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Edited Transcript of VSI earnings conference call or presentation 26-Feb-19 1:30pm GMT

Q4 2018 Vitamin Shoppe Inc Earnings Call

NORTH BERGEN Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Vitamin Shoppe Inc earnings conference call or presentation Tuesday, February 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Wafford

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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Conference Call Participants

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* Craig Carlozzi

BulwarkBay Investment Group - Analyst

* Damian Andrew Witkowski

G. Research, LLC - Research Analyst

* Sean Stephen Kras

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Vitamin Shoppe 4Q 2018 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, ma'am.

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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 fourth quarter 2018. 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 Bill Wafford, 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, intend, 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 a reconciliation for these numbers in Table 4 in the 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 results 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. A presentation accompanies this webcast today.

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, all for joining us this morning. I'll spend a few minutes discussing the highlights from the quarter and year. Bill will then take you through the financial results. I'll come back to share with you our exciting plan to revitalize the Vitamin Shoppe and then Bill will conclude with a discussion of our 2019 guidance. After that, we will open the call up to your questions.

To begin. We have made progress across the organization and our full year 2018 results were generally in line with our expectations. Full year total comparable sales improved when compared to the prior year.

Additionally, results in the quarter were even better on the cost and product margin fronts, which provides us with a solid footing as we move into the current year. We have done a comprehensive review of our real estate portfolio and our Board of Directors has approved our new long-range plan.

As we look back on 2018, it was a year of resetting the business and getting back to retail fundamentals. This included divesting NutriForce, our contract manufacturing business, closing our North Bergen, New Jersey facility and consolidating our corporate support teams in Secaucus, New Jersey.

Additionally, we made significant changes to our executive leadership team, and we now have a clear path forward.

Moving on to 2019. We are transforming the Vitamin Shoppe to be a customer first sales driving agile organization that is innovative and executes with excellence. We are challenging everything we do. Speed to market and leveraging technology to drive competitive advantages will be critical in turning our business around and returning the Vitamin Shoppe to growth. These plans are underway, and our focus is now to accelerate and execute that plan.

I'll come back to that later. Let me turn the call over to Bill to discuss our recent financial results. Bill?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [4]

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Thank you, Sharon, and good morning everyone. We continue to execute on our strategic priorities and are seeing the benefits of our investments in margin building and cost savings initiatives. For the full year, we reduced long-term debt by close to 60%, inventory by 13% and capital expenditures were 49% lower. We closed 6 stores in the quarter and 13 for the full year, as we continue to evaluate and strengthen our real estate portfolio. We opened 2 stores in 2018.

On a headline basis, GAAP loss per share from continuing operations in the fourth quarter was $0.14. Adjusting for the items shown in Table 4 in the earnings release, loss per share from continuing operations in the fourth quarter was $0.19, compared with earnings per share of $0.02 in the fourth quarter of 2017. For the full year, we reported GAAP EPS from continuing operations of $0.58, compared with the loss per share of $10.17 in 2017. On an adjusted basis, we reported 2018 EPS of $0.26 compared to $0.80 in 2017.

With respect to comp sales, Q4 total comps were down 4.7%. Store comps were negative 5.4%, an improvement when compared with the same period in 2017. Digital comps which include vitaminshoppe.com, marketplaces and auto delivery were basically flat. As a reminder, we cycled strong auto delivery sign-ups in the fourth quarter of 2017 and marketplace sales were weaker this past quarter as we transitioned the business.

Excluding marketplaces, e-commerce sales were up 8.6% in Q4. As we look to the coming year, taking into account our digital and omnichannel focus, our plan going forward is to report total comparable sales only. During the fourth quarter, sales were driven by the strength of new categories including keto.

Moving down the P&L. Adjusted gross profit margin of 32.4% was up 170 basis points when compared with the fourth quarter of 2017. Components of the changes in gross profit rate in the fourth quarter include improvement in product or transaction margins of 280 basis points year-over-year.

