supplement retailer, [Vitamin Shoppe Inc.], operates more than 700 company-owned stores predominantly in the US, including Super Supplements and Vitapath stores as well as stores using its own brand. Its net sales, retail and online combined, grew 3.8% to $301.4m during the July-September period, the Secaucus, N.J.-based firm reported.

Vitamin Shoppe's manufacturing revenues grew 3.5% in the third quarter to $20.7m. The firm earlier in 2015 marked its commitment to turning around the business by adding powder production to its capabilities and hiring a new president for the unit (Also see "Vitamin Shoppe In Retail ‘Reinvention,’ Contract Manufacturing Correction" - Pink Sheet, 10 Aug, 2015.).

Like GNC and Vitamin Shoppe stores, the Vitamin World chain offers its own brand of products in addition to other vitamin, supplement, health and wellness brands, including NBTY's MET-Rx,Nature’s Bounty, Osteo Bi-Flex, Pure Protein, Solgar and Sundown Naturals products.

Unlike the other manufacturer/retailers, NBTY does not disclose separate-sector sales totals. Total net sales in the July-September period, its fiscal 2015 fourth quarter, were flat, up 0.5% from the prior-year period, at $796.9m, according to the company’s November SEC filing on its quarterly and full-year results.

International Retail Grows, US Slows

In addition to Vitamin Word, NBTY's retail channels include its Puritan's Pride catalog sales and the 834-store Holland & Barrett International retail chain in 12 countries, primarily in the UK but also in other European markets, China, Singapore, United Arab Emirates, Cyprus, Malta and Kuwait; 161 De Tuinen stores in the Netherlands; 18 Essenza stores in Belgium; and also in the UK, 49 GNC and MET-Rx co-branded stores, which are being changed to the MET-Rx brand alone, according to NBTY's SEC filing. Those retail lines also offer online sales.

The firm estimated 60% of it sales in its fiscal 2015 would be in the US, and it has been "dependent to a large degree upon the success" of Vitamin World and other retail operations, according to the SEC document. "There can be no assurance that the retail channel will be able to grow as it faces price and service pressure from other channels," NBTY stated.

NBTY, again, like GNC and Vitamin Shoppe, has been making a similar forecast about its contract manufacturing and private label revenues. The firm in August said it will cease contract manufacturing as it increases its focus on growing its branded product and retail businesses, particularly international (Also see "NBTY Cuts Its Losses, Leaving Contract Manufacturing" - Pink Sheet, 17 Aug, 2015.).

The company moved to cut its manufacturing costs in June by agreeing to sell its nutritional bar and powder manufacturing operations to Nellson Nutraceutical LLC and also purchase those products from Nellson in a deal expected to close in the first half of its fiscal 2016.

While trimming its manufacturing operations in 2015, NBTY also spread its brand holdings by acquiring the Dr. Organic Ltd.’s skin care line, which it already was selling at its UK and US retail chains (Also see "NBTY Brand Mission Moves Into Personal Care Space" - Pink Sheet, 18 Aug, 2015.).

NBTY says branded products accounted for around 75% of consumer product sales in its fiscal 2015 and 25% came from private label products, a sector where the firm sees particular threat.

"Increased competition from companies that distribute through the wholesale channel, especially the private label market, could have a material adverse effect on our business, results of operations, financial condition and cash flows as these competitors may have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities far greater than ours," according to the firm’s November SEC filing.