After a dismal 2017, retailers have mostly rallied in 2018, and Vitamin Shoppe (NYSE:VSI) has been one of the biggest winners. VSI stock has gained over 150% just since early April. An activist effort, two straight quarters of “good enough” earnings, and likely some short-covering have driven the rally.
Back above $10, however, VSI stock looks potentially volatile. Margins are razor-thin, meaning modestly good — or bad — news could send the stock moving sharply in either direction. And the risk of a pullback seems rather high.
Long-term performance hasn’t been that impressive. First-half numbers themselves have hardly been spectacular. Vitamin Shoppe has cleaned up its balance sheet but still has nearly half a billion dollars in operating leases due after this year.
With competition rising, there seems to be a lot of risk here. While VSI admittedly still could move higher, the smart play seems to be to take at least some money off the table.
A Blowout Q2
The big gains came on Wednesday, with VSI stock climbing 32% after a strong Q2 earnings report. But while the news compared to expectations looks impressive, the numbers relative to last year are not quite as stunning.
On the top line, revenue of $293.7 million dropped 1.1% year-over-year. Same-store sales fell by the same percentage. That’s not exactly impressive, but it was better than expected. Analysts forecast a roughly 5% drop on both fronts. Adjusted EPS of $0.31 was flat relative to Q2 2017 levels.
But that figure compared to consensus of just $0.05 and likely was a big driver in Wednesday’s huge gains. A company that seemingly was left for dead just a few months ago now looks much healthier from a bottom-line standpoint.
Caution Still Advised
All that said, some caution is advised. As impressive as recent performance seems for both the company and VSI stock, comparisons matter. VSI stock, for instance, has risen 271% from its 52-week low. But it’s still below levels reached 15 months ago, and more than 50% cheaper than it was at the beginning of 2017.
Those declines came in large part due to a disastrous performance in 2017. Comparable-store net sales dropped 6.9% for the full year. In last year’s Q2, same-store sales declined 8.3%, and online sales fell more than 20%. In that context, flat earnings, further weakness in-store, and a 37% increase in digital sales isn’t nearly that impressive.
Is it progress? Absolutely. And management sees that progress continuing in Q3 and Q4. But Vitamin Shoppe also is heading into seasonally weaker quarters, where non-GAAP profits are likely to turn into losses. And beyond 2018, the story here remains a little bit tricky.
Is a Turnaround on the Way?
In many ways, VSI’s bull/bear debate reflects that of the industry as a whole.
Are the gains in retail stocks of late — stocks like Abercrombie & Fitch (NYSE:ANF), Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) all have gained at least 160% from 52-week lows — a sign that the market overreacted last year, and brick-and-mortar retailing isn’t dead?
Or is this just a “dead cat bounce,” with the sector benefiting from a strong economy and easy comparisons?
That question can be asked of Vitamin Shoppe, and from here, it’s far too early to declare victory. Again, comparisons are easy across the board. The vitamin industry hardly seems healthy. Rival GNC Holdings (NYSE:GNC) looked potentially headed for bankruptcy before receiving a lifeline earlier this year. Yet GNC stock is back to threatening an all-time low.
Online competition is rising, with Goldman Sachs (NYSE:GS) a backer of startup Care/Of, whose valuation is approaching that of the publicly traded chains. And I’m skeptical Vitamin Shoppe’s brand is quite enough to outwit that startup, let alone major grocers or Amazon (NASDAQ:AMZN).
Indeed, Vitamin Shoppe’s online sales fell 12% over the past three years, at a time when they should have been rising nicely. Strength on that front in the first half is a step in the right direction, but only a step.
The Bull Case for VSI Stock
That said, there’s a lot of upside here if the turnaround does hold. The midpoint of updated full-year guidance suggests VSI will generate about $5 million in operating income, a margin of less than 0.5%.
It doesn’t take much in the way of improvement to move those profits up substantially and quickly. Debt has been repaid, with Vitamin Shoppe repurchasing its convertible debt below par. By getting operating margins to 3-4% and some gross margin expansion and/or enough revenue growth to leverage costs, VSI could continue to climb.
But that’s a big ask with still-negative sales. And Vitamin Shoppe has an anchor around its neck in some $516 million in operating lease commitments after this year, with $162 million committed after 2022. That belies the argument that Vitamin Shoppe can nimbly pivot to the online business, and leaves a high cost structure in place while it tries to compete with online-only sellers.
Is a turnaround possible? Certainly. But I don’t think it’s likely. And with VSI now trading at a sector-level ~7x EBITDA (based on guidance) and up 150% in a matter of months, I wouldn’t be terribly comfortable holding it.
As of this writing, Vince Martin has no positions in any securities mentioned.