Our continued ability to improve margin management via the relationships with our vendor partners, sourcing and procurement of our private brand products and the efficiency of our promotional vehicle has enabled -- vehicles has enabled us to enhance our product profitability.

Supply chain and occupancy deleveraged by approximately 110 basis points due to the impact from channel shift and lower sales. Reported SG&A expenses were $84.7 million and include $600,000 in expenses associated with management realignment. On an adjusted dollar basis, SG&A was $84.1 million, $2 million lower than adjusted fourth quarter 2017. In the quarter, we incurred store impairment expense of $1.5 million compared to $800,000 in fourth quarter of 2017.

During the quarter, we repurchased $8 million in aggregate principal amount of our convertible notes at a discount, bringing the full year total to $83.3 million. These repurchases resulted in us recording a $700,000 gain on the extinguishment of debt in the fourth quarter and a $16.9 million gain for the year.

Moving on to the balance sheet and cash flow. Our balance sheet and cash flow generation remain healthy. We ended the quarter with cash and equivalents of approximately $2.7 million. Convertible notes with a total face value of $60.4 million and nothing drawn on our credit facility.

Inventory was another area we made significant progress during the year as we reduced unproductive inventory both in our warehouses and stores, improving our turnover performance. As a result, inventory at year-end was down $29 million or 13% from 2017.

Cash generated from operating activities for the year was $90 million. Capital expenditures were $3.5 million for the quarter and $28 million for the year with funds primarily used for IT and digital investments.

I will now turn the call back to Sharon.

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

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Thank you, Bill. As I said on our last call, our ability to think differently about our business going forward is paramount to our future success and it all starts with the customer. We have to really know them, put them in the center of everything we do and leverage our data to make better decisions.

The retail world we live in has changed substantially and we're playing catch up. That means we have to move quickly, be innovative, lean in on digital, deliver a seamless omnichannel experience, streamline our cost structure and operations and our store portfolio. Operating with excellence and executing flawlessly must get delivered each and every day.

So let me take you through our initial plans to revitalize our business. First a little background. We have been a recognized leader in the vitamin, mineral and supplement industry since 1977. For over 40 years, we have provided our customers with a broad product assortment and cultivated a deep relationship with our vendor partners.

We have developed a private label business with brands such as our own Vitamin Shoppe brand as well as plnt, BodyTech and others. Our mix of product is balanced both in breadth and depth. However, our private label business overall is small and its growth stagnant.

We have an extensive footprint of stores across the United States with most of our stores located on pads or in small strip center outparcels. Our store productivity has declined significantly in recent years. We reach millions of customers each and every day through our stores, e-commerce business and digital efforts. However, our customer base hasn't grown as much as we'd like it to, and we need to attract new customers to our business.

We are proud of our heritage and how we've grown over time from our first store in New York City to where we are today. However, we have not delivered results these past few years. Our performance has suffered due to increased competition, lack of innovation, poor execution and our inability to evolve with the swift changing landscape of the retail industry, clearly a wake-up call for change.

As I shared previously, in my first 90 days, I tried to learn as much as I possibly could about our business and our competition. What was clear to me is we didn't know who we were and how to differentiate ourselves in the marketplace. We also weren't clear on who our customer really was.

The questions I'd ask myself and others was, is the Vitamin Shoppe a brand or a place that sells a collection of other people's brands? We say we are a specialty retailer, but we don't act like one, nor do we look like one. Our awareness is very low. How do we distinguish ourselves amongst a very broad set of competitors and become nationally recognized.

Before I share how we are going to change this business, it all starts with our brand, the Vitamin Shoppe brand. We know that a consistent brand is a vital source to our business image. It's who we are and who we aspire to be both externally and internally.

A great brand is a living business asset, it understands their customer, delivers great products, knows how to get their message across, has strong awareness, is consistent, innovative and it delivers. When executed well, it creates identification, differentiation and intrinsic value, great brands, know who they are, and more importantly, who they aren't.

