Vitamin Shoppe VSI
July 16, 2015 - 1:34pm EST by
2015 2016
Price: 37.85 EPS 2.14 2.39
Shares Out. (in M): 31 P/E 17.7 15.8
Market Cap (in $M): 1,162 P/FCF 0 0
Net Debt (in $M): 16 EBIT 106 119
TEV (in $M): 1,178 TEV/EBIT 11.1 9.9

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VSI is growth story in a growing, defensive industry in retail:

  • Vitamin industry forecasted to grow 7% through 2020
  • 38 quarters of positive SSS, including 2008-2009 – recession resistant industry
  • VSI is growing its store base from 700 today to 900+ (8% sq ft growth in 2015)
  • Store growth + industry growth = double digit revenue growth for next several years
  • One of the few retail stories with both white space for store expansion & healthy underlying fundamentals (compare to apparel, consumer electronics, office supplies)
  • Underlying industry data has recently accelerated after lapping pressures from negative media articles on fish oil (June 2013) and multi-vitamins (December 2013)

Lapping significant investments & acquisitions that pressured margins:

  • EBITDA margins down 100 bps over past year due to 1) the acquisition of Nutriforce (vitamin manufacturer), 2) a new DC opened in Q313 & 3) higher advertising spend
  • However, margins should begin to inflect positively in back half of 2015:
    • In Q215, VSI expects to start leveraging DC through supply chain efficiencies
    • In addition, the Nutriforce acquisition (Q214) will go from a headwind to a tailwind, as the company begins to
      manufacture its own private label product

Small size and unlevered BS give significant optionality:

  • LBO math suggests sponsor can pay 30% premium ($49) and generate a 20% IRR
  • Required check would be $580mm – an easily digestible size for large PE fund
  • $49 represents 9.8x 2016 EBITDA, which is the average since IPO and almost 50% below the high of 14.8x reached in early 2013

Trends in Vitamins and Supplements Improving:

  • On December 17, 2013 USA Today published an article entitled “Case Closed Against Vitamin Pills” which claimed that vitamins had few to no benefits and caused the vitamin category to stumble
  • For the quarter ended 3/31/14, Nielsen data showed a -2.4% growth rate in the industry
  • Recently (period ending 7/4/15) Nielsen data has showed a +6% trend for the last 4 weeks and +7.4% on a two year stack

Levered Recap or Sale to Private Equity or Strategic Could Be Brought About Through Activist Pressure:

  • In April, Carlson Capital filed a 13D reporting a 5.4% stake in VSI and plans to engage in discussion with management and the Board, and said it "may take other steps to bring about changes to increase shareholder value"
  • Currently VSI has no debt while GNC has 2.7x - VSI could easily do 2 turns of debt (~$300mm) and buy back almost 25% of shares outstanding
  • Private equity has historically liked the vitamin business as GNC was owned by multiple sponsors and another competitor, NBTY, is currently owned by Carlyle - it’s possible that NBTY decides to separate their US Retail/Wholesale and European Retail businesses or that 2 of the 3 combine (GNC, VSI and NBTY) – our anti-trust work suggests this is feasible
  • Although quiet recently, there has been media discussion about a VSI sale in the past - on 10/20/2014, Reuters reported VSI was responding to activistshareholder pressure and speaking to banks about a potential sale

Risks & Considerations:

  • VSI expensive to GNC on an EPS basis (17.7x vs. 14.9x) on 2015 numbers
    • However, this is due to VSI’s lack of leverage
    • On an EBITDA basis, VSI is actually 1.7x cheaper (8.2x vs. 9.9x)
  • Internet competition is a persistent risk given that vitamins lend themselves well to online shipping (high value to weight) and recurring purchases of uniform product – faster channel shift to online competitors like Amazon could pressure sales for VSI even if the industry grows
  • Industry is subject to volatility based on studies & media reports (such as the negative reports on multivitamins in December 2013 and fish oil in July 2013) which influences public perception & sales
  • Lack of recent innovation, particularly in the weight loss and sports nutrition phases, has been inhibiting recent growth, and it is unpredictable when new compelling products will be launched


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- A levered recap or sale

- Further pressure by activist investors

- Improvement in earnings in 2H15

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