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Edited Transcript of VSI earnings conference call or presentation 8-May-19 12:30pm GMT

Q1 2019 Vitamin Shoppe Inc Earnings Call

NORTH BERGEN Jul 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Vitamin Shoppe Inc earnings conference call or presentation Wednesday, May 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Knight

Vitamin Shoppe, Inc. - Executive VP & CFO

* Kathleen Heaney

Vitamin Shoppe, Inc. - Head of IR

* Sharon M. Leite

Vitamin Shoppe, Inc. - CEO & Director

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Presentation

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Operator [1]

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Good day, and welcome to the Vitamin Shoppe 1Q '19 Earnings Results Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Kathleen Heaney. Please go ahead.

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Kathleen Heaney, Vitamin Shoppe, Inc. - Head of IR [2]

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Thank you, and good morning, everyone. Earlier this morning, we released financial results for first quarter 2019. A copy of the earnings release can be found at vitaminshoppe.com in the Investor Relations section. Making presentations today will be Sharon Leite, Chief Executive Officer; and Chuck Knight, Interim Chief Financial Officer.

Before we begin, I need to remind listeners that remarks made during the course of this call may contain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 about the company's future results or plans, guidance, strategy and prospects. These are subject to risks and uncertainties that could cause the actual results and implementation of the company's plan to differ materially. The words believe, expect, plan, estimate or anticipate, and similar expressions as well as future or conditional verbs such as should, would and could identify forward-looking statements. You should not place undue reliance on these forward-looking statements, and we expressly do not undertake any duty to update forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by law. During the call, we may refer to non-GAAP figures. We have provided reconciliations for these numbers in Tables 4 and 5 in the earnings press release. We refer all of you to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K as well as our quarterly reports on Form 10-Q for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

I will now turn the call over to Sharon.

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [3]

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Thank you, Kathleen, and thank you for joining us. First, I want to welcome Chuck Knight to our call this morning. Welcome, Chuck.

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Charles D. Knight, Vitamin Shoppe, Inc. - Executive VP & CFO [4]

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Hi, everybody. Happy to be here.

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [5]

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Today, I will start by briefly taking you through the highlights of the first quarter. Chuck will then take you through the financial results. Then I'll come back to share with you how the execution of our strategic plan is progressing.

To begin, we are making progress against our turnaround plan and remain on track to deliver our key initiatives for the remainder of the year. During the first quarter, our key financial metrics, including gross margin, operating income and earnings per share, are all headed in the right direction and our cost-saving initiatives are also bearing fruit. Total comps, while still negative, are also improving year-over-year.

We continue to be focused on growing the top line profitably and are still finding the balance of margin expansion while driving customer traffic. We know how important growing top line sales is to our future success. However, we will not chase sales at the expense of merchandise margin dollars. We will be thoughtful and diligent as we restore the Vitamin Shoppe's top line sales numbers.

The Vitamin Shoppe today is a story of execution as well as evolution, and we are delivering on both of these. We are accelerating innovation and utilizing technology to shape the future Vitamin Shoppe retail experience. We are making shopping at the Vitamin Shoppe easier for our customers, and our Health Enthusiasts are equipped with more tools to serve our customers better than before.

I'll turn the call over to Chuck now to discuss our recent financial results. Chuck?

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Charles D. Knight, Vitamin Shoppe, Inc. - Executive VP & CFO [6]

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Thank you, Sharon, and good morning, everyone. I'm very pleased to be participating in my first earnings call today. Our first quarter results were in line with our expectations and mark continued progress toward restoring momentum in our business. Although comp sales were negative, being more efficient with promotional spending and managing expenses, we delivered bottom line improvement on an adjusted basis. We are keenly focused on advancing our strategy to regain top line growth and improve profitability. During the first quarter, we closed 5 stores and did not open any new store locations.

Before getting into details of the quarter, I want to point out that at the beginning of the fiscal year, we adopted the new accounting standard for leases. The new standard did not have a material effect on our P&L or our internal controls over financial reporting. Nor do we believe that the new standard will have a material effect on our P&L on an ongoing basis. We did, however, see a meaningful impact to our balance sheet, which I will discuss in a little bit.

Now on to a discussion of the first quarter results. On a headline basis, GAAP earnings from continuing operations in the first quarter were $0.15 per share. Adjusting for the items shown in Table 4 in the press release, earnings from continuing operations in the first quarter were $0.21 per share compared with $0.10 per share in the first quarter of 2018. As a reminder, the reconciliation of the non-GAAP figures being discussed to the closest corresponding GAAP figure are shown in Tables 4 and 5 in the earnings press release.

With respect to comp sales, Q1 total comps were down 3.5%, which is a slight improvement compared to the first quarter of 2018. Transactions were down in the quarter, but this was partially offset with higher average order value as we cycled a very promotional period in the prior year. During the first quarter when looking at product categories, we saw good growth from new product offerings, including keto and on-the-go nutrition. Our private brand growth was also positive.

