Sector financial performance:

This company, which are primarily retailers of vitamins, minerals, and herbal supplement products (“VMHS”) and sports nutrition products, has been grouped into VMHS& sport nutrition stores sector in natural food industry.

Generally, while we do not have direct data, our company data of sale volume from store-based manufacturers and direct selling manufacturers indicate that the US domestic demand for nutritional supplement products including VMHS may have been shrinking in the past several years. However, the poor performance in manufacturers’ comparable sales number may come from the increasing competition, resulted from larger availability for VMHS products from alternative sales channels such as massive merchandise and club warehouse, which have made the situation even more unfavourable to speciality stores. We see that comparable store sales of companies have decreased at an annual rate of as fast as 3-4% cross the whole sector in the past several years. The online comparable sales presented a larger fluctuation during the same period of time but an accelerating upward trend in 2018.

With increasing competition and decreasing sales, more pressure has been added on price because companies have to lower the price or promote frequently to deal with competitors that usually have bigger economy scales. Therefore, the pressure on price, plus the increased costs that companies have difficulties to pass on to consumers in this situation, have been considered as the main reasons that caused companies’ gross margins shrink. The decreased gross margin, working together with the increase spending on selling and the diluted margin by new opened stores, resulted in more than half cut in companies’ operating margins in the past three years.

The typical gross margin is currently down to about 31% and operating margin is down to 3% in 2018.

According our analysis, companies’ enterprise price/adjusted EBI is around 14with interest/EBITDA ratio of 52%.

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Company performance:

Growth in comparable stores sales had been negative in 2015/16 both from store based sales and e-commerce. However, the decrease in same store slowed down in 2017/18 due to positive increase transactions of online sales.

For first nine months of fiscal 2018 compared with same period of 2017(ended 20180930)

The organic sales of this company decreased 1%. Same store sales decreased 0.6%.

For fiscal 2017 compared with 2016

The net sales of this company decreased 3.4%, primarily attributable to decrease in loyalty program sales and manufacturing/wholesales. Same store sales were flat due to increase of 12% in transactions and decrease of 10% in transaction size.

The organic sales of this company decreased 4.2% in the first six months of fiscal 2017 compared with the same period of 2016, primarily attributable to decrease in same store sales( down 2.4%), less stores, and manufacturing/wholesales.

The organic sales of this company decreased 5.3% in fiscal 2016 compared with the same period of 2015, primarily attributable to decrease in same store sales (down 6.5%).

The organic sales of this company increased 1.1% in fiscal 2015 compared with the same period of 2014, primarily attributable to increase from new same stores. The same store sales went down 2.1%. 

This company’s gross margin has decreased from around 37% of 2014 to about 33% of 2017/18 mainly because of decrease in price/promotion. In addition, increased store occupancy costs, probably from opening of new stores, also deleveraged gross margin. Due to significantly increased SG&A, which include advertising spending and addition of store operation, this company’s operating margin went down largely from about 16% of 2014 to 7% of 20118.

Deflation in price, increased advertising spending, and increased costs related with new stores opening all contributed to this decrease in margin. As a result of decreasing comparable store sales and margins, its operating income and cash inflow have decreased straight and significantly in the past three years.

Stock price

This stock currently has an enterprise price/EBI ratio of 14 ($2.8/share), which we think, is relatively fair considering that the difficult situation that companies in this sector are facing may become long term trend.

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