Since our last call, we went to work to define our brand, we learned more about the competitive landscape, went out to real customers and got quantitative and qualitative data to validate what they love about who we are and what we do today yet learn what we could do to be better. Leveraging all of this information, we set our sights on our plans for the future and what we need to do to grow our business and deliver results.

Our new brand vision is the driver behind everything we do. And is the foundation of our united commitment to becoming better every day. First, we are a specialty retail brand. We create positive, emotional and personalized connections with our customers, inspiring them to build a continuing relationship with us. We will be leaders within our market space.

Advancements in technology and research are pushing the health and wellness category to evolve faster and faster. We will be more innovative and quicker at everything we do.

We exist to nurture the hearts, minds and bodies of those who are on their quest to take control of their well-being and live their best life. Our promise will help you become a better you, your best stuff as you define it.

We offer encouragement and inspiring solutions with unsurpassed knowledge and expertise and will deliver a highly personalized experience tailored for each individual. We will be an authority, destination and resource for more than vitamins and are steadfast in expanding our reach with our existing customer and with new customers to grow past who we are today.

We are innovators. We are always learning and growing and we'll constantly develop new and proprietary product aligned with current trends, needs and advancement in knowledge, we will look for new ways to bring our products to consumers.

We will actively explore fresh ways to bring our products to market, add services and will expand the Vitamin Shoppe brand outside of our traditional bricks-and-clicks business model. We will bring the Vitamin Shoppe to customers in new ways. Our standards are clear, we are authentic and trustworthy everything we will do, will exceed industry standards and stand for the utmost quality.

We want our customers to always know they can be confident with the products they purchase from us each and every time. We do not take shortcuts and we do not compromise. We listen and understand our customers' needs and goals, we recognize that we serve consumers in various communities and will anticipate and meet their unique needs.

Everyone on the Vitamin Shoppe team is a health enthusiast, we are passionate about learning every day, sharing our knowledge and guidance with our customers through every channel of our business.

We are committed to becoming better every day for our customers, for our community, for our shareholders and for each other. We are the Vitamin Shoppe and here's what we're going to do in 2019 to bring this brand vision to life. We have three enterprise themes to guide us, they are: drive and build the business; deliver operational efficiencies; and reduce enterprise cost.

First, drive and build the business. It all starts with the customer. We will have a relentless focus, understanding and deep relationship with our customers. We will deliver an integrated customer experience across all touch points, one that supports the clarity of who we are as a brand. Improving our experience across all touch points starts and ends with keeping the customer at the center of everything we do.

We will be consistent and clear in communication whether that is through the collateral that is outwardly visible to the customer to how our health enthusiasts engage with them. Consistency and clarity of message is extremely important in increasing customer awareness and consideration. Specifically, we will plan our marketing activation pillars with a consumer mindset and storytelling first versus product promotion first. These activation pillars will be clear, concise and create customer engagement.

In this example used for illustrative purposes, you can see how we brought our keto story to life across all touch points from website, mobile, store signage to educational materials. Again, the customer is at the center. The experience translates into awareness, purchase consideration and loyalty.

We will significantly improve our in-store and online experience and integrate digital technology into our business. We will do this by relaunching our healthy awards program later this spring. This program is rooted in four key pillars, and they are designed to reward, celebrate, guide and connect. Our rewards will be flexible to earn and redeem.

We will have 3 tiers; bronze, silver and gold, we will celebrate our customers with birthday surprises, insider opportunities, choose your own sale day, special events and more, and we will guide with nutritional coaching, easy reorder and auto delivery.

Our private brand portfolio will be a cornerstone of the program as a way to further connect the customer to us. And our VShoppe app will take center stage as a vehicle for communication and engagement with personalized messaging for our customers to connect with us, our brand and a community that shares their goals. This enhanced program has numerous tenets as we embark on our pursuit to have more meaningful experiences with our customers.

