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 fromnegative 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.
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