Did Vitamin Shoppe's Stock Not Follow General Nutrition Guidelines?

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

More Americans take a nutritional supplement than drink coffee. While coffee is a favorite for 54% of Americans every day, 64% of Americans currently use a vitamin or supplement an average of 6 times per week – up from 60% in 2010. Additionally, organic food sales are predicted to hit $42 billion by 2014 within the US – up from $31.5 billion in 2011. With healthy lifestyles trending higher and the growing consumption of nutritional supplements within this country, Vitamin Shoppe (NYSE: VSI) stock should be up this year – but it isn’t.

Missing the 2013 market train

Vitamin Shoppe now has 622 stores with a focus primarily in America and Canada. The supplement retailer has been growing for nearly two decades with positive comparable store sales for 19 consecutive years. This past quarter saw company high revenues of $279 million for a 28% increase year-over-year as net income hit $18.3 million. Looking at the company's profit margin trends, it has been rising from 1.29% five years ago to 7.45% this past quarter.

With so much positive news, why is Vitamin Shoppe down nearly 20% year-to-date? Did Vitamin Shoppe’s stock not follow general nutrition guidelines this year?

In short, expectations were far too high after the company continually crushed estimates the past couple of years. It started the year off by missing revenue expectations for the fourth quarter 2012, causing shares to fall 19% in February. The decline was magnified by a drop during holiday season going from $239 million in the third quarter of 2012 to $219 million in the fourth quarter. Its first quarter results caused the stock to fall another 10%.

Reading between the lines

Analyzing Vitamin Shoppe over the past few years, one can see that the company is not slowing down at all as it expands through the country and possibly globally in the near future. EPS for 2012 was $2.02 compared to just $0.28 in 2009, while net income went up from $13 million to $61 million.

The company has been making key acquisitions like Super Supplements in February earlier this year for $50 million in cash. Its growing brand selection as well as its own proprietary company brands like BodyTech have generated a solid following within the cost-conscious fitness community. To better understand Vitamin Shoppe, it would be better to compare it to GNC Holdings (NYSE: GNC).

<table> <thead> <tr><th> </th><th> <p><strong>Vitamin Shoppe</strong></p> </th><th> <p><strong>GNC</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$1.5 billion</p> </td> <td> <p>$4.6 billion</p> </td> </tr> <tr> <td> <p><strong>Locations</strong></p> </td> <td> <p>622 stores</p> </td> <td> <p>8200+ stores</p> </td> </tr> <tr> <td> <p><strong>Revenue 1<sup>st</sup> Quarter 2013</strong></p> </td> <td> <p>$279 million</p> </td> <td> <p>$665 million</p> </td> </tr> <tr> <td> <p><strong>Online Sales 1<sup>st</sup> Quarter 2013</strong></p> </td> <td> <p>$30.7 million</p> </td> <td> <p>$31.7 million</p> </td> </tr> <tr> <td> <p><strong>Net Income 1<sup>st</sup> Quarter 2013</strong></p> </td> <td> <p>$18.3 million</p> </td> <td> <p>$72.6 million</p> </td> </tr> </tbody> </table>

Looking at the table above, one can see that GNC has over 13 times the number of locations, but only produced revenue just over twice that of Vitamin Shoppe in their most recent quarters. Using this information, Vitamin Shoppe appears to be operating a much more efficient business model by making more money on average at each location than GNC.

Additionally, the fact that its online sales nearly match that of GNC, Vitamin Shoppe looks to be a formidable David in a battle against Goliath. GNC, however, is holding its own with four consecutive years of 25%+ revenue growth and a 24% increase in Gold Card memberships.

Another way to play healthy trends

Trader Joe’s is a popular stop for fitness enthusiasts, but it is a private company. The next best thing is Whole Foods Market (NASDAQ: WFM), which is the largest retailer of natural and organic foods with 348 stores and counting. It has been growing steadily for several years and recently moved into the Detroit area this past June despite the city recently filing for bankruptcy. Moves like these demonstrate that Whole Foods is willing to take chances and capture markets that its competitors would rather ignore.

The stock is up over 420% in the past five years, and because it sells products at premium prices, its margins crush competing grocers like Kroger and Safeway (4.69% vs. 1.60% and 1.19%, respectively).

Revenue last quarter was about $3 billion which is 10 times less than that of Kroger. Interestingly, net income was $142 million vs. Kroger’s $481 million last quarter, and this only supports the fact that margins and locations matter greatly. Whole Foods has a lot of potential with organic food sales setting new records annually and the fact that their store count can go up much more in the near future.

<img alt="" src="http://media.ycharts.com/charts/c770f16eebb5bc16819b10e439bbb009.png" />

VSI Total Return Price data by YCharts

Oversold?

At first glance of the stock, Vitamin Shoppe looks to be in trouble. It has gone the opposite direction from its competitor GNC and another nutritional play – Whole Foods. However, if you look at the big picture, Vitamin Shoppe may be greatly oversold as its story hasn’t changed at all.

Online sales for Vitamin Shoppe and GNC last quarter increased 16.1% and 17.4%, respectively. This could hint at the possibility that Vitamin Shoppe doesn’t need the thousands of locations that GNC has currently. This could foreshadow a future where online sales dominate the supplement industry and actual brick and mortar locations will become more of a burden for companies like GNC.

In the end, all 3 nutritional-related companies should have trended together this year. The fact that Vitamin Shoppe separated from the pack could make it a great buying opportunity.

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Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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