We are enthused about this launch as customer feedback in our test markets has been very positive and new customer acquisition performance and capture rate is outpacing the balance of the chain.

We will continue to improve our in-store and online participation and integrate the web experience into our stores. This is important because our omnichannel customers spend more than single-channel shoppers.

Examples of initiatives to improve cross-channel shopping are: our website and app will be the best source of information to educate our customers as well as our health enthusiasts on the best products to meet their needs with a focus on product information, product recommendations and shopping by solution.

We will encourage and incent buy online, pickup in store from our website, mobile experience and app. Our health enthusiasts will be educated to save and build the sale utilizing our website as their go-to place for additional or endless aisle inventory needs. We will continue to grow our auto delivery program. We will bring online personalized solutions to life digitally in stores through innovative in-store technology.

And speaking of innovative technology, we are delighted to share with you first that we are embarking on an evolutionary digital personalized solution that will guide the customer's shopping journey. With so many choices in our stores and on our website, shopping with us can be overwhelming. We are on a quest to demystify our category, simplify the experience and enable our customer to find the right products for their needs.

Through a series of questions, our customers will be served up recommendations just for them. This is the first step on our journey as we change the game of how customers will shop with us. We can't wait to get it up and running later this year.

Our product assortment and the high-quality products we carry are one of the reasons our customers shop with us. We are developing a world-class innovation pipeline, both with our vendor partners and within our own family of private brands and we will be first to market on emerging trends. We will increase our private brand portfolio of products and improve our private brand sales penetration.

To begin, we are accelerating the introduction of refreshed and new private brand products such as the relaunch of BodyTech, which hit stores in January. The long-overdue refresh of our core Vitamin Shoppe brand products, to make them more relevant for today's consumer. And we are excited to launch in April Your Essentials. Your Essentials is a curated regimen of private brand products based on customer need states.

In addition, we are enhancing our private brand portfolio and, through our new private brand architecture, are bringing in new, innovative and even higher quality products later this year.

Building upon the success and heritage of our better tier sports nutrition brand BodyTech, we are enthused about launching BodyTech Elite in the best tier. The BodyTech Elite brand is positioned to more experienced fitness enthusiasts and those with an athlete mindset. BodyTech Elite will be distinguished by superior levels of efficacy.

We are all very enthusiastic about our [V-thrive] introduction. V-thrive is a lifestyle brand and sits in our elevated best tier of our private brand architecture. V-thrive is positioned to more experienced wellness enthusiasts who seek a higher level of ingredient transparency and clarity. V-thrive will be distinguished by clean and transparent ingredient call-outs and industry-leading certifications, and just think, we are just getting started.

We will launch more newness and innovation at the Vitamin Shoppe than we have ever before. Our team is committed to refining and improving the innovation process to ensure a continuous pipeline of new products that are first to market, distinct and meaningful to our customers.

As I said earlier, we will expand outside of our traditional challenge -- channels and are developing new business opportunities to sell our own products. Today, we distributed a press release that we have developed a relationship with the United States Navy. By year-end, our full line of private brand products will be carried in 30 of their stores. We are encouraged about this opportunity, as this is the first step of our new wholesale and partnership business model.

Today, we have over 770 stores and we believe in stores. They are the gateway to our customer and act as a brand ambassador. Stores are an important asset to us. Providing us a place for our customers to explore and learn is a critical component to our brand revitalization. Stores also help us build loyalty.

Yet, we also believe in profitable and productive stores, and unfortunately, as I said in my earlier remarks, we have some poor performing stores. In order for us to gain momentum, we will close our poorest performing stores and we'll prune approximately 60 to 80 existing stores out of our fleet over the next 2 to 3 years.

