NYSE:VSI VITAMIN SHOPPE
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%.
Growth in comparable stores sales have been slowing down in the following three years after an increase of 3.7% in fiscal 2014 and fell significantly in 2017/18, primarily due to increasing competition from other sales channels of nutritional supplement (sport nutrition) products according to companies in this sector. Companies’ owned online direct sales seem to have been weak until 2018, after which we have seen a large jump in comparable sales of online from their own websites.
For the first nine months of fiscal 2018 compared with the same period of 2017(ended 20180929)
The organic sales (excluding extra weeks) of this company decreased 2%, primarily attributable to decrease of 2.2% in comparable net sales of both VMHS and sport nutrition products including the comparable stores (down 5.5%) and direct selling customers comparable sales (up 26%).
For fiscal 2017 compared with 2016
The organic sales (excluding extra weeks) of this company decreased 7%, primarily attributable to decrease of 6.5% in comparable net sales of both VMHS and sport nutrition products including the comparable stores (down 6.9%) and direct selling customers. Most of decrease has been from retail of its sport nutrition products and its manufacture sales actually increased.
The organic sales (excluding extra weeks) of this company decreased 7.1% in the first six months of fiscal 2017 compared with the same period of 2016, primarily attributable to decrease of 7.3% in comparable net sales in both VMHS and sport nutrition products from the comparable stores (down 6.7%) and direct selling customers. All decrease has been from retail and its manufacture sales actually increased about 9%.
The organic sales (excluding extra weeks) of this company has no changes in in fiscal 2016 compared with 2015. There is a decrease of 0.9% in comparable net sales in both VMHS and sport nutrition products from the comparable stores (down 1.5%) offset by increase in direct selling customers. Its manufacture sales actually decreased about 4%.
The organic sales (excluding extra weeks) of this company increased 4.4% in in fiscal 2015 compared with 2014, attributable primarily to increase in non-comparable net sales. Comparable net sales are flat in both VMHS and sport nutrition products. Its manufacture sales actually increased about 90%.
Its comparable net sales increased about 3.7% in fiscal 2014.
This company’s gross margin had been stable at around 33% but went down to 30% in the 2018 period primarily because this company written off some of its costs from manufacturing segment. In addition, increased store occupancy costs, probably from opening of new stores, and increase supply costs also contributed to the decrease in gross margin. Due to significantly increased SG&A, which include promotion costs, this company’s operating margin went down largely from about 8% of 2014 to -1% of 2018. Writing off of manufacturing segments accounts for more than half of those decreases. In addition, increase in store operation costs from new stores and promotion costs also 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.
This stock currently has an enterprise price/sales ratio of 0.21($7.8/share), which we think, is relatively fairly valued compared with its peers.
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