VSI
#Thank you, <UNK>.
Good morning, everyone, and thank you for joining us.
I will begin by reviewing the highlights of our first quarter and then discuss the progress on our strategic initiatives.
<UNK> will then take you through the financial performance and discuss our guidance for the year.
Finally, Alex will then provide a few closing remarks.
So let's start with the Q1 '18 results.
We're encouraged with our performance for the quarter as we continue to make progress and delivered results that were in line with our expectations.
The performance was due to an improvement in underlying sales trends, reflecting an increase in new customers and transactions, while digital commerce increased by 21%.
Product margins improved over 100 basis points as we refined our promotional cadence.
The positive trend in product margins continued into Q2.
Lastly, reflecting the quarter's performance and our confidence for cash flow for the remainder of the year, we repurchased $45 million face value of our convertible debt at a discount to par.
As we discussed on the last call, we're focusing on strengthening our fundamentals as part of our New Base Plan to position the Vitamin Shoppe as the wellness authority for our customers.
I will discuss how we progressed in the quarter on some of these initiatives.
So first on the customer acquisition front.
The digital experience we're creating is more engaging, more inspiring and gives us the capability to deliver more personalized content intended to convey the expertise of our Health Enthusiasts.
During the first quarter, we scaled pilot work we began in 2017.
We increased digital marketing investments in both paid search and performance marketing.
And in our storage, we continued to refine our incentives and grassroots marketing programs to help drive stronger traffic and customer acquisition.
We also made changes to improve SEO.
This increased investment focus on customer acquisition resulted in new customer growth of 10.3%, and we also saw growth in overall transactions.
Customer conversion.
We're creating a frictionless omni-experience that is more personalized, more inspirational, more educational and enjoyable to use.
A good example of this was our March Battle of the Brands promotion.
Working along with our vendor partners in the sports category, we integrated the stores and digital marketing promotions with an emphasis on social media and digital content; brand bracket voting, influencers, recipes and sport team Health Enthusiasts training.
The Battle of the Brand promotion was an example of us utilizing the Health Enthusiasts in the stores to generate excitement, which in turn generated a lot of customer engagement and was successful in driving significant incremental sales as well as margin dollars.
So as a result, you're going to see many more of these to come later on in the year.
The ongoing improvement and customer usage of Auto Delivery is helping to drive our digital commerce sales, which were up 20.7% in the quarter.
Additionally, our focus on mobile is also working to drive sales.
We relaunched our app during the quarter with an enhanced shopping experience.
Since the launch, we've experienced increased traffic and have seen increased sign-ups for the app and commerce is steadily building.
Lastly, we are investing in technology to provide better analytics to support decision making and product selection, pricing, promotions, planning and allocations.
Looking at digital commerce.
Our plans include further investments in technology and ongoing site optimization to ensure that we're differentiating our products, delivering a superior customer experience and further distinguishing the Vitamin Shoppe brand.
So now let's move on to our product and promotion strategy.
We've restructured and retooled our pricing and promotion initiatives.
By working more collaboratively with our vendor partners on pricing and aligning with them on an annual promotion plan, we've eliminated inefficient promotions and realized better pricing and began to see the margin benefits of this somewhat about halfway through the quarter.
Our product margin improvements in the quarter were in line with our expectations and also reflect the better negotiation work we completed last year.
We saw improving trends, both year-over-year and sequentially in the sports category, notably sports protein as well as good growth in herbs and homeopathy.
With respect to new products, during the quarter, we had many top-to-top meetings with our key vendor partners as we continue to work closely with them on joint business planning to bring new and exciting products to our customers.
We are seeing increased participation from our vendors related to opportunities for first-to-market products, exclusive products for the Vitamin Shoppe and more innovation.
Let me give you a quick example.
In the second quarter, working with Ora Organics, we will be the launch partner and first national retailer to carry the brand as the company expands from online only to omnichannel.
This is a plant-based brand with nutrients from organic and sustainable sources across a broad range of categories, including digestive health, omegas, vitamins, proteins and greens.
It is also gluten, dairy, soy and wheat-free as well as non-GMO.
This is only one example, but there are many others as we currently have a healthy pipeline of innovative products from third parties.
Other ways we're working more closely with our vendor partners include some store-within-store retail concepts, increased unique sampling in our stores and working with them on joint training programs.
At the same time, we remain committed to growing our private brand business and look forward to reinvigorating this business with many new innovations of products across our portfolio being launched in the coming months.
Now let's talk about customer loyalty and retention.
Our Spark Auto Delivery platform, or ADP for short, continues to perform well and ahead of our expectations.