Moving down the P&L. We reported gross profit margin of 33.5%, which was up 200 basis points when compared to the first quarter of 2018. On an adjusted basis, the improvement was 150 points better. The primary driver of this improvement was due to higher product margins as we continue to be more efficient with our promotional activity, which includes leveraging our strong vendor partner relationships. We also benefited from efficiencies in our supply chain. On the flipside, we experienced occupancy deleverage due to the lower sales performance.

Reported SG&A expenses were $88.5 million and include $1 million in expenses associated with management realignment as well as $900,000 of expenses associated with store closures. The latter primarily reflect lease termination charges. On an adjusted dollar basis, SG&A was $86.6 million, $2 million lower than the adjusted first quarter of 2018. This was primarily due to lower medical and payroll expenses this year versus last year.

Our advertising and promotional cost increased 13% or $845,000 in the first quarter related to higher digital advertising expenditures and costs related to our enhanced loyalty program. Adjusted EBITDA benefited from margin improvement and increased to $18.2 million. This represents a 9% or $1.5 million increase over the same period in the prior year.

Moving on to the balance sheet. Our balance sheet remains healthy. We ended the quarter with cash of approximately $1.6 million, convertible notes with a total face value of $60.4 million and nothing drawn on a revolving credit facility. Our balance sheet also reflects the adoption of the new lease accounting standard. This added to our balance sheet a $446 million right of use asset and a short- and long-term lease liability of $97 million and $390 million, respectively. The majority of these amounts are associated with real estate leases for our store locations. Capital expenditures were $4.4 million for the quarter, with funds primarily used for IT and digital investments.

Moving on to the outlook for the year. Based upon our first quarter performance, we are reducing our comparable store sales -- our comparable sales forecast for the year. We are now estimating full year total comparable sales of negative to mid -- to low single digits compared with prior guidance of negative low single digits to flat. For the balance of the year, we will be focused on stabilizing our store performance, significantly growing our digital business as well as the launch -- as well as launching new growth initiatives, which Sharon will speak to shortly. Revenue growth will also be impacted by store closures.

Also, when taking into account our first quarter results, we are comfortable that we will meet our prior gross margin rate and EBITDA guidance. To recap the guidance -- to recap, our guidance calls for a full year gross margin rate of between 31.7% and 32.2%. This will be down slightly from 2018 as we expect the shift to lower-margin digital sales to offset the positive benefit of our ongoing efficient promotional activity and increased private brand penetration.

Next, adjusted EBITDA is estimated to be between $62 million and $65 million. Our estimated combined federal state and local tax rate will be 28%. We are planning full year capital expenditures of approximately $33 million. This includes the opening of approximately 10 new stores, which we plan to deliver by the end of the year. As we have evaluated our real estate portfolio, we made the decision to close between approximately 60 and 80 stores over the next 3 years. We expect to incur a charge of up to $12 million in 2019 associated with these closings.

In summary, we remain confident that we are doing the right things to improve the business and position the Vitamin Shoppe for long-term success. We understand the challenges we face, and we understand the need to execute quickly. Thank you for your time this morning.

I will now turn the call back over to Sharon. Sharon?

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [7]

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Thanks, Chuck. For the last time we were together, I spoke to you about the importance of transforming the Vitamin Shoppe to a customer-first, sales-driving, agile organization that is innovative and executes with excellence. I also shared that we were on a quest to becoming a nationally recognized brand by becoming the destination to help our customers become their best self as they define it by providing them with solutions, innovative products and expertise to accomplish their goal. Advancements in technology and research are pushing the health and wellness category to evolve faster and faster. We will become leaders within our market space. Our 3 enterprise themes to guide us are grow and build the business, become more operationally efficient and reduce enterprise cost. Our strategic plan had a number of exciting initiatives. Now I'll share an update on how we are progressing.

First, grow and build the business. We launched our new Healthy Awards loyalty program at the beginning of April. While it's still early days, we are happy with our results thus far as our redemption rates are higher in the new program, which indicates better engagement and is an early indicator of higher customer frequency. Through our Celebrate You campaign, we are engaging with customers in a way like never before.

Our omnichannel customers spend more than our single-channel shoppers. Therefore, we have made progress improving our in-store and online experience and integrating the web experience in our stores. Through Q1, we optimized performance of our site, including site speed, search engine optimization, cart execution, check out and more. We are increasing email revenue generation through personalization and loyalty tier migration and recognition.

In addition, we have improved the buy online, pickup in-store process and have made operational improvements to our auto-delivery program in order to grow subscriptions and retain current customers. Our high-quality, innovative and varied assortment of products are one of the many reasons our customers shop with us. Our private brand portfolio architecture is taking shape, and our renewed focus on private brand is starting to take hold. We beat our private brand plan in first quarter, and we did this through our relaunch of BodyTech, expansion of our Vitamin Shoppe brand, plnt and True Athlete portfolio.

