Did you know you can now simultaneously get your income taxes done while also shopping for your nutritional supplements at The Vitamin Shoppe? Most of industry veterans know that the nutritional supplement industry has a “me too” innovation problem, but I never thought The Vitamin Shoppe would blatantly copy Walmart!
I am obviously joking about offering tax services at Vitamin Shoppe locations (maybe), but the nutritional supplement specialty retailer was acquired by Liberty Tax for $208 million.
Who is Liberty Tax?
If a “tax company” acquiring a nutritional supplement specialty retailer is confusing you more than filling out your annual 1040, let me explain a bit about Liberty Tax.
- Liberty Tax is the current name of the holding company that owns Liberty Tax Service. It is a publicly traded company on the OTC markets and is traded under the stock ticker TAXA
- Liberty Tax also just acquired Buddy’s Home Furnishings. This is a ~290 location home furnishings specialty retailer that is 90% franchised
- Liberty Tax is changing the holding company strategy from tax services to an investment company
- This new investment company is changing its name to Franchise Group, which better defines its strategic focus
What is the Franchise Group?
The strategic focus of Franchise Group is the acquisition of franchise-oriented or complementary businesses, including businesses that are not presently subject to franchising arrangements, but that have the potential to be franchised in the future (more on that later…).
In the short-term, I believe the Franchise Group will seek to be “up-listed” from the OTC markets to create more institutional investment. The additional acquisitions could likely stem from a similar strategy that led them to target The Vitamin Shoppe. Both Liberty Tax and The Vitamin Shoppe, shared a large investor named Vintage Capital Management. If we look at the current holdings listed on website, a likely addition could be Papa Murphy’s Pizza. The private equity firm also recently offered to buy Red Robin Gourmet Burgers. I am not saying that Vintage Capital Management equals Franchise Group, but movements of this firm could signal future plans for the new The Vitamin Shoppe parent company.
Continued Slid in Performance
Before I jump into what the above could mean for The Vitamin Shoppe’s business model, I wanted to take a quick look at the 2019Q2 numbers.
- Total sales were $271 million in the quarter, which was down 7.6% YoY
- Same store comps were down 7.2%
- Gross profit was 33.3%, which improved from the 32.2% last year
- 4 stores closed in the quarter and no new stores opened, leaving the total store count at 765 (this is down 17 locations YoY)
- Tradename impairment charge of $9M was recorded (“tradename impairment” is a non-cash balance sheet adjustment that is done from a yearly evaluation that determines if the carrying value of the goodwill is higher than the fair value)
Since the quarterly earnings call was cancelled, additional commentary around the numbers could not be attained from the CEO, CFO, and other senior leaders. Despite this fact, The Vitamin Shoppe did provide some great information from a June 2019 presentation at Jefferies Consumer Investment Conference. This presentation deck, while not comprehensively new, provides insights into the possible future of The Vitamin Shoppe in a post-acquisition state.
The Vitamin Shoppe Reinvention Phase
The core of the “reinvention phase” is refocusing on the “specialty” in being a specialty retail brand. The Vitamin Shoppe (and all retailers) need to solve the question of “why should someone shop with you?” This comes down to being able to create an exclusive experience for the customer. The substitutions for customers buying functional CPG products are almost endless that this point, so how does The Vitamin Shoppe plan to differentiate itself?
- Providing the highest quality merchandising that is focused on-trend (Note: I would like to see additional steps in this area and have been advocating for a “regional” merchandising strategy that is localized, similar to Costco)
- Providing industry-leading customer service expertise for a goal-orientated and technical CPG/FMCG category of products that demand the touch point for many consumers.
- Improving and adding to the private label assortment (see image below)
As you can see from the above image, there is a “coming soon” area in the super premium private label category of vitamins & minerals and specialty supplements. That “coming soon” will be filled by a future personalized nutrition offering, which The Vitamin Shoppe has not released official details on (outside of the below image).
Personalized nutrition offerings will be just one of the many “personalized” areas that The Vitamin Shoppe must focus on to compete against Amazon. These personalized experiences will be delivered through an omni-channel retail approach that will feast on the acquisition of customer data.
Vitamin Shoppe “Stores” 2.0
While all these investments towards omni-channel retail and personalization is happening, The Vitamin Shoppe is still a physical retailer that is struggling with the economics around their bloated real estate portfolio.