Our in-store Health Enthusiasts have been instrumental on signing up new customers.
We now have almost 600,000 active subscriptions.
Importantly, the retention rate and incremental sales contribution are running ahead of our expectations as well.
Customer sign-ups for ADP on average are 50% incremental once they stay on the program for 5 months.
As we forecast impact to customer lifetime value, our analytics show that customers that subscribe to Spark Auto Delivery see an additional $125 annual increase on overall spending with the Vitamin Shoppe above and beyond their subscription purchases.
The best part of Spark Auto Delivery is it's a recurring revenue stream and increased profitability over time.
So given the success of Auto Delivery, which demonstrates market demand for a subscription service at the Vitamin Shoppe, we saw an equally attractive opportunity to address those customers who did not want to sign up for a subscription service but were amenable to being reminded to reorder.
As you might remember, 75% of our sales are replenishment based.
So to address these customers, we are launching a new service called Easy-Reorder.
This is a service you might be familiar with from your local drugstores that send you prescription reminders and ability to reorder.
It's an attractive option for customers as it's convenient with one click reordering and a choice of delivering their product at home or pick up in store.
For the Vitamin Shoppe, it is a means to connect with our customers digitally and to drive incremental customer shopping behavior.
Easy-Reorder is in pilot right now with anticipated rollout in the back half of the year.
We're excited about the opportunity to enable customers who've already shopped with us, make it as easy as possible for them to continue to shop with us.
Our digital initiatives will also help us to gain further insights into our customers.
This work will further be supported by our healthy rewards membership program that will be more robust, uniquely positioned in the marketplace in terms of offering and value by its members.
We will be piloting this new program in Q3 of this year, and we expect a full rollout by year-end 2018 or early 2019.
And as we look ahead, we're continuing to work to drive customer traffic and engagement by growing our overall customer database.
I will now turn over the call to <UNK> to provide further details on our financial results about Q1.
Thank you, <UNK>, and good morning, everyone.
Our overall business fundamentals continue to reflect the initiatives we have launched, delivering improving comp transaction and new customer acquisition, while also continuing to improve product margin.
Our cash flow trends also improved in the quarter.
On a GAAP basis, earnings per share from continuing operation in the first quarter was $0.41, benefiting from a $12.5 million pretax gain on the extinguishment of debt and partially offset by $2.2 million in net pretax expenses associated with the closure of the North Bergen facility.
Adjusting for these items, earnings per share from continuing operations in the quarter was $0.10.
The GAAP loss per share when including the Nutri-Force discontinued operation was $0.17.
As a reminder, we have provided a schedule in the earnings release that reconciles all of this information.
Our tax rate was impacted this quarter by approximately 400,000 of discrete tax items, mainly relating to stock compensation.
During the first quarter, total comps were negative 3.6%.
Later in the quarter, comps were impacted by several nor'easter storms, which had a negative impact estimated at around 40 basis points.
During the quarter, we increased our level of investment in key parts of our business and continued to partner with vendors on price and promotion tactics to accelerate improvement in product margins.
These actions along with our stepped up marketing program helped drive an improvement in transaction count and new customer growth.
We're seeing further comp improvement to date in the second quarter.
Now a few words on Nutri-Force.
Nutri-Force, our contract manufacturing business, has been a challenge for us.
And after an extensive review of the business and strategic alternatives, we made the decision to sell Nutri-Force.
We closed on the sale earlier this week with Arizona Nutritional Supplements, or ANS, with proceeds to the Vitamin Shoppe of approximately $15 million.
ANS has a strong history of driving product innovation.
As a part of the transaction, ANS has committed to specific investments in innovation on behalf of the Vitamin Shoppe, which is a key factor for us in building penetration of our private brand portfolio.
As a part of this transaction, we entered into a long-term supply agreement with ANS.
Over the next 6 months, we will be transitioning the majority of the Nutri-Force production to the ANS facility.
As we evaluated potential buyers, it was important for us to find a high-quality partner as a large portion of our private brand sales would now be moving to this third-party facility.
ANS is already one of our key manufacturing partners, and we're pleased to continue working with this company.
Now on to gross margin.
Excluding the special adjustments for the North Bergen facility, adjusted gross profit margins declined 34 basis points from the same period in 2017.
Components of the changes in gross profit rate include product margin improvement of 115 basis points year-over-year, reflecting benefits from improved vendor partnership, mix shift and inventory management.
This was partially offset by our increased investments in pricing and promotion as well as increased shipping cost with the strong growth of our digital business.
