Vitamin Shoppe, Inc. (NYSE: VSI), a multi-channel, specialty retailer and manufacturer of nutritional products, today announced preliminary results for the three months ended June 25, 2016. Total net sales in the second quarter were $332.7 million, 3.2 percent higher than the same period of the prior year. Reported fully-diluted earnings per share in second quarter 2016 were $0.44, compared with $0.48 in second quarter 2015. Results in second quarter 2016 include approximately $3.4 million (pre-tax), or $0.12 per diluted share, of costs related to certain strategic initiatives. Excluding these items in both periods, adjusted EPS was $0.55 and $0.57, in second quarter 2016 and second quarter 2015, respectively.
Commenting on the quarter's results, Colin Watts, chief executive officer of the Vitamin Shoppe, stated: "The external environment was more promotional and volatile than we had anticipated, and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter."
"On the positive side, we continue to make progress with implementing our reinvention plan and are seeing solid results with our new loyalty program and focus on private brands. Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability," he concluded.
Second Quarter 2016 Results
Total sales of $332.7 million in the quarter increased 3.2 percent over the same period of the prior year primarily due to an increase in retail and direct sales offset by lower manufacturing revenue. Total comparable sales were 1.6 percent in the quarter reflecting a 0.8 percent increase in retail store comparable sales and a 9.4 percent increase in ecommerce sales. Manufacturing third party sales decreased 15.5 percent from the same period of the prior year. The company opened nine stores in the quarter and closed four.
Cost of goods sold, which includes product, distribution, manufacturing and store occupancy costs, increased $10.8 million, or 5.1 percent, to $224.9 million for the three months ended June 25, 2016, compared with $214.1 million for the three months ended June 27, 2015.
Gross profit of $107.8 million was down 0.4 percent from $108.3 million in second quarter 2015. Gross profit as a percentage of net sales was 32.4 percent in second quarter 2016, compared to 33.6 percent in 2015. The decrease was primarily due to lower product margins as a result of greater promotional activity and loyalty redemptions, occupancy deleverage and weaker performance at Nutri-Force.
Selling, general and administrative expenses (SG&A), including operating payroll and related benefits, advertising expense and depreciation and amortization increased $2.4 million, or 2.8 percent, to $87.1 million for the quarter ended June 25, 2016, compared with $84.7 million for the quarter ended June 27, 2015. SG&A includes approximately $1.5 million of professional fees related to implementation of the company's cost reduction initiatives as well as $1.9 million related to the closure of the Canadian stores. SG&A for second quarter 2015 included total costs of $4.0 million related to management realignment, bad debt reserve and integration related expenses. Excluding these items for both periods, SG&A as a percent of revenue was 25.2 percent in second quarter 2016 and 25.0 percent in second quarter 2015. This increase in SG&A rate was mainly driven by higher store payroll & benefits and marketing expenditures partially offset by lower corporate costs.
Second quarter results also includes benefits from the company's cost reduction project of approximately $2.5 million. The company has been implementing various cost initiatives since 2015 focused on reducing costs of goods sold and SG&A across the organization. In 2016, outside consultants were engaged to help identify and drive additional opportunities. During the quarter, the company identified additional savings potential with an estimated value of at least $10 million annualized, and is now targeting total annualized savings of $22.5 million with the majority being realized in 2017.
Income from operations in second quarter 2016 of $20.7 million compared to $23.6 million in the same period of the prior year. As a percentage of net sales, income from operations was 6.2 percent for second quarter 2016 compared with 7.3 percent for second quarter 2015. Adjusted for the items noted in the preceding paragraph, income from operations as a percentage of sales was 7.2 percent in second quarter 2016 and 8.5 percent in second quarter 2015.
Net income was $10.4 million for second quarter 2016, compared to $14.2 million in the same period of the prior year. Reported earnings per diluted share were $0.44 in second quarter 2016 compared with $0.48 in second quarter 2015. EPS, on an adjusted basis (for the items described in Table 4) was $0.55 for second quarter 2016 and $0.57 for second quarter 2015.
Balance Sheet and Cash Flow
Cash and equivalents at June 25, 2016 were $2.0 million. At quarter end, the company had $15.0 million drawn on the revolving line of credit and a convertible notes liability of $118.1 million.
Capital expenditures were $9.3 million in the quarter. Funds were primarily expended on new stores, supply chain, digital and other IT investments.
During the quarter, the Company repurchased 0.3 million shares of its common stock, or 1.3 percent of the shares outstanding, for a total purchase price of $8.7 million.
Management expects the following for 2016, on a 53-week basis, reflecting both second quarter 2016 results and a more volatile competitive environment.
- Total comparable sales growth expected to be flat to slightly negative;
- Approximately 30 new stores;
- Adjusted Earnings per diluted share in the range of $2.10 to $2.30 for the full-year of 2016. This excludes the impact of certain costs associated with the Company's strategic initiatives, and GAAP fully diluted earnings per share in the range of $1.83 - $2.03. (See Table 5).
- Capital expenditures of approximately $40 million.
Non-GAAP Financial Measures
Adjusted information is non-GAAP financial information. These supplemental non-GAAP measures should not be considered superior to, or a substitute for, and should be considered in conjunction with the GAAP financial measures presented. We believe such non-GAAP financial information provides additional perspective regarding how we evaluate our financial results and what we consider to be the core operating performance of our business. Accordingly, we believe this supplemental information will enhance the understanding of readers of trends in our historical results. The Ccompany provides a reconciliation of adjusted financial information to the most directly comparable financial measures calculated and presented in accordance with GAAP in Tables 4 and 5.