There Is Little Upside for This Supplement Company

  Some investors of major vitamin companies are worried given the recent article published by the Annals of Internal Medicine, entitled "Enough Is Enough: Stop Wasting Money on Vitamin and Mineral Supplements." However, vitamins were called into question in the early 1990's, and still managed to grow into a multi-billion dollar business. While the hem and haw might be overblown, there is still a fundamental problem for the middle-market vitamin companies, namely Vitamin Shoppe (NYSE: VSI  ) .

Vitamin Shoppe is feeling the pressure as Amazon.com (NASDAQ: AMZN  ) convinces shoppers it's cheaper and easier to buy online. Meanwhile, the leading brick-and-mortar vitamin retailer GNC Holdings  (NYSE: GNC  ) is beating Vitamin Shoppe on many levels. GNC is already building out its e-commerce platform to compete with Amazon and seeing marked success; in addition, GNC has already put its international growth plans in place.

Vitamin Shoppe has a lot of catching up to do; it has less than one-fifth the stores that GNC boasts. The other issue is that Amazon continues to focus on its top-line growth at the expense of its bottom line, meaning it will continue to offer goods, including vitamins, at advantageous prices. However, it is worth noting that Vitamin Shoppe does have a presence on Amazon, but Amazon shoppers an also get a majority of GNC's products on Amazon.com. Back in 2013, William Blair analyst Mark Miller found that of a sample of 100 items sold at GNC stores, 84 can be bought on Amazon.com. 

As noted above, while GNC has a much larger store base, Vitamin Shoppe offers its shoppers a much broader selection of products. Vitamin Shoppe's retail stores offer up to 8,500 stop keeping units (SKUs) in its retail stores. Meanwhile, GNC offers some 1,800 SKUs. Yet the key to remember is that while many shoppers like the variety that Vitamin Shoppe offers, they also appreciate the fact that GNC carriers higher quality and proprietary branded products. 

Vitamin Shoppe has its own margin troubles
Vitamin Shoppe still has a lot of expenses that it thought it could shed, and its gross margin was down 37 basis points year over year during the latest quarter. After a few years of notable expansion, its net margin has contracted over the trailing-12 months. In addition, expenses continue to rise, including those from the acquisition of Super Supplements from a year ago.  

And while Vitamin Shoppe expanded slightly with the Super Supplement acquisition, GNC continues to increase its store growth with the help of Rite Aid, where GNC is allowed to open store-in-a-store concepts within Rite Aids.

Beyond that, e-commerce sales only comprise 11% of sales, and nearly all of Vitamin Shoppe's stores are located in the U.S. What's more is that GNC continues to see more traffic thanks to the revamping of its Gold Card rewards program. 

Bottom line
Vitamin Shoppe is churning out a return on equity that's half of GNC's at 13%, compared to GNC's 32%, and Vitamin Shoppe doesn't offer investors a dividend, while GNC's is at 1%. GNC still looks like an appealing investment opportunity, with a PEG that's right at 1 and an international growth plan in place. Meanwhile, Vitamin Shoppe appears to be stuck between a rock and a hard place, with GNC being the rock and Amazon being the hard place. Amazon will likely continue eating market share of various retailers, and it will only be those retailers that offer a unique shopping experience that will survive. For now, GNC's branded products and its robust rewards program suggest that it will continue to win out versus Vitamin Shoppe.

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9/18/2014 11:31 AM
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