Product margin improvement represents a strong sequential improvement from the fourth quarter and we're continuing to see benefits in the second quarter as we continue to improve our pricing and promotion mix.
Supply chain and occupancy delevered by approximately 130 and 15 basis points, respectively, due to the lower sales as well as the impact from channel shift.
Reported SG&A expenses were $89.3 million and include a $0.5 million cost associated with the closing of the North Bergen distribution center.
On an adjusted basis, SG&A, as a percentage of sales, delevered by approximately 370 basis points.
This deleveraging is mainly driven by store payroll, advertising, other store operating costs and corporate costs.
Corporate costs include higher health care costs and store impairment combined of a little over $2 million.
Advertising spend increased approximately 10% year-over-year with incremental investment focused on customer acquisition.
And as <UNK> mentioned, we saw a 10% increase in new customer acquisition and traffic improved as well.
Given this improving trend, we are continuing this higher rate of advertising investment and expect to increase spend by approximately $1.5 million in the second quarter of 2018 over the second quarter of 2017.
During his presentation, <UNK> discussed the progress we're making on 4 of our strategic pillars.
Let me take a brief comment about our last strategic pillar, operational excellence, which at its core is focused on streamlining the business to maximize efficiencies and execution.
During the quarter, we continued to focus on improving inventory forecasting accuracy and reduced inventory levels contributing approximately $9 million to operating cash flow.
And we expect ongoing improvements throughout the year.
The sale of Nutri-Force is also an important component in streamlining the business.
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 cash equivalents of approximately $2 million, convertible notes with a total face value of $98 million and $35 million drawn on our credit facility, which we subsequently reduced in April to $25 million.
Cash generated from operating activities was $18.2 million and capital expenditures for the quarter were $6.7 million with funds primarily utilized for IT and digital investment.
Based on our confidence in cash generation for the remainder of the year, we repurchased $45.4 million face value of convertible debt during the quarter at a 26% discount, resulting in a net gain from the extinguishment of debt of $12.5 million.
To end my presentation, a few words on our outlook for the year.
Our guidance is unchanged from that we provided on the last earnings call in February, except to account for the sale of Nutri-Force.
We continue to expect steady progress and improvements in sales comp trends.
This expected improvement is driven mainly from continued growth of our Spark Auto Delivery program and improvement in new customer acquisition trends.
While we are encouraged by the progress made to date, we remain cautious and expect comparable sales growth in the negative to ---+ negative low- to mid-single-digit growth range for the year.
This includes growth in digital commerce, including vitaminshoppe.com and Auto Delivery sales of over 20%, offset by a decline in store sales as more customers shift to e-commerce.
Our gross margin is expected to be in the range of 30.5% to 31.0%.
We expect an improvement in rate from the annualization of savings from our cost of goods reduction initiative and moderating fixed cost deleverage, partially offset by increased delivery expense.
We expect SG&A to be between $340 million to $345 million.
This excludes expenses associated with the CEO change.
Total capital expenditures are planned at approximately $30 million.
This includes the opening of 2 new stores and increases in digital investments, which is planned to be our largest area of investment.
We plan to close approximately 10 stores during the year.
With the reduction of capital expenditures, combined with continued favorability from cash-generating activities, including inventory reductions, we expect additional cash flow available for other uses for the remainder of the year.
We will continue to evaluate and discuss capital allocation alternatives with the board, including stock and debt buyback activity.
I will now turn the call over to Alex for a few comments.
Yes.
I think it's very sustainable, and in fact, we expect it to continue to improve as the year goes on.
We've really improved a lot of the talent on our digital side of the business over the last several months and now have some dedicated executives that are focusing on e-commerce and particularly on helping us upgrade the site itself.
So what you're seeing in the first quarter is you're seeing a combination of both making the site more usable, more navigable as well as you're seeing the benefits of some of the replenishment strategies that we're starting to put in place, most notably Auto Delivery.
I mentioned the Easy-Reorder product that will be coming online.
And that product is really another modernization that we think will actually be interesting to a larger audience than the Auto Delivery program itself.
We think that's going to have also a positive impact on our overall digital impact.
So I think for the balance of the year, you're going to see strong results from the e-commerce side or digital side of our business ongoing.
Yes.
I mean, <UNK>, I would say actually that we were actually quite pleased by what we saw in terms of product margin improvement over the course of the quarter.
We didn't necessarily pull back on promotions.
We got a lot smarter about how we were using the money over the course of the quarter.
You may remember last year, in the third quarter, we accelerated to market a new pricing and promotion strategy that we called Shop with Confidence.