We also launched Your Essentials, a curated regimen of private brand product based on consumer need states. We have created one-click purchase solutions on the web, integrated Your Essentials into our rewards program and are adding sports nutrition solutions and will continue to evolve Your Essentials based on consumer insights and seasonal needs. Our beauty assortment is getting a refresh. We are in the process of resetting our beauty section in our stores, and our goal is to be known as a specialty destination for natural beauty. We will carry products with unique, natural ingredients with leading industry certifications such as paraben- and cruelty-free designations. We are doubling the amount of newness and innovation in 2019 compared to last year and look forward to future product launches of V Thrive, BodyTech Elite, the restage of our core Vitamin Shoppe brand, Fit Factor, our new weight management system and so much more.

Our team is committed to refining and improving the innovation process to ensure a continuous pipeline of new products that are first to market, exclusive and differentiated to provide a meaningful distinction to our customers while standing behind the quality of our products with our tested and trusted quality seal. As part of the reinvention of our brand, we shared that we would expand outside of our traditional channels through a wholesale channel and expand into services. We are excited about our relationship with NEXCOM. We are providing a curated assortment of over 325 Vitamin Shoppe-branded products for the United States Navy, and in Q1, we delivered our first store with a full-line assortment. We will expand into 31 doors by midsummer with a full-line assortment and then additional doors with a 4-seat minimart assortment towards the end of the year.

In addition, we are excited to share with you first our expansion into nutritional services by virtual consultation which will launch in June. Our customers have told us that they trust our knowledge and look to us for expertise. We believe that building out our services organization by providing convenient and digital solutions will enable us to further differentiate ourselves from the competition and provide another reason for customers to come to us for their health and wellness solutions. We are excited about expanding the expertise of the Vitamin Shoppe outside of our 4 walls as we build out our wholesale and services business and look forward to sharing more with you in upcoming calls.

We believe in stores. Stores are important to us as are our Health Enthusiasts who run our stores. Our in-store Health Enthusiasts are a critical part of our business and act as brand ambassadors for the Vitamin Shoppe and are important to the success of the revitalization of our brand.

However, we expect to run profitable stores. As we've shared previously, we will plan to close 60 to 80 stores over the next 3 years and are well underway renegotiating leases and exiting out of poor-performing stores. In addition, we are making progress with our new store prototype and expect to have the first remodeled store reopened in late September. This new prototype will be the model we will use with the approximately 10 new stores which will open by year-end.

Our second theme of improve operational efficiency is focused on 3 key areas. First, our pricing and promotional effectiveness. As you saw with our Q1 results, we are delivering improved margin rate through the continued focus on cost management with both our national and private brand suppliers, competitive pricing strategies and promotional programs like National Keto Day that our customers responded extremely well to. We are working closely with our vendor partners to align promotional strategies and marketing efforts to increase sales and consumer engagement.

Through agile category management, we are improving the efficiency of our inventory through better turns year-over-year. By leveraging market data, trends and analytics, we are improving our product assortment to ensure that our inventory is more productive.

Our supply chain efficiency efforts are paying off. Both our distribution centers are operating with improved productivity. The improvement seen in our financial results have been made through a strong focus on process, analytics and accountability. We've built a continuous improvement program, and by putting the customer first, our DCs will continue to focus on safety, quality, productivity, service and cost.

Execution has been a strong focus of the organization this year, and I'm pleased with our progress in delivering the initiatives we set out to accomplish in 2019. As Chuck shared through the results, our third theme of reducing enterprise cost is well underway as we realized a reduction in SG&A, improved indirect spend and have employed a diligent approach to capital deployment.

We are committed to becoming better every day for our customers, our Associates, for the communities we serve and for our shareholders. Our commitment to our customer and this business is clear. We'll be there for our customers when, where and how they want to shop and deliver new products and convenient experiences that are unique to the Vitamin Shoppe. We are transforming our business expeditiously to better serve our customers while shaping an exciting future for our business.

To summarize, the first quarter showed solid progress on our transformation plan, and we recognize we still have much more work to do. With our key accomplishments from the quarter, we are confident we are moving in the right direction with opportunities to improve our financial performance as our transformation continues to gain traction in the marketplace.

In order to deliver our transformational plan, you have to have an enthusiastic, talented team that is unwavering in our mission to deliver results. Our Health Enthusiasts across the organization are just that, and I want to thank the entire Vitamin Shoppe team for their hard work, passion, determination and commitment to our business.

This ends our prepared remarks. In closing, we're pleased with our overall progress so far this year as we continue to establish a healthy foundation for our business. I look forward to sharing updates on future calls. Thank you again for your interest in the Vitamin Shoppe and for joining us this morning.

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Operator [8]

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This concludes today's call. Thank you for your participation. You may now disconnect.