As I said, we believe in stores. They are an important vehicle to bring our brand to our customers. So in tandem with store closings, we will also open new stores. However, they will be different. These stores will be placed in strategic markets, they will be smaller. We will be testing new formats and they will all be in an exciting new store design that will be much more relevant for today's consumers. I can't wait to walk you through one of them before the end of the year.

The people in our stores, our health enthusiasts, are also core to our success. We are committed to their education, therefore, we will leverage technology to deliver more frequent and comprehensive product knowledge, so they can continue to provide relevant information and assistance to our customers. Our team is rallied behind and eager to build the future Vitamin Shoppe, a brand, which will be relevant for generations to come.

Well, while we build our brand, we have to be more operationally efficient and take costs out of our business. Our second enterprise theme is improve operational effective -- sorry, improve operational efficiency. We know we need to be more efficient in everything we do, so we are embarking on the following.

First, pricing and promotional effectiveness. We are partnering with our vendors to deliver launch packages to amplify our message via both paid and social media. We are planning further out and more effectively aligning with our vendor partners to further amplify our message externally. We have recently signed with Dunnhumby, a known worldwide leader in customer data science and have built a team specifically focused around this initiative to ensure our products are priced competitively and that we are getting the most from our promotional spend.

Second, agile category management. We know that with all the SKUs we carry, our inventory needs to be managed very closely. Through a disciplined process, we are working across categories to improve productivity, reduce and eliminate unproductive SKUs, as well as identify white space to help us drive innovation.

Third, our supply chain needs to be more efficient. We will accomplish this by optimizing productivity inside the four walls of our distribution centers, while simultaneously enhancing our retail and direct-to-consumer transportation networks. And through everything we do, we need to improve overall execution across the enterprise and we must deliver against our strategic initiatives. We understand we need to move with a greater sense of urgency to change the trajectory of this business.

The third enterprise theme is reduce enterprise cost. As I mentioned earlier, we will be closing 60 to 80 poorly performing stores and we'll be negotiating with our landlord to close before the end of their current lease term. These stores will close over the next 2 to 3 years. In addition, we are in the process of reducing inefficient spend across the organization. We anticipate the combination of these cost reduction efforts to yield a 100 to 200 basis point improvement in our SG&A as a rate of sales over the next 3 years.

We are deploying a rigorous approach to all capital deployment. Over the years, we have applied a disciplined approach to our capital allocation program. We do not expect significant changes to our financial policies. Our priority is first to invest in high return opportunities to grow the company. We have strong cash flow and a healthy balance sheet that gives us flexibility to make the necessary investments to drive long-term shareholder value.

Our team is intent on reducing costs and increasing efficiency. By doing so, it will allow us to invest in the appropriate initiative to accelerate the growth of our business and build shareholder value. All of our strategic themes, drive and build the business, improve operational efficiencies and reduce enterprise cost, are underway as we reset and reimagine the new Vitamin Shoppe.

Looking ahead, we are excited about our future and believe we are on the right path to maximize our growth potential. We will take a balanced and disciplined approach to building our brand and evolving our business model. We believe the Vitamin Shoppe is positioned for long-term success.

We know this won't be easy. We have a lot of work ahead of us. We are steadfast to revitalizing this business, turning around our financial results with a focused view of our future. I want to thank the entire Vitamin Shoppe team for all of their hard work and support as we reshape who we are today for a successful tomorrow.

I look forward to building a relationship with our investment community and sharing more specifics of our strategy when we meet with each of you in the coming weeks and months ahead and on future calls.

I will now turn the call back to Bill to discuss our outlook.

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [6]

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Thank you, Sharon. Moving on to our outlook for the year, I'll provide a bit more context around these items than what you read in the earnings release. We are projecting full year total comparable sales of negative low-single digits to flat. The improved performance compared to 2018 will be driven by an improvement in the store comp, as well as significant growth in digital commerce and the launch of new growth initiatives. Total revenue will partially be offset by store closures.

