VSI
#Thank you, Alex, good morning, everyone, and thank you for joining us.
I appreciate Alex's comments and want to thank the board and the company for the opportunity to serve over the past 3 years.
Now on to the business at hand.
Looking back on Q4 and 2017, overall, we are seeing progress in our business recovery.
Throughout the year, we launched a series of initiatives focused on price value, customer acquisition and retention, which are having positive impact in our results.
We also improved our product margins by 50 basis points in the quarter.
Our overall transaction count increased in Q4, and we saw positive growth in new customer acquisition as well.
We also saw our comp declines further moderate to negative 3.2%, adjusted for holiday timing of the 53rd week.
Fourth quarter comps represented sequential improvement from our Q3 comps of negative 5.8%, excluding hurricane impact, and Q2 comps of negative 8.3%.
The initiatives we rolled out last summer, which focused on improving our performance in the area of digital commerce and the launch of our new Spark Auto Delivery program, are all performing well.
During the fourth quarter, we continued with our stepped-up marketing and promotional activities begun in Q3.
We increased digital marketing investments in both paid search and performance marketing.
In our stores, we continued to refine our incentives and grassroots marketing programs to help drive stronger traffic and customer acquisition.
All of these actions resulted in a positive growth in both new customers and overall transactions in Q4.
Our launch of our innovative Spark Auto Delivery platform has also exceeded expectations.
And I'm happy to say that the program, which was launched in August 2017, had almost 400,000 active subscriptions by year-end.
Importantly, the retention rate and incremental sales contributions are running ahead of our expectations as well.
With respect to our strategic pricing initiative, overall, we have seen improvement in unit volume and traffic trends, but margins are not yet where we want them to be.
As a result, we will continue to fine-tune our pricing strategy in order drive the best balance between traffic growth and overall profitability.
Our continued focus on private brands is driving increased penetration, up 95 basis points in fourth quarter 2017 and 110 basis points for the full year.
During the quarter, we relaunched our MyTrition line with new packaging and products.
And earlier in the year, we introduced new innovation across multiple brands.
We are seeing particular success with the plnt brand up 25% and the ProBioCare brand up 10% in 2017.
And I'm also pleased that we have made progress in broadening our vendor partnerships, and with the expansion of Performance, one of the fastest-growing brands in sport supplements.
Nutri-Force, our manufacturing business, was restructured over the past 9 months and has improved its overall performance and reliability, but still represents a drag on overall profitability.
As we developed our new 3-year plan for Vitamin Shoppe, we have done a thorough review of the future prospects of the Nutri-Force business and have decided to evaluate a range of strategic options for the operations of the business, including a possible change of ownership.
No matter what action we decide to pursue, it will be important for us to maintain the continuity of product supply from Nutri-Force to achieve our product brand growth and margin goals in the future.
I will now turn over the call to <UNK> to provide further details on our financial results for Q4 and full year 2017.
Thank you, <UNK>, and good morning, everyone.
On a GAAP basis, the loss per share in the fourth quarter was $0.75, impacted by a $15.3 million tax charge to revalue our net deferred tax asset base on the new tax reform legislation as well as $800,000 pretax in net expenses associated with the closure of the North Bergen facility.
This was partially offset with a net pretax $3.7 million reduction in previously recorded Nutri-Force restructuring costs.
Adjusting for these items, the per share loss in the quarter was $0.17.
As mentioned on our last call, we increased our level of investment in key parts of our business to accelerate improvement.
These actions helped to drive an improvement in our cost of sales.
During the fourth quarter, comps were a negative 4.6%, or a negative 3.2% adjusted for the timing of the Christmas holiday, as Christmas fell in our 53rd week in 2016.
Our store comps declined 7%.
This decline was partially driven by our customer shifting to Auto Delivery fulfillment.
Digital commerce, which includes vitaminshoppe.com and Auto Delivery, increased 15.3%.
Given the propensity of customers shopping on an omnichannel basis, coupled with our strategy to focus more on omnichannel, we believe the most accurate way to judge how our business is progressing is to look at total comps.
