Does Vitamin Shoppe, Inc. Have a Healthier Future Than GNC Holdings Inc.?

 Following the release of their latest quarterly earnings results, the market whipped shares of health and wellness retailers GNC Holdings (NYSE: GNC  ) and Vitamin Shoppe (NYSE: VSI  )  on May 6 and May 7. GNC's first quarter of fiscal 2014 had weak sales, which were attributed in part to a drop in demand for its diet products, which have lately fallen out of favor with consumers. However, Vitamin Shoppe's results seem to imply  more positive momentum for the remainder of the year. The company posted stronger sales during the first-quarter than its rival, especially in its direct-sales channel. While both companies faced a challenging quarter, Vitamin Shoppe seems to offer shareholders a better investment value going forward.

Market praises Vitamin Shoppe's management 
While top-line revenue showed strength, higher expenses were noted during the first quarter, mostly due to acquisition-related expenses and higher depreciation. Some of the first quarter's highlights are:

  • Total net sales for the quarter increased 10.3% to $307.8 million versus $279.1 million in the same quarter in 2013.
  • Total comp sales grew by 3.6% and the first quarter marked the 34th consecutive quarter of positive growth.
  • The e-commerce (direct-sales) channel posted a 17% increase in revenue
  • Net income was $20.5 million, down by $288,000
  • Diluted EPS dropped a penny to $0.67 from $0.68 in the same period in 2013
  • .

 Despite some short term issues, analysts at Barclays had high praise for Vitamin Shoppe's management and their focus on diversifying the company's business as well as the stable results achieved given the current environment. Two days after the first-quarter earnings release, they upgraded the stock to overweight from equal weight. The company is known for its broad product offerings much like its main rival GNC. Its offerings include vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products. Vitamin Shoppe sells about 900 brands that include both independent brand names and its own proprietary brands.

As of March 29, there were 667 Vitamin Shoppe stores in operation, and direct sales to consumers are made through the company's and websites. During the quarter, the company opened nine stores, including one in Canada. Since the first quarter in 2013, Vitamin Shoppe has added 46 new stores and expects to open 60 additional locations during 2014.

How is the competition feeling in this challenging market?
In GNC's first quarter ended on March 31, the company reported weaker top-line results than its smaller rival Vitamin Shoppe. Consolidated revenue rose 1.9% to $677.3 million; the retail segment's revenue increased 3.1%, but the franchise and manufacturing segments declined by 1.4% and 2.2%, respectively. A decline of 0.7% in comp-store sales was blamed on bad winter weather during January and February.

While net income declined by 3.7% to $69.9 million, the company reported diluted EPS of $0.75, an increase of 2.7% compared to the same period last year. Management attributed the results to negative publicity about vitamins and supplements and weakness in third-party diet and pre-workout products. While these trends are expected to continue in the next few quarters, the company is responding by focusing on growing products categories such as fitness, enhanced marketing efforts, and offering value to customers through its member pricing program.

Another competitor in the vitamin and supplement space is CVS Caremark  (NYSE: CVS  ) , which has a broader selection of products for sale plus a retail pharmacy, its main revenue driver. The company's first quarter of fiscal 2014 had net revenue of $32.7 billion, up by 6.3% compared to the same period last year; the operating profit rose by 19.5% to about $2 billion. Comp-store sales increased during the quarter by 1.4% compared to 2013's first quarter; and while pharmacy same-store sales rose 3.8%, front store-same store sales dropped by 3.8%.

Both pharmacy and front store were negatively affected by the winter weather and a weaker-than-expected flu season, especially when compared to last year. While prescription volumes were negatively affected by 180 to 200 basis points, overall total same-store sales increased due to stronger prescription volumes and higher prices for brand-name drugs.

Foolish Takeaway
The Vitamin Shoppe is showing more optimism about its growth prospects for the remainder of 2014 than some of its competitors and is the better choice for investors. Shares trade at 15.8 times 2015 earnings and have a five-year expected PEG ratio of approximately 1.5.

Management is showing sound judgment by emphasizing and investing in an e-commerce strategy for its products, which are well suited for online shopping. Retail comp-store sales for 2014 are expected to grow by low- to mid-single digits; total comp-store sales, including e-commerce sales, are expected to grow in the mid-single digits.

GNC is more cautious about the rest of 2014, with same-store sales expected to stay flat or increase by low-single digits. It's been struggling lately, having missed market earnings estimates in the past two quarters. However, it is expanding its business abroad where it can encounter less competitive pressure. Managing costs and product pricing is critical for GNC, as well as Vitamin Shoppe, because a larger player, like CVS, with more competitive prices could lure some of its customers away.

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  • Report this Comment On May 28, 2014, at 6:54 PM, ml999 wrote:

    I believe GNC stock will be under a lot of pressure in the future. They are fighting with a number of vendors and there are a lot of problems with the franchisees. GNC is getting desperate to better its bottom line but at the expense of the franchisees; its most profitable part of the business. GNC owned stores are -BLY but franchisee stores are +BLY and in desperation GNC is making things really hard for the franchisees.

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Related Tickers

8/28/2015 4:01 PM
CVS $104.18 Down -1.02 -0.97%
CVS Health CAPS Rating: ****
GNC $46.33 Up +0.35 +0.76%
VSI $35.57 Up +0.17 +0.48%
Vitamin Shoppe CAPS Rating: ***