Reported full year gross margin rate of 31.7% to 32%. This will be down slightly from 2018, as we expect the drivers of transaction margin improvement, such as ongoing efficient promotional activity and increased private brand penetration, to be partially offset by increasing digital commerce. Next, adjusted EBITDA is expected to be between $62 million to $65 million. Our estimated combined federal, state and local tax rate is 28%.

We are planning full year capital expenditures of approximately $33 million. This includes the opening of approximately 10 new stores, which are planned for the end of the year. As we have evaluated our real estate portfolio over the past year, we've made the decision to close approximately 60 to 80 stores over the next 3 years. We expect to incur a charge in the range of $10 million to $12 million in 2019 associated with the closures.

In conclusion, as Sharon mentioned, our focus now is on executing our aggressive plans, which are well underway. This ends our prepared remarks. We'd be happy to take your questions. Operator, please open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Sean Kras from Barclays.

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Sean Stephen Kras, Barclays Bank PLC, Research Division - Research Analyst [2]

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And Sharon, appreciate the -- all those comments. Maybe just to start, can you discuss what drove the decline in the marketplace business in the quarter and then how we should think about digital sales growth this year?

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

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Yes. So as far as our -- as marketplaces, we are in the process of changing that over and refocusing on vitaminshoppe.com, making sure that we show up appropriately on Amazon and repositioning that business.

As you know, we have a new Head of Digital and customer experience and since Stacey has been here, literally about 2 months, she's already transitioning and refocusing that business. So we really -- we continue to expect a growth in the e-commerce business and repositioning that as we go into 2019.

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [4]

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And Sean, it was also kind of doubled-down with the fact that we were moving to a more of a focus on our private label portfolio on marketplaces as well as the change in our fulfillment methods.

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Sean Stephen Kras, Barclays Bank PLC, Research Division - Research Analyst [5]

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Okay, that makes sense. And then the gross margin was a little bit higher than was implied for the full year guidance in the fourth quarter. And so, I'm wondering what droves the upside versus what you expected.

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [6]

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Really it was our ability to execute more from effective promotional programs. If you look at on a 3-year basis, Sean, it was probably more in line with our -- how we performed in 2016. 2017, we did some things that really depressed our gross profit margin rate, and then we got back to a healthier position for us. And it just came through stronger in the fourth quarter.

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Sean Stephen Kras, Barclays Bank PLC, Research Division - Research Analyst [7]

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Okay. And...

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [8]

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And we are very -- and Sean, in addition -- and Sean, I would just add in addition to that, we're very focused on margin dollars and to make sure that we really set that up, so that we can build on that as we look ahead as well.

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Sean Stephen Kras, Barclays Bank PLC, Research Division - Research Analyst [9]

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Okay. And Sharon you talked a bit about the health rewards program relaunch. Can you talk a little bit about what you've been seeing in the test stores in terms of comp lift and maybe changes in transactions or any other KPIs you can share?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [10]

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Yes, I mean it is pilot ready and we are encouraged by the results. I don't think we would quote what a comp lift's coming from, but we have seen increased frequency from the customers in the new program, which is obviously leading us to be excited and encouraged about rolling out the program this year across the chain.

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [11]

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Yes, the pilot stores are -- have been very favorable. Just in terms of even the ease of the program, it's much simpler for the customer to understand and certainly -- it certainly supports the customer engaging with us on a more frequent basis. Just even the communication is so much clearer and we're very excited about the program and what it will bring to us the rest of the year.

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Operator [12]

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And we'll take our next question from Damian Witkowski with G Research.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [13]

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So the stores you're closing, the 60 to 80 stores, is that basically it in terms of what you think over next 5 years you'll be closing in total?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [14]

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I mean, Damian, we've evaluated the portfolio as it exists today, right. And we've targeted those 60 to 80 and it's a combination of stores that will close at lease expiration along with ones that we're going to look to terminate earlier than their lease expiration.

