With Americans spending nearly $25 billion annually for nutritional supplements, vitamin and supplement retailers seem like a good place to invest.
The two big publicly traded names in the sector are GNC Holdings Inc. (NYSE: GNC) and Vitamin Shoppe, Inc. (NYSE: VSI). Every stock and every sector has a story, and the story here is that America has an aging population interested in health, which means the vitamin industry should continue to grow.
Do the numbers support that theory? Let’s take a look.
Are The Results Healthy?
While there’s a lot of noise about what a great business nutritional supplements are or should be, it’s good to check the numbers. After all, sales and profits are what make a business go. If those numbers are strong, the stock should follow.
Vitamin Shoppe missed its estimates last quarter, posting adjusted earnings per share of $0.47 while analysts expected $0.52 a share. Revenue of $308.9 million was less than the expected $314.5 million.
GNC, on the other hand, beat earnings. EPS was $0.75, a penny higher than expectations. However, revenue fell just short at $656.3 million against an expected $666.5 million.
Still, an earnings or revenue miss for a quarter is not necessarily a big deal, if the company is doing well longer term.
Sales and earnings for GNC are expected to end up flat to slightly down for this year, though analysts see a brighter 2015. Vitamin Shoppe’s prospects look slightly more robust.
Given the recent quarters of both, though, it’s not unreasonable for investors to be conservative in their expectations.
Both companies cite temporary problems. GNC has spent heavily on advertising and inventory of late. The company’s new CEO, Michael Archbold, plans to bring reel those expenses in to generate what he said would be “double-digit” earnings growth.
Vitamin Shoppe spent a lot on a new distribution center and made several acquisitions, both of which dampened growth. There were even rumors the company might be put up for sale.
Are These Value Stocks?
Both GNC’s and Vitamin Shoppe’s stocks are trading in the middle of their 52-week price ranges.
GNC’s stock price was recently a shade over $43 a share, trading at about 16 times earnings. Vitamin Shoppe traded at just over $46, with a PE of nearly 24.
Those valuations are pretty reasonable, especially when you consider that the S&P 500 currently trades at 20 times earnings. But hold on, there’s more to the vitamin story.
A Crowded Field
While it’s tempting to say that the two stocks have a kind of duopoly in the vitamin trade, much like Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) do in the do-it-yourself business, that’s not really the case. In addition to GNC and Vitamin Shoppe, there is privately held Vitamin World, a large nutritional supplement retailer.
Beyond those “Big Three”, there are numerous big-name retailers that have elbowed their way into what is an increasingly competitive space. Drugstores such as Walgreen (NYSE: WAG) and CVS (NYSE: CVS), along with retailers such as Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) are wanting a piece of the vitamin pie.
Other players including pharmaceutical giants Procter & Gamble (NYSE: PG) and Pfizer (NYSE: PFE), as well as other large consumer-products companies that have either acquired or developed their own supplement lines. Many of these products retail mostly at supermarkets, discount stores or drugstores – places that are more easily accessible to the average shopper than GNC or the Vitamin Shoppe.
Vitamins have become something of a commodity, more like food. That’s different from, say, pharmaceutical drugs, which are proprietary and where the exclusive rights are owned for their formulas.
In a commoditized business, margins, competitive pressure and the lack of entry barriers are all major considerations. These are the areas to watch in the retail vitamin business.
Should You Buy These Vitamin Stocks?
Taking all of those factors into consideration, I wouldn’t buy GNC or Vitamin Shoppe right now. The sales and earnings need to get healthier first.
These stocks will be worth considering if they can meet the challenges in their tough industry. If sales and earnings pick up on a more sustainable basis at either company, then start looking for attractive valuations and entry prices that would make them a bargain worth buying.
Until then, your portfolio doesn’t need vitamins.
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