We will also continue to report digital commerce comps, as it is a major focus and area of investment going forward.
As we have been discussing over the past several quarters, we have restructured Nutri-Force to reduce complexity and improve overall profitability.
In the fourth quarter, Nutri-Force recorded operating income of $15.3 million (sic) [$5.3 million].
This includes the $3.7 million net reduction in restructuring costs, mainly relating to reductions in inventory obsolescence and accounts receivable reserves taken earlier in the year.
We finalized the streamlining of this business in the fourth quarter, resulting in better than previously estimated charges.
Excluding this $3.7 million benefit, Nutri-Force's operating income was $1.6 million, a significant improvement from losses reported in the prior quarters.
While we are pleased with that improvement in performance, the fourth quarter benefited from a stronger year-end business and gross margin adjustments and is not necessarily indicative of the performance we expect for 2018.
For 2018, we expect an improvement, but we'll still operate at a loss.
And as <UNK> discussed, we are also exploring strategic alternatives for this business.
Now on to gross margins.
Excluding the special adjustments for the North Bergen facility and Nutri-Force previously discussed, adjusted gross profit margins declined 180 basis points from the fourth quarter of 2016, mainly from deleverage in the business.
Components of the changes in gross profit rate include a product margin improvement of 50 basis points year-over-year, reflecting the benefits of lower cost from improved vendor partnerships and favorable product category mix shift, including the impact from the growth of private brands.
This was partially offset by our decision to increase promotional pricing activity as well as increased shipping costs with the strong growth of our digital business.
Supply chain and occupancy deleveraged by approximately 250 and 140 basis points, respectively, due to lower sales as well as some deleverage from supply chain, as we were operating 3 DCs through the end of the year.
North Bergen distribution operations have now all been transferred to our other 2 facilities in Virginia and <UNK>zona.
And we are now working on closing the facility, including moving office personnel to other New Jersey locations by the end of the lease time in August.
Lastly, gross margins benefited by 160 basis points from improvement in the Nutri-Force business.
Reported SG&A expenses were $87.1 million, and include a $0.4 million reduction in previously reported costs related to the Nutri-Force turnaround.
On an adjusted basis, SG&A as a percentage of sales delevered by approximately 500 basis points.
This deleveraging is mainly driven by store payroll, advertising, other store operating costs and corporate costs.
Corporate costs include one-off consulting cost of $1.3 million.
In addition, annual and long-term incentive costs were higher by $2.3 million, mainly driven by favorable accrual adjustments last year.
Advertising spend increased $2 million year-over-year, with incremental investments focused on customer acquisition.
As <UNK> discussed, trends improved during the quarter, increasing 0.3% in new customers, a solid improvement from the negative 17.4% in the first 3 quarters of the year.
Given this improving trend, we are continuing this higher rate of advertising investment in early 2018.
You may have noticed an increase in reported depreciation and amortization in Table 2 of our press release.
This is due to a change in classification we made on our statement of cash flows during the quarter.
This amount now includes depreciation and amortization associated with our supply chain assets, classified within cost of goods sold of approximately $1.7 million per quarter or $7 million for the year.
For the first 3 quarters of 2017, the amount in Table 2 and in our statement of cash flows specifically represented depreciation and amortization recorded in SG&A only.
We are now reporting the combined amount.
This only impacts 2017, as in prior years, this cost depreciation was classified within SG&A.
As such, full year amounts are comparative on the statement of cash flows.
One last point on expenses.
The fourth quarter 2017 includes $800,000 of store impairment charges as compared to $400,000 on an adjusted basis in 2016.
Our balance sheet at year-end remains healthy.
We ended the year with cash and cash equivalents of $2 million, convertible notes with a total face value of $144 million and $12 million drawn on our credit facility.
Our total credit facility [line] is $90 million, with the opportunity to increase to $150 million at the company's discretion, providing for strong liquidity to support operations, fund growth initiatives and other capital allocation alternatives.
Capital expenditures for the year were $55 million and included approximately $15 million for the new DC.