Right now that's all we have our sights on, we feel good about the portfolio -- the totality of the portfolio. And you could call it 10%, right, that we feel like that we really need to move on and make way for new stores.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [15]

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And you probably won't provide a real number, but if you looked at EBITDA for 2018 and if you exclude those stores, I mean what would -- how much are they detracting from overall company EBITDA (multiple speakers).

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [16]

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We don't [quote].

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [17]

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Are they profitable in the four wall basis or (multiple speakers)?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [18]

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I mean, Damian, it's going to be a combination. I think also as we look forward, we just know that there are stores that are performing below the level we would like them to perform at. And we want -- and especially ones that have a lease termination that are farther in the future that we believe that we need to get out of to make it -- to give our financial performance a healthier outlook.

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [19]

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It really help us within (multiple speakers).

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [20]

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And then (multiple speakers).

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [21]

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Of what we're trying to do with the business.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [22]

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And then, Bill, on the $10 million to $12 million charge in 2019, how many stores does that assume?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [23]

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That would assume if we get out of the majority of the targeted stores, we know we have a range in there and that's something that we'll work through throughout the year and we'll make sure to kind of update you on each quarter of our progress along those lines. So we're still in process on negotiating with some of these.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [24]

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Okay. And then CapEx, the $33 million, you're opening 10 new stores, but what's maintenance CapEx? I mean should I -- is the $3.5 million you guys spent in the fourth quarter kind of a good run rate on an annual basis for maintenance CapEx?

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [25]

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I think if you just think about the maintenance of our stores, you have to look at maintenance on a combination. We're also going to look at the remodel of a good number of stores as well. And we'll try to make sure that we're efficient in spend of remodeling stores where we are also going back in for maintenance.

I feel like over the last few years from a maintenance perspective, we've kept up when you think about simple things of HVAC and things like that, right, that you need to do on any retail store. So it's not -- we're not quoting a number of, hey, how much we spend on maintenance, but it's going to be baked in.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [26]

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And then Sharon, lastly, are you investing in the -- are you actually advertising the Vitamin Shoppe brand now? Or -- I mean, historically, you haven't really spent any money promoting the brand itself. Is that changing?

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [27]

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Yes, in terms of -- yes, so in terms of kind of like outward reach in traditional advertising, it's all in the way we currently [have] been doing it. There will be much more focus on digital and doing it through our digital channels because over 75% of our customers start their shopping journal -- journey with us on a digital device. And so we believe that digital is the way to go. And that's what we're targeting -- targeting our efforts at this point.

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Operator [28]

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(Operator Instructions) And we'll take our next question from Craig Carlozzi with Bulwark.

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Craig Carlozzi, BulwarkBay Investment Group - Analyst [29]

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So I noticed that your bonds -- and congratulations, you guys have done a terrific job managing your liabilities in the open market. But they're due within 2 years and I was curious how sensitive you are to having this particular convert becoming a current liability for you? Or is the plan simply to continue to repurchase them opportunistically in the open market and deal with them at maturity? Thank you.

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Bill Wafford, Vitamin Shoppe, Inc. - Executive VP & CFO [30]

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Craig, we're working with our Board of Directors on kind of our capital allocation strategy and what we think about capital structure. We feel very comfortable with our current leverage ratios today and level of debt and we feel confident that we'll be able to manage our debt level through maturity and beyond.

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Operator [31]

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And there are no further questions at this time. So I'd like to turn the call back to Sharon for any additional or closing remarks.

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Sharon M. Leite, Vitamin Shoppe, Inc. - CEO & Director [32]

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Great, thank you so much. Well, we appreciate the fact that you guys joined us on the call. We know that we need to expeditiously turn this business around and we absolutely will. Our team is energized and focused on delivering long-term sustainable growth and value creation. And we all -- we look forward to updating you on future calls. So thank you again for your interest in the Vitamin Shoppe and for joining us this morning.

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Operator [33]

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That concludes today's presentation. We thank you for your participation. You may now disconnect.