This week Durig Capital reviews a supplements company who is combining the best of traditional and online retailing. The Vitamin Shoppe (VSI) has combined the convenience of online retail with the personal service of in-store shopping. The results look impressive for its Q1 results.
- Q1 digital commerce increased 20.7%.
- New customer growth in Q1 was up 10.3%.
- The company’s Spark Auto Delivery program now has 600,000 active subscriptions.
Customers are able to shop online and still receive the personal attention of the company’s Health Enthusiasts (store associates) when needed as well as the ability to do returns / exchanges either in-store or online. Also, in Q1, VSI repurchased $45 million of these convertible bonds reducing the amount outstanding. With online sales in the supplements industry projected to grow an average of 12% annually for the next few years, the Vitamin Shoppe is definitely positioning to capture some of this growth. The company’s 2020 convertible bonds, currently discounted with a yield-to-maturity of more than 11.5%, make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is displayed below.
Highlights from First Quarter 2018 Results
The Vitamin Shoppe recently released its results for the three months ending March 31, 2018. Here are selected highlights from those results:
- First quarter digital commerce increased by 20.7%.
- New customer growth increased 10.3% in the first quarter.
- Since the unveiling of the company’s Spark Auto Delivery program in the third quarter 2017, in-store Health Enthusiasts have been instrumental in signing up new customers, resulting in nearly 600,000 active subscriptions. For VSI, these active subscriptions represent recurring revenue.
- In the first quarter, VSI repurchased $45 million face value of the company’s 2020 convertible bonds at a discount. Total spend for the company was $34 million.
- On May 7, 2018, VSI completed the sale of Nutri-Force, its manufacturing business, to Arizona Nutritional Supplements. Net proceeds realized by VSI were approximately $15 million.
Colin Watts, Vitamin Shoppe CEO shared his view of the company’s first quarter performance. “We’re encouraged with our performance for the quarter as we continue to make progress and delivered results that were in line with our expectations.”
About the Issuer
Vitamin Shoppe is an omni-channel, specialty retailer of nutritional products based in Secaucus, New Jersey. In its stores and on its website, the Company carries a comprehensive retail assortment including: vitamins, minerals, specialty supplements, herbs, sports nutrition, homeopathic remedies, green living products, and beauty aids. In addition to offering products from approximately 1,000 national brands, the Vitamin Shoppe also carries products under The Vitamin Shoppe®, BodyTech®, True Athlete®, MyTrition®, plnt®, ProBioCare®, and Next Step® brands. The Vitamin Shoppe conducts business through more than 775 company-operated retail stores under The Vitamin Shoppe and Super Supplements retail banners, and through its website.
Bringing Offline Services to Online Customers
With more than 700 stores operating across the country, the Vitamin Shoppe is one of the largest health and wellness retailers in the United States. While providing high-quality products is a main focus and critical for its growth, the company gives equal time and energy to providing outstanding and seamless customer service both online and offline. The company’s store associates, known as Health Enthusiasts, are trained to provide personal service and information to help customers find the best products for their individual needs. In addition to this, customers can make personal, virtual appointments to connect to a Health Enthusiast, either online or by phone if they are not able to visit the store in person. The goal is to provide more consistency for the customer, no matter where they interact with the company (online, in-store, or phone call). This personal service for online shoppers began in 2017, when VSI looked to offer more products online. In support of this, the company also pays in-store associates a commission associated with online purchases from customers they have previously worked with.
This integration of the best of online and offline is also apparent in the company’s relatively recent initiation of its Spark Auto Delivery program. Spark enables customers to save on their favorite health and wellness products while receiving them in a flexible, automated shipping schedule. Subscribers receive 10% off of their purchases, receive double Healthy Awards points, free shipping and hassle free returns in-store or online. In addition, the program gives subscribers additional perks such as complimentary, virtual wellness consultations with certified nutritionists. Also, subscribers will receive a complimentary personalized sample box four times a year to help introduce them to new products that may be of interest.
The Health Supplement Industry
The dietary supplements market is being driven by increasing awareness on the part of the consumer, who is seeking preventative healthcare. In addition, it is also being driven by the growth of the aging population. In 2016, North America made up 28% of the $132.8 billion global dietary supplements market. Globally, this market is projected to reach $220 billion by 2022.
For 2017, the supplements market in the U.S. was estimated at $44 billion according to the Nutrition Business Journal (NBJ). According to the NBJ, the supplements industry is expected to register a compound annual growth rate (CAGR) of 6.2% from 2017 to 2021. Sports supplements and meal replacement categories are projected to post the highest CAGRs at 8.6% and 7.9%, respectively. Increased focus on healthy diet and nutrition, along with growing fitness and wellness program participation, serves as a positive trend for the nutritional supplements industry. Retailers of supplements products primarily include specialty retailers and mass merchants, such as supermarkets, drug stores and wholesale clubs. Specialty retailers typically cater to more sophisticated supplements customer by focusing on selection and customer service, while mass merchants generally offer a more limited product line of more mainstream products with less customer service. NBJ anticipates that the specialty retail channel will grow at an average rate of 5.5% through 2021. Additionally, NBJ forecasts the internet channel to grow at an average rate of 12.0% from 2017 to 2021.
Interest Coverage and Liquidity
Interest coverage for bondholders translates to how well a company is able to service its existing debt. For its most recent quarter (three months ending March 31, 2018) the Vitamin Shoppe had operating income of $3.8 million and interest expense of $2.4 million, giving VSI an interest coverage ratio of 1.6x. Also, for Q1, VSI registered net cash provided by operating activities of $18.2 million.
In terms of liquidity, VSI had cash on hand of $1.8 million as of March 31, 2018. Also, the company has borrowed $25 million of the $90 million available on its revolving credit facility. This equates to a total liquidity of $66.8 million.
The risk for bondholders is whether VSI can continue to differentiate its offerings from other specialty supplement retailers. The growth in the company’s digital sales in Q1 is encouraging – up 21%. Also, VSI has created what looks to be an effective hybrid model of retailing, combining the advantages of online-ease of ordering, delivery- with the advantages of offline / in-store transactions, namely, personal service. Based on these developments, the over 11.5% yield-to-maturity on the company’s 2020 convertible bonds appears to outweigh the risks identified.
Summary and Conclusion
The health and wellness industry continues to grow in this country, spurred on by an aging population and busier lifestyles. As consumers look for products to keep them healthy and / or treat illnesses without pharmaceutical drugs, they will continue to look to vitamin and mineral supplements for options. The Vitamin Shoppe has encompassed and combined the convenience of online retailing that the consumer craves, with the personal attention normally associated with an in-store experience. This has resulted in healthy gains in its digital sales for its most recent quarter and company management has stated that it expects this digital growth to continue. Given these developments, VSI’s 2020 convertible bonds, currently selling at a discount with over 11.5% yield-to-maturity make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio.
Issuer: Vitamin Shoppe Inc.
Price: $4.95 (as of 5/22/2018)
Conversion Price: $39.74/share
Ratings: – / –
Yield to Maturity: ~11.54%
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Disclosure: Durig Capital and certain clients may hold positions in VSI’s December 2020 bonds.
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