by Will Ashworth | November 9, 2012 7:00 am
They might not sound very exciting, but vitamins and supplements are actually quite a hot commodity.
Bayer (PINK:BAYRY) purchased Schiff Nutrition International (NYSE:SHF) for a hefty $1.2 billion, for example.
Earlier this week, Vitamin Shoppe (NYSE:VSI) also announced a record third-quarter, giving shares a 16% bump. And the company’s larger competitor GNC Holdings (NYSE:GNC) has put on a stellar performance as well.
But which stock is the best way to supplement your income? Let’s take a look.
Vitamin Shoppe went public back in 2009, gained nearly 6% on its first day of trading and has now gained more than 260% since its IPO. The original price: $17. Tuesday’s closing price: $61.67. Momentum investors seem to be licking their chops at the additional gains that could lie ahead.
GNC, on the other hand, went public in 2011, gained nearly 5% on its first day and has gained more than 120% total. On an annualized basis, GNC has actually outperformed Vitamin Shoppe by 10 percentage points, with nearly 64% growth.
Comparison of same-store sales growth seems to tip the scales towards GNC as well — but only slightly. GNC saw same-store sales at domestic company-owned locations increase just under 10% last quarter. Domestic franchise locations fared even better, with a more than 14% increase at ones open at least a year.
Vitamin Shoppe’s holds its own in this arena, though. Its same-store sales grew 9.6% last quarter. And while GNC gas increased same-store sales for an impressive 29 consecutive quarters, Vitamin Shoppe is only one quarter behind. Pl;us, it saw a 17% gain in online sales.
Next up: profitability. Vitamin Shoppe’s gross profit increased just under 19% to $82.5 million, while GNC’s increased just under 21% to $235.2 million. GNC is also ahead in terms of gross margins, so gross profit advantage goes to the larger company.
Not everything about GNC, however, is perfect. Vitamin Shoppe, for one, opens large company-owned stores in high-traffic, high-visibility areas. GNC tends to open smaller stores in malls and other harder to find locations.
For years, the company has had difficulty balancing its company-owned stores with its franchise locations. Recently, it’s also added more than 2,000 Rite Aid franchised store-within-a-store locations, which will only increase that friction.
The biggest red flag for GNC, though, is its total debt as of the end of the third quarter: $1.1 billion with a capitalization ratio of 57%. Vitamin Shoppe, comparatively, doesn’t have any debt. Even compared to drug store peers CVS (NYSE:CVS) and Walgreen (NYSE:WAG), who each have a ratio around 24%, GNC’s number seems high.
Even worse, GNC is using its debt to repurchase shares. It’s definitely not a good idea for most people to borrow money to buy stock, and the same holds true for companies.
On the basis of its debt alone, I’d have a problem investing in GNC despite its strengths.
Plus, Vitamin Shoppe readily admits that its new stores take four years to mature. Until that point, margins are affected. Since the company has opened an average of 48 stores per year over the last five years, its profitability in 2017 should be a lot brighter than it is now. What’s already a good business will just get better with age.
Looks like Vitamin Shoppe is the healthier choice after all.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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