Additional funds were expended on the opening of 15 stores, cost associated with accelerating the closure of North Bergen facility, mainly building additional office space in Secaucus, and the BDS and [LMN3] models and IT investments.
For 2018, we are planning a significant reduction in the level of capital expenditures, which I will further discuss when I cover our top line guidance.
I will now turn the call back to <UNK> to provide an update on our new 3-year Base Plan.
Thanks, <UNK>.
So our 2017 performance was disappointing and made it clear that we have been lagging the rapid shift to omnichannel digital retailer.
As a result, over the past several months, working closely with our board and external consultants, including McKinsey and Digital Prophet Networks (sic) [Digital Prophets Network], we have developed our New Base Plan, that when fully executed, will give the Vitamin Shoppe the capabilities, functionality and characteristics that are the table stakes for modern retailers to be competitive.
While the successful implementation of our New Base Plan will improve customer engagement and profitability, I want to emphasis that it is not an end in itself.
Once completed, the plan will position the Vitamin Shoppe as a compelling health and wellness brand and will be the foundation for additional business growth through new category innovation, deeper customer personalization and unique business partnerships to help enrich the lives of our customers.
As we built our new plan, we started with a deep analysis of the wellness market and the wellness consumer.
The market for wellness continues to have very attractive attributes, including solid underlying growth projected by multiple sources to be high single digits, driven not only by Baby Boomers' obsession with quality of life, but also Millennials and Gen Z for spending even more than their parents on wellness, fitness and better-for-you products.
While innovation has slowed somewhat in our core supplement market, we are seeing growth through new products coming to market in the guise of more convenient food forms, such as chews, bars and ready-to-drink products.
We are also seeing new brands with rapid growth profiles bringing new excitement to the market, particularly in the areas of functional foods, sports nutrition and lifestyle categories, such as aromatherapy and natural beauty.
So while the wellness market itself continues to grow, what has changed is the way consumers navigate and shop this market.
The wellness customer, while still purchasing the majority of their products at traditional retail stores like ours, are rapidly shifting the way they discover, navigate, decide and ultimately ascribe loyalty, based on aggressive adoption of mobile, internet tools and social media.
Our strategic vision for the Vitamin Shoppe is to become the wellness authority for our customers, delivering a personalized experience and innovative products to support our customers' wellness goals.
Our New Base Plan is built around the customer decision journey and accomplished by the implementation of 5 of our strategic pillars that will follow this journey: Targeted acquisition, engaging omni experience, differentiated product offerings and personalized loyalty and replenishment.
Finally, operational excellence is the foundational pillar that helps drive fulfillment and profitability across the entire strategy.
You can see this entire picture on Page 7 of the presentation that is now on our website.
The approach is simple and powerful.
Our first pillar, customer acquisition, is driven by a stepped-up level of relevant contents and wellness expertise that help customers navigate both online and in-store during the discovery phase of their journey.
We are also increasing our marketing spending and support at 2 levels of the business.
In 2018, we expect a significant increase in acquisitions through paid search and paid social channels as well as the strong grassroots efforts we started in the back half of 2017, which will continue throughout 2018.
As we mentioned, we returned to customer acquisition growth in Q4, and we are seeing continued momentum in Q1 as well.
Our second pillar is improving customer conversion through upgrades to our omni customer experience.
Shopping for wellness solutions, particularly across broad supplement categories, is overwhelming for most customers.
And while our store Health Enthusiasts themselves have been benchmarked as best in the industry, through helping guide and coach our customers, we have a significant opportunity to upgrade our digital tools and online offerings to mirror the in-store experience.
Last week, we launched our new Vitamin Shoppe mobile app, which enhances our customer experience and ease of shopping significantly.
In addition in Q4, we introduced a more integrated calendar for omni promotional events.
These events are designed to provide excitement and entertainment to our customers, both in-store and online, including special contests, tasting and sampling events as well as celebrity visits in our stores that are also broadcast on our site and across platforms like Facebook Live.
In the past 4 months, on the weekends when we have hosted these events, we have seen double-digit spikes both in customer count and comp sales, which clearly indicates that we're onto something good.
