Nutritional products retailer Vitamin Shoppe Inc. (NYSE:VSI) remains well positioned for sustained long term growth, as the company reinvests its capital preparing to enter smaller markets and ultimately expand its unit potential.
Vitamin Shoppe reported upside to earnings expectations for the ninth consecutive quarter, with continued gross and operating margin expansion. Earnings per share increased to 32 cents from 21 cents last year. Excluding items, earnings per share in the quarter were 38 cents, topping Street view of 33 cents.
Net sales grew 19.2 percent to $214.9 million as comparable store sales rose 6.5 percent. The company opened 14 stores in the quarter, with total store count standing at 528 as of Dec. 31, 2011, compared with 484 on Dec.25, 2010.
Gross margin rose to 34.7 percent from 33.1 percent a year-ago. The increase was driven by comparable sales growth and benefit from the additional week in the quarter, as well as ongoing improvement in inventory management.
"We believe the quarter reflects the management strength and market positioning within an industry poised for sustained, long-term growth. Additionally, we continue to envision operating margin expansion over the longer term driven by a maturing store base and expense discipline," Susquehanna Financial analyst Bob Summers wrote in a note to clients.
For 2012, Vitamin Shoppe sees comparable store sales growth in mid-single digits, with continued improvement in operating income margin. The company expects capital expenditures of $32 million and open about 52 new stores.
After paying down its credit facility and long-term debt, the company continues to believe that its best use of cash is to reinvest into its growth prospects. Specifically, the company now plans to build on its 900 store units goal by expanding into new, smaller markets in the second half of 2012 with new prototype.
"We continue to believe the company possesses attractive growth prospects stemming from the new unit growth (expecting 10 percent growth long-term and reaffirmed by company guidance for FY12) and benefiting from a maturing store base," Summers said.
Given the company's long runway for growth, the analyst opts to look through transitory issues concerning product cost increases and heightened internet investment spending. Further, he believes concerns over the past six months about store productivity, investment and product costs are over blown. Summers has a "positive" rating on Vitamin Shoppe shares.
In addition, consistent execution, strong growth potential and capitalizing on structural/multi-year health & wellness trends would support an elevated valuation. "We believe further upward earnings revisions are possible and serve as a catalyst for valuation expansion and stock price appreciation," said Summers, whose $54 price target on Vitamin Shoppe shares applies about 29.5 times P/E multiple to its FY12 EPS estimate of $1.83.