Looks like leading nutritional supplement maker NBTY (NYSE:NTY) needs to dip into its own inventory a bit to perk up growth. Perhaps it could use some ginseng to add energy, or bilberry to better see the road ahead, or echinacea to boost its immunity. Because as I suggested back in early June, NBTY finds itself in a tough spot as the nutritionals market cycles downward.
Fourth-quarter results were discouraging. Sales would have been down a bit more than 2% without the inclusion of the Solgar acquisition from Wyeth (NYSE:WYE) earlier in the year. Across the board, there wasn't much good news on the sales front. Sales in the wholesale and North American retail businesses were down organically (that is, excluding acquisitions). European sales were up 1%, and direct-response sales were up just 3%.
Worse yet, margins took a beating. The gross margin dropped about three full percentage points, and the operating margin fell nearly four points as operating income dipped 43%. Higher interest expenses chewed up more of the profits, and the company saw net income cut almost in half for the quarter.
I'm sure some readers will now be expecting me to pound on this company for this dismal performance. Well, I won't. All in all, I think this is a reasonably well-run company. In fact, it has flirted with double-digit returns on capital and assets in the past few years, and that's often the hallmark of a company with some real competitive advantages.
The trouble here is that this is a fickle and cyclical business. Demand for supplements is often based upon goofy pseudoscience and the latest hippy-dippy health books that suggest roots and berries cultivated by Peruvian witch doctors as your key to long life and happiness. Sure, some supplements really do have demonstrable value and benefits, but a lot of this industry is based upon the next big fad.
As I said back in June, this is a business that you could generally expect to buy at a high-single-digit to low-teens earnings multiple. And since it looks like times are tough now (the company's Vitamin World posted negative same-store comps), this is a good time to start doing due diligence.
I'm really not worried about competition, whether from the likes of Nature's Sunshine (NASDAQ:NATRE), Perrigo (NASDAQ:PRGO), or even mighty Wal-Mart (NYSE:WMT), and I'm only slightly worried about competition from the likes of USANA (NASDAQ:USNA). Sooner or later this cycle will work itself out, and I would expect NBTY to still be a powerful player. That said, it's hard to pinpoint the bottom of a cycle, so this is probably a stock best left to risk-tolerant types.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