Pillar 3 is about providing a unique and differentiated product solution set to better meet our customers' needs.
Over the past year, we've embarked on a substantial upgrade to our assortment.
We've been working in conjunction with some of our best vendor partners, including folks like Glanbia and Garden of life, to build fully integrated programs for their brands.
Additionally, in 2018, we will be introducing several unique product lines or exclusive flavors from top vendors to increase the level of innovation and differentiation of our assortment in a heavily competitive market.
A couple of good examples include unique flavors of the rapidly growing Bang ready-to-drink line and the recently launched Jay Cutler line of sports nutrition products, both of which are exclusive to the Vitamin Shoppe.
And finally, there continues to be a major role for our own private brands, which account now for 22% of our sales, but has significant growth potential going forward.
Leading this effort is Dave Mock, who recently joined the leadership team as Executive Vice President and Chief Marketing and Merchandising Officer.
Dave brings years of experience of leading retailers in Canada, including Loblaws, Canadian Tire and Zellers, and here in the States, leading the growth of Earth Fare in the Carolinas.
Dave is a seasoned veteran in building strong private brands, partnering with vendors in powerful ways and driving very strong business results.
Our fourth pillar is focused on customer loyalty and replenishment.
As you are aware, 75% of our customer visits to the Vitamin Shoppe are replenishment trips.
We start with a loyalty program, which is both a rich source of customer data, but once upgraded in 2018, can be a major driver of incremental revenue growth through the modernization of the program's structure and customer reward points.
Currently about 90% of our revenue comes from our Healthy Awards members, and as we finalize our new Healthy Awards loyalty program, we are designing it to provide tiered membership benefit levels for all our customers.
We will also use our new loyalty program as a vehicle to enhance our CRM approach via personalized e-mails, content and offers.
We will be in pilot for the program in Q2, with rollout expected later in 2018.
Additionally, Spark Auto Delivery continues to be a major source of incremental growth to our customer ---+ to our company, fueling our digital commerce push, as it brings a novel subscription solution to all of our customers.
In 2018, we will continue to enhance this platform by focusing on upgraded technology and offers geared toward driving stronger cross-selling and upselling to our customers.
The economics of Auto Delivery are compelling, with an average of over 50% incrementality for customers who are in the program after 5 months, which is the majority of sign-ups.
And as we forecast impact to customer lifetime value, our analytics show that customers that subscribe to Spark Auto Delivery see a $100 annual increase on overall spending with the Vitamin Shoppe, above and beyond their subscription purchases.
We are also getting great support from our vendor partners, who see the brand loyalty and incremental growth potential of Spark Auto Delivery and are helping provide support for the program through samples and trade funding offsets.
Our fifth and final strategy focuses on operational excellence, which includes a relentless focus on driving efficiencies, controlling our costs and increasing our overall margin at the Vitamin Shoppe every year.
Our operational excellence is guided by a heightened focus on free cash flow and includes a significant reduction in our CapEx going forward, as well as uses for our cash across a broad range of capital allocation options to return value to our shareholders.
Now a brief comment on our store network strategy.
We opened up 15 stores in 2017 and closed 5.
As part of our long-term strategy planning process, we also completed an evaluation of our store network strategy.
We know that having stores is a competitive advantage and our Health Enthusiasts provide information and knowledge that our customers value.
We will continue to find ways to share that knowledge, as we continue to enhance our omnichannel customer experience.
At the same time, we will be significantly cutting back on new store openings, with only 2 planned for 2018.
Although we are slowing new store openings, we remain committed to innovation at the store level.
In 2017, we introduced our kombucha bar on-tap and our fit freezer cooler sections to over 80 stores by year-end.
We are also starting to see an increase in both overall basket and frequency of visits in these locations.
Before I hand the call back to <UNK> to provide our guidance for the current year and a bit about how we see the business longer term, I want to reiterate that working with the board, the senior leadership team and external consultants, this plan is spawned from the need to adopt an aggressive turnaround mentality to get the business back to financial health.
The solid fundamentals underpinning the businesses ---+ the business does not change.
