Shares of NBTY jumped over 27% after the company reported a 12% net sales increase for the fiscal second quarter ended March 31. The company also reported a 20% net sales increase for the combined results of the first two quarters, driven by its Wholesale/U.S. Nutrition division. Profitability remains a concern, as total gross profit margins were down 9% for the quarter, though CEO Scott Rudolph chocked that up to foreign exchange and inflationary pressures—the British Pound Sterling declined 27% compared to the previous quarter--and noted that the company continues to garner greater market share in the supplement market.
The company’s wholesale division continues to drive growth within the company, as total revenues increased 35% to $350 million for the quarter. That represents the only one of NBTY’s four divisions to post growth for the quarter, as domestic retail growth was flat and European retail was down 15%. Direct and e-commerce sales fell 6% compared to the second quarter of 2008.
Profitability in the wholesale division actually decreased from 41% to 27% for the second quarter. The company’s wholesale profit margin has been negatively affected by a raw material market that has seen significant price increases over the last 18 months. In January, executives announced their plans to begin passing along increased raw material costs to consumers. Up until that point, the company had been hesitant to pass along any increases because both the supply and consumer markets were so volatile. The company has increased costs over the last three months, but the increases have not been enough to offset increased material costs. NBTY made a conscious effort to be one of the last companies in the market to increase costs to consumers, according to Rudolph, and it would appear as though the company’s profitability has been slow to catch-up as a result.
Still, investors and analysts see a bright future for NBTY. As of April 28, shares were up 34% over a five day period and were trading at $25.22 per share. RBC Capital upgraded the stock from “Sector Perform” to “Outperform” status. Canaccord Adams increased its target price from $24 to $25 and expressed confidence that profit margins will improve over the next 6 to 9 months.
NBJ doesn’t anticipate any significant bumps in the road for NBTY now that Leiner has been fully integrated. Its wholesale margins can only improve as the company is able to realize profits associated with price increases. Once the retail and direct selling markets begin to show signs of recovery, the company should be firing on all cylinders.