Monday, February 20, 2006

NBTY, Inc.--Needs a New Growth Vitamin?

NBTY Inc., (NTY-$21.72), the leading U.S. nutritional supplements marketer, posted a 9.3% increase in January sales, boosted by recent acquisitions and a strong performance from its North American retail stores. According to its preliminary results, sales climbed to $165 million from $151 million in January 2005.
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Sales at the company's North American retail stores, including its Vitamin World stores, jumped 29 percent to $22 million from $17 million the year before. Sales at the company's Direct Response and Puritan's Pride division rose 21 percent to $23 million from $19 million.
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On January 27, 2006, NBTY also reported better-than expected 1Q:06 share-net earnings.
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Responding to “proof of life”—shares of NBTY have soared almost 39 percent year-to-date, as investors anticipate an increase in consumer demand for the vitamins of this vendor.
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Given the aforementioned good news, the timing of the February 15, 2006, SEC 8-K filing by NTBY, Inc, could not have been more propitious. Scott Rudolph, Chairman and CEO, and Harvey Kamil, President and CFO, were awarded 2005 cash bonuses of $500,000 and $350,000, respectively.For 2005, the salaries of Messrs. Rudolph and Kamil were $813,472 and $455,545, respectively.
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While we are on the subject of openness—the Company maintains a consulting agreement with Rudolph Management Associates, Inc. for the services of Arthur Rudolph, a director of the Company. The agreement requires Mr. Rudolph to provide consulting services to the Company through December 31, 2006, in exchange for a consulting fee of $450,000 per year, payable monthly. In addition, Mr. Rudolph receives certain fringe benefits accorded to other executives of the Company. {ed. note. Any relation to Scott Rudolph?]
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Not that we are beholden to paranoia—but after dusting off and perusing through NTBY’s more recent 10-Q filings, we question—once again—what metrics are the Compensation Committee using to award corporate performance bonuses for 2005?
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NBTY’s business strategy is to target the value-conscious consumer segment by offering supplements at value prices. Management’s performance can be best judged objectively, therefore, on the following metrics: sales, improvements to manufacturing efficiencies, and increased profitability.
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As reported, sales for the 1Q:06 ended December 31, 2005, increased approximately eight percent to $455.3 million, primarily due to acquisitions. For example, were it not for the February 2005 acquisition of Le Naturiste, a chain of 101 retail stores located throughout Quebec, organic growth for stores open more than one year in North America would have been flat.
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Net sales for the Wholesale / US Nutrition segment, which markets certain brands including Nature’s Bounty, Sundown and Solgar brands, increased 24.8% compared to last year. Exclude the fiscal 2005 acquisitions, and net sales for existing products grew only 9.3%, year-over-year.
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On a performance basis, COGS jumped 360 basis points to 54.0% of net sales and income from operations fell 330 basis points to 8.5 percent. To management’s credit, net cash provided by operations for the 1Q:06 jumped $62.7 million year-over-year to $99.6 million, principally due to management’s ability to work through $52.7 million in inventories.
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Earnings slipped to $0.33 per share from share-net of $0.43, largely on an impairment charge and write-downs of about 40 non-profitable Vitamin World stores. However, on an adjusted basis, 1Q:06 earnings did beat the consensus estimate of $0.30 per share.
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The vitamin business is price/promotional sensitive. For example, In the Direct Response / Puritan’s Pride operating segment, sales decreased approximately 27 percent due to the timing of promotional catalogs. In addition, Internet orders remained flat as compared to the prior like period. On-line net sales comprised 32% of this segment’s net sales—a slight decrease in the three months ended December 31, 2005 as compared to the prior comparable period.
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NBTY reported almost a 25 percent increase in advertising, promotion and catalog expenses as compared to last year. Total advertising, promotion and catalog expenses—as a percentage of net sales—increased sixty basis points to 5.5%, as compared with 4.9% in the prior year period.
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Performance card for senior management:
  • Sales: A
  • Operating Efficiencies: C
  • Profitability: B-
Does someone with a B/B- average on their report card deserve a $350,000 –to- $500,000 bonus? NO!
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We do give credit to management for finding new growth through acquisitions: (a) 2004 results benefited by the July 2003 purchase of Rexall; and, (b) the recent acquisition of Solgar vitamins.
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Going forward, we caution that management needs to build-out a strategy that will sustain organic growth—not just growth through accretive acquisitions. Also corporate has become too dependent on promotional blitzes [and we are not even talking about sales incentives to merchants]. This aggressive advertising cannot continue—without adversely impacting the bottom-line.
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In our opinion, NBTY’s current top-line growth is just a blip on the radar—rather than a visible, direction-course change in consumer demand.
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Anti-oxidative medicines to keep us young, glucosamines for arthritis, and herbs for weight-loss or colonic cleansings—among the many natural—alternative—therapies that help to drive sales at companies like NBTY. At present, there are no new therapies that have grabbed headlines and consumers’ pocketbooks. This does not bode well for future industry-wide growth prospects.
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NBTY’s price-earnings multiple (21x), Enterprise Value-to-EBITDA ratio (8.91), and Enterprise Value-to-Revenue multiple (1.0x)—these valuations are in-line with peer comparables like USANA Health Sciences (USNA) and Nature’s Sunshine Products (NTRE). In other words, NBTY’s current share price already discounts any fundamental improvements. If you bought at the most recent lows—take your profit. If you bought last year, prior to earnings’ missteps—be thankful for the rebound—and sell, too!

1 comment:

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