Work has already begun, and we are seeing solid quarter-over-quarter recovery across almost all areas that we are addressing.
We expect that these benefits from these initiatives will translate to healthy growth and more reliable profitability, as we establish a new platform for growth opportunities for the Vitamin Shoppe.
Now I'll turn it over to <UNK>.
Thank you.
Before I cover our thoughts on guidance, I would like to make a point of clarification on a number I stated earlier.
Reported Nutri-Force operating income is $5.3 million, not $15.3 million.
Now I will discuss our guidance for the current year and provide our thoughts on longer-term outlook for the business.
For 2018, we expect continued progress and steady improvements in sales comp trends, and we are targeting to have flat comps by the end of the year.
This expected improvement is driven mainly from continued growth of our Spark Auto Delivery program and improvements in customer acquisition trends, which work to offset the continued competitive headwinds.
Overall for the year, we expect comparable sales growth in the low to mid-negative-single-digit range.
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.
Year-to-date 2018 trends support this guidance, with comps generally consistent with adjusted fourth quarter 2017 trends.
Overall, we expect the gross margin rate to be close to flat with the 2017 rate.
We expect an improvement in rate from the annualization of savings from our cost of goods sold reduction initiatives as well as improvements from Nutri-Force, offset by increased delivery expense and fixed cost deleverage.
We expect an increase in SG&A expenses of 2% to 2.5% over 2017.
This excludes expenses associated with the CEO change.
This increase includes an increase in advertising expense, which we are planning to be more heavily weighted earlier in the year.
For the first quarter, we expect an increase in SG&A of around 10%.
Total depreciation and amortization expense is estimated at approximately $40 million.
With the new tax legislation, we expect a combined federal, state and local tax rate of 28%.
This excludes taxes associated with permanent book-to-tax differences estimated at $0.5 million to $1 million.
Total capital expenditure is planned to decrease significantly to approximately $30 million, with further tightening in future years.
This decrease is driven by the completion of the new <UNK>zona DC in 2017 and a decrease of new stores to only 2 planned for 2018, partially offset by 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 positive free cash flow for the year.
We will continue to evaluate and discuss capital allocation alternatives with the board, including stock and debt buyback activity, while also maintaining adequate liquidity.
Longer term, we expect a continued significant growth from digital commerce, as customers shift their buying behaviors from bricks and mortar to digital, and project that digital commerce could represent over 25% of Vitamin Shoppe sales in 3 years, up from about 10% now.
With this expected significant channel shift, we will increase the sales in channels with higher variable costs, mainly shipping costs, but much lower fixed costs.
As such, it will be critical that we continue to evaluate our store network and seek opportunities to significantly reduce fixed costs by closing underperforming stores.
Our guidance assumes the closure of 10 stores in 2018.
However, this rate of closure could increase as we look to optimize our store network.
With this growth towards digital commerce, we expect operating margin improvement from improved sales and lower fixed costs, offset partially by an increase in variable costs.
This ends our prepared remarks.
We'd be happy to take your questions now.
Operator, please open the line to questions.
Sure, I'll take that call ---+ take that question, sorry.
So during the fourth quarter, we generally saw comps improving during the fourth quarter, with December being the strongest month.
In the ---+ as we look at the first 2 months of the first quarter, we are seeing, I would call it, gradual improvement.
We did have a softer early January, quite frankly.
There were some pretty significant storms that did impact the comp.
But overall, I would say it would be sort of a steady, gradual increase during the quarter.
I'll take that.
Yes, it's a good question.
We started last summer to run pilot programs that combined the benefit of driving spending on the digital level, both paid search and paid social.
Last summer was the first time we had spent ever on paid social as a company, and we combined that with strong grassroots activities.
So these would look like both in-store and around-store events that we would have our Health Enthusiasts populate.
In some cases, we'd actually sponsor some of those events in order to attract new customers coming into the Vitamin Shoppe.
All of those would be coupled with strong offers, either promotional offers on our third-party vendor business and/or on our private brand business.
We piloted that in third quarter, we saw good results, increased that for a few weeks during fourth quarter.