And over the course of the back end of the year, we started to realize that there were some relatively significant inefficiencies with the way we were bringing that program to market.
Since Dave Mock, who is heading up our merchandising and marketing team, joined our organizing at the start of January, he's really torn apart and torn down that entire strategy and helped to rebuild it on a much more solid foundation.
I think the team is actually feeling like the margins are well in control and we're actually able to be much more surgical about the way we're applying promotional strategies as we roll into the second quarter.
We're seeing the same strong momentum we saw in the first quarter continue to roll through the second quarter.
So I think you're going to see this also as an important tailwind for the business as the year progresses.
I would add some numbers to that.
As we looked at our product margin improvement in the fourth quarter, we were up 50 basis points.
And in this first quarter, we're up 115 basis points.
So a nice sequential improvement.
And that's really driven by the refinement in our pricing and promotion strategy.
So in summary, <UNK>, I guess, what I would just is, look, it's a competitive environment, there is no question.
But I think we're getting a lot smarter about how we're competing.
And as a result of getting smarter about the way we're competing, I think we're able to bring margin to the table, while at the same time, growing transaction count for the company, which is a real positive sign.
Yes.
<UNK>, we do continue to expect and we are seeing that steady improvement.
And yes, we are still targeting flat comp by the end of the year.
We are guiding specific to low ---+ negative low to mid-single digits as we continue to remain cautious in this environment.
But targeting to flat comps at the end of the year is still our goal.
Great questions.
So look, this is a very ---+ as Alex said in his remarks, this is a very healthy industry.
It's been growing in solid mid-single digit comps for a while, continues to grow.
We're not necessarily seeing it grow faster but we're also not seeing it slowdown per se.
I think the Vitamin Shoppe is now starting to really transform against the customer habit base, which means we're starting to realize that customers are now starting to shift to shopping at times online, shopping at times in store.
And what we're doing is, we're starting to shift our strengths, particularly the consultative sale that our Health Enthusiasts do for our customers on a more ---+ stronger basis so that they can get the help in those particular areas.
So net-net, I think behind Dave Mock's leadership now, we've just got a much better handle on how to drive demand on this business.
And you're right to note that we've been seeing sequential improvement on comps and you're right to also note that our expectations by the end of this year is that we're going to get flat comps and then grow from there.
So there is more work to do in that area, we're not done yet.
But we feel like we've got a good handle and a good cadence on bringing on the initiatives on this business necessary to meet the demand that is there in this market.
Does that help answer the question.
So apologies if I missed this on the call.
But just curious if there is going to be any impact to product margins from the shift away from Nutri-Force after it's divested to ANS or not.
Yes, it's a great question.
I'll let <UNK> answer it and then I'll jump on top of her answer.
Okay.
So if you look at the specific segment reporting, there will be no impact to the retail side of the business.
All of the margins associated with the selling from Nutri-Force to the Vitamin Shoppe is embedded ---+ was embedded in the manufacturing segment.
If anything, we expect that there could be some improvement in gross margins for the retail segment as we believe ANS can be much more efficient.
And based on our pricing with them, we would be able to realize the benefit of that efficiency.
So when you look at it consolidated, yes, there will be some gross margin impact because we will lose the margins from the manufacturing segment; that is now reflected in the guidance I provided.
When you look specifically at the retail business, we expect if anything, margin upside given the more efficient ANS business.
Yes.
I'd just add that this ---+ the deal that we've set with ANS is really ---+ it's a partnership deal.
So it's one that is designed to make sure that we remain cost competitive.
We're going to work closely with them to drive efficiencies through the way we forecast, the way we work together to make sure that we can bring the best possible margin to the business.
And I don't want to miss the point about innovation.
ANS is truly recognized in the industry as one of the more innovative suppliers and brings a pipeline of new technology and new capabilities to our private brand portfolio.
So we're very much looking forward to working with ANS as we move forward to drive success here.
Thank you, operator.
So as this will be my final earnings call as CEO of the Vitamin Shoppe, I wanted to say a few things in closing out my tenure.
One, it's been an honor and a pleasure to serve as both CEO and Chief Health Enthusiast for the past 3 years.
Two, I look forward to a really bright future for this company as it makes the full transformation to a modern-day omni retailer and continues to differentiate as the most broad-based wellness authority in retail nationally.
And three, I would say to shareholders and investors, they should be comforted that the Vitamin Shoppe is stewarded by some of the best retail executives in the business with strong board oversight and will continue to thrive based on both its people, our over 5,000 Health Enthusiasts and our purpose to help inspire and nourish our customers so they can thrive every day.
Thank you for taking the time for joining us this morning.
