Vitamin Shoppe Inc (VSI) Falls…Is the New GNC Holdings Inc (GNC) Gold Card Program to Blame?

Health supplement retailer Vitamin Shoppe Inc (NYSE:VSI) announced fourth quarter results recently. Revenue grew only 2% on a reported basis to $218 million, but the company was lapping a 14 week quarter in the prior year. Therefore, on a comparable basis, we think sales grew closer to 10% year-over-year, though the number was still slightly below expectations. Earnings, excluding certain items including the integration costs of Super Supplements and the impact of Sandy, were $0.40 per share, in line with consensus expectations and 29% higher than the same period a year ago.

Same-store sales growth was fairly solid, in our view, up 5.2% year-over-year in spite of a 1.6 percentage point drag from Hurricane Sandy. This lagged competitor GNC Holdings Inc (NYSE:GNC), which reported same-store sales growth of 7.1% during the fourth quarter. Many seem to think that GNC’s new Gold Card program that provides consumers with discounts every day is eating into Vitamin Shoppe Inc (NYSE:VSI)’s sales growth. To some extent, we agree. GNC Holdings Inc (NYSE:GNC) has proven to have a sticky customer base, and it has a larger network of supplement stores.

However, we at Valuentum think the real game changer for GNC Holdings Inc (NYSE:GNC) and Vitamin Shoppe is online competition. As regular supplement users become more educated on the supplements themselves, we believe they tend to search online for the lowest cost rather than looking for in-store convenience and expertise. Not surprisingly, Amazon.com, Inc. (NASDAQ:AMZN) has vendors selling supplements in its marketplace. Again, it’s no surprise that Amazon also has among the lowest prices. Upstart Bodybuilding.com, which has several millions of loyal fans, also provides strong competition in the space. The company has consistently low prices, and it rarely increases product prices out-of-step with market price inflation.

A price comparison on Optimum Nutrition’s Gold Standard Whey Protein reveals the following:

Source: Valuentum, company websites

To compete, GNC Holdings Inc (NYSE:GNC) and Vitamin Shoppe Inc (NYSE:VSI) will have to continue to charge lower prices to match those of Amazon. Although Bodybuilding.com is slightly costlier than competitors, buyers also get several free supplement samples and other free items when ordering (so the above may not be apples-to-apples in terms of complete value add). Bodybuilding.com also has about 300,000 more “likes” on Facebook Inc (NASDAQ:FB) , indicating its popularity with younger consumers that are highly likely to spend a significant amount of money on supplements now and in the future. Still, price transparency and Amazon’s presence will keep margins in check for the industry, in our view.