And now basically, our 2018 outlook looks to assume that we will be consistently supporting that throughout the year this year.
So it's really a combination of digital media support and really hard hustle at the store level that's helping us deliver those customer acquisition numbers.
Yes, as we think about 2018 and looking at current trends, we do expect the continued improvement in product margins, and that gives for many of the same reasons we saw the improvement in the fourth quarter.
So we have the benefit of mix shift, including the increase in private brands as well as the benefit that we're continuing to realize from improved vendor relationships and the lower cost of goods sold associated with that.
That is offset by increased promotion and pricing activity, which we're continuing to focus on, and quite frankly, we believe there is adjustments that we can make there, which will help gross margins going forward.
<UNK>, it's fair to say we got more ---+ we got sharper, both on pricing and promotion, middle of last year.
As we look back at that work, we see some opportunities for some very significant adjustments, not necessarily to lower overall promotion level, but to make it smarter, in terms of its impact on the business.
And we think overall, that's going to help our margin position as well as the year progresses.
No, it's been fairly consistent.
All the same types of trends that we saw in 2017 continue in 2018.
Yes, continues to be very promotional in 2018.
<UNK>, we're facing the same situation we have for most of 2017.
The vast majority, over 80% of our decline, sits in the sports and weight management business.
The actual ---+ the VMS side of the business continues to be fairly stable, as we move forward to the business.
We've been participating on a year-to-date basis in improvements in areas that are tied to the flu season and other areas.
But in general, I's say the mix is similar.
We're working closely with top vendors in the sports nutrition area.
We think that's going to help us to be able to address some of the softness we've seen on that side of the business in the last year or so.
And we're bullish about our opportunities in terms of both private brand growth and some of the new innovation that we're seeing on the VMS side of the business as well.
Sure, I'll take that.
So as you know, in the middle of 2017, we did change our approach to guidance.
We specifically backed off from giving specific EPS guidance, and instead, we are providing guidance around the drivers of the business.
And that, quite frankly, is given the environment that we're operating in, we have experienced much more volatility in the past 12 to 18 months than we did prior to that.
So by giving guidance this way, quite frankly, as you do the math, you will have quite a range of potential outcomes with respect to operating income and EPS.
So to specifically address your operating income point, if you were to take the lower end of the range on all of the components we provided, yes, you would get to operating income that would be flat to into the negative.
On the other end of it, if you were to take the higher end, you would be in the double-digit positive.
So it is quite a range, we acknowledge that, given the environment that we're in.
Great, just a quick one on the store footprint.
So you guys said that you might accelerate the closures above the 10 from this year.
Would you care to comment maybe on what you think of a longer-term footprint, where that could stand maybe over the next couple of years.
<UNK>, I don't think we're in a position right now to make a comment about the longer-term footprint, except for the fact that I would just say we continue be diligent.
We have a dedicated team that's looking at the performance of all of our real estate.
We are actively renegotiating leases where it makes sense in the marketplace.
And ultimately, as I said earlier in the call, there is a clear role for our stores in our network, but we are shifting towards a more omnichannel stance as a retailer.
And so we want to make sure we have the right balance between the fixed cost of our store network and what we're doing digitally for the business moving forward.
Okay, and then just a quick follow-up.
If I heard you correctly, did you say that you might have seen somewhat of a benefit from what's been a very bad flu season.
And if you did, how big was that.
I can't give specifics, <UNK>, except for the fact, like any retailer that has products that are in cough, cold, flu areas, everyone is seeing a bit of an improvement because of the seasonality.
So I'll take that, <UNK>.
So it ranges year-to-year, but in general, we have anywhere between 60 and 80 stores that are up for renewal each year.
And generally, those renewal periods are for 5 years.
And if we look at the average length between now and renewals, it's probably on average, 5 to 6 years.
I will say, as we go to renegotiate renewal periods, oftentimes, we look to build more flexibility and reduce the renewal periods to something less than 5 years.
Thanks, everybody, for attending the call.
We look forward to speaking with you on the next call of next quarter.
