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Friday, November 6, 1998

FOOL ON THE HILL
An Investment Opinion
by Warren Gump

Industry In Turmoil: How Can Investors Profit?

Holders of vitamin-related stocks have had a pretty unhealthy second half of the year. The problems were exacerbated yesterday when Rexall-Sundown (Nasdaq: RXSD) announced that earnings per share for the quarter ending in November would fall below the prior year's $0.20, which is well below analyst estimates of $0.28. Not surprisingly, Rexall tumbled 41% to $13 1/16. In sympathy, most of the other major stocks in the industry fell as well, with General Nutrition (Nasdaq: GNCI) and Twinlab (Nasdaq: TWLB) each falling 17%, Natures Bounty (Nasdaq: NBTY) tumbling 15%, and Whole Foods Markets (Nasdaq: WFMI) squeezed for a 9% hit.

These plunges follow an even more severe hit taken by the sector in early August when General Nutrition stated that it would cut prices on basic products to battle increasing competition. On the news of a potential price war, all of the above stocks fell over 20%, except for Nature's Bounty, which "only" fell 14%. To see the cumulative impact of these events, the table below shows the total losses in these stocks since June 30th:

         6/30/98       11/5/98     Loss
RXSD 35 5/8 13 1/16 63%
NBTY 18 3/8 7 5/8 58%
GNCI 31 1/8 14 1/4 54%
TWLB 43 11/16 21 11/16 50%
WFMI 60 1/2 39 13/16 34%


Ouch! These stocks have definitely not been supplements to shareholders' portfolios over the past five months. This whole situation brings up "the cockroach theory," an adage on Wall Street that notes, just like with cockroaches, when you see one bit of bad news, it is more than likely additional problems will surface.

A problem was noted by General Nutrition in early August, and now in November we are seeing additional problems emerge at Rexall. Will other companies be impacted by the problems at these two major industry players? Probably. Will the industry implode into bankruptcy? Probably not. As noted in one company's 10-K, people over 35 years of age account for 73% of vitamin users, and that population category is expected to grow by over 18% to 150 million in the U.S. alone between 1995 and 2005.

Before going continuing, we should review some of the players in the industry.

General Nutrition is a nationwide specialty retailer of vitamin and mineral supplements and sports nutrition and herbal products, and is also a leading provider of personal care and other health-related products. The company's products are sold through a network of 3,898 retail stores operating under the General Nutrition Centers, Health & Diet Centre, Nature's Fresh, GNC Live Well, and Amphora names, of which 2,566 are company-owned and 1,332 are franchised. General Nutrition stores are located in all 50 states, Puerto Rico, and 23 international markets. Sales for the nine months ending October were $960 million, with net income of $76 million.

Nature's Bounty is a manufacturer and retailer of a broad line of high quality, value-priced nutritional supplements in the U.S. and the U.K., with 200 Vitamin World stores in the U.S. and over 400 Holland & Barrett stores in the U.K. The company markets more than 1,000 products under several brands including Nature's Bounty, Vitamin World, Puritan's Pride, Holland & Barrett, and Nutrition Headquarters. Sales for the three quarters ending in June were $425 million, producing $32 million in net income.

Rexall Sundown develops, manufactures, markets, and sells vitamins, nutritional supplements, and consumer health products through three channels of distribution: sales to retailers; direct sales through independent distributors; and mail order. Brands include Sundown, Rexall, SDV, Thompson, and private labels. Rexall Sundown had sales of $531 million in its fiscal year ended in August, with net income of $69 million.

Twinlab markets nutritional products through its TWINLAB Division, a full line of herbs and phytonutrients through its Natures Herb's Division, herbal teas through its Alvita Tea Division, and nutritional supplements through Changes International. It also manufactures, markets, and distributes products through its Bronson and PR Nutrition Inc., subsidiary. Twinlab also publishes All Natural Muscular Development, a sports and fitness magazine, and health and fitness related books, audios, and newsletters. Sales for the nine months ended in September were $253 million, with net income before extraordinary items totaling $29 million.

Whole Foods Markets owns and operates the country's largest chain of natural foods supermarkets, with 87 stores in 19 states and the District of Columbia. Sales for the nine months ended in July were $1.1 billion, yielding net income of $34 million.

Now, it is virtually impossible to know when bad times for an industry will end. It is even more challenging to figure out when other investors are going to perceive the worst is over for an industry and start buying into that sector's stocks. How can an investor successfully tread into such a situation? Unfortunately, we don't have enough time to delve into the strategy tonight, but we will follow up with the answer on Monday.

If you want a hint, however, it might be helpful to bone up on the idea of "dollar cost averaging." If you're really interested in that subject, you may want to head over to the Fool's own DRIP portfolio which, by its nature, utilizes this investing concept.

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