Vitamin Shoppe to revamp outlets as 'wellness' locations, restricts expansion plans

03-Nov-2016 - Last updated on 03-Nov-2016 at 16:25 GMT

Vitamin Shoppe is embarking on a plan to revamp existing stores as ‘wellness locations’ with in-store beverage bars, sampling counters and the possible addition of perishable items. The plan also calls for a drastic slowdown in the pace of new store openings.

The plan is embodied in a pilot store that opened in the third quarter whose concept was outlined in the company’s third quarter earnings call with analysts yesterday. The call was posted in transcript form on the site seekingalpha.com.

In the call, CEO Colin Watts outlined progress on the plan to rebuild the struggling vitamin retail giant. Like its competitor GNC, Vitamin Shoppe’s earnings have stagnated in recent quarters and the company’s stock price has been in steady decline for several years. Watts said the company has made a decision to drastically scale back on promotional activity (something GNC has done as well) and to better integrate those promotions between brick-and-mortar stores and online sales.

Forsake the new, rebuild the old

But the big news from the earnings calls is that Vitamin Shoppe is now looking to revamp existing stores and to scale back its drive to open new outlets. As late as early 2015, shortly before Watts took over as CEO from Tony Truesdale, the company was touting the rapid pace of new store openings with 60 new stores opening in the first quarter of that year even as profits were falling and same store comp sales were starting to level out.

Watts said since taking over the reins he has toured all of the company’s more than 500 locations. The rapid expansion of outlets has left a network of varied quality, he said.

“It was obvious that many years of focusing on expanding our national network of stores had left a substantial number of our older stores, many of which are our biggest revenue generators in need of a refresh. As a result, our more mature stores have been comping slightly negative in recent years,” Watts said.

Ideas for how to revamp those outlets have been tested in a pilot store. The store seeks to build more of a customer ‘experience,’ a concept that helped bolster the growth of Starbucks, as that company sought to make the buying and drinking of coffee as much or more about the experience as about the beverage itself. In the case of Vitamin Shoppe’s pilot store, it has “a transformed and differentiated customer experience from the fresh on tap kombucha bar at the front of the store, designed as a frequency driver to the sports protein sampling experience at the back of the store. In the center of the store, you find our solutions table, which is a focus point for product sampling and encourages lingering and customer interactions with our health enthusiasts,” in Watt’s words.

“I think we understand still that, hey, our name is the Vitamin Shoppe, and the core of our categories will always be about supplements,” Watts said. But the new store concept will also include “perishables in some cases, healthy food assortments and natural beauty assortments as we move forward,” he said.

Market saturation?

Is Vitamin Shoppe’s plan to restrict expansion a sign that the health food store/vitamin retail outlet market becoming saturated? The moves by the heavyweights in the market seem to indicate this may starting to become true. GNC has stepped back from the new store game and is in negotiations to sell large numbers of corporate owned stores to franchisees. Whole Foods Markets, which is primarily a food and packaged goods retailer but also sells a significant amount of supplements, has revamped its leadership structure and is seeking to reinvent its market positioning with the launch of its 365 stores. And the major players have mid-level condition specific competitors, like sports-product oriented Complete Nutrition with its 180 outlets, nipping at their heels.

Among the larger publicly traded vitamin retailers, only Natural Grocers by Vitamin Cottage continues to tout a strategy of accelerated new store openings, with 15 new stores opened in the first half of 2016, compared to 12 in the similar period a year earlier. When the company—which sells organic foods but also derives more than a quarter of its revenue from supplement sales—went public a few years ago, it was touting a market research report that stated that there was room for an additional 1,000 stores like Natural Grocers in the North American market. Time will tell if that outlook was overly optimistic.

Earnings details

Total revenue in the quarter was essentially flat with the same period of the prior year at $315 million. Total comps sales were a negative 1.9% driven by the negative 2.3% retail comp. The decrease was primarily driven by a reduction in average transaction value due to change in product mix. By contrast, the e-commerce comp was a positive 1.7% driven by what the company said was a strong transaction count on the vitaminshoppe.com website. The company’s profit, despite strong cost-cutting moves during the quarter, was a slim 5 cents a share. Both the revenue and profit numbers came in slightly below analysts’ estimates, and the market reacted negatively, with the company’s stock price falling from an average of about $25 a share prior to the earnings announcement to $22.38 this morning. The company’s stock was trading at more than $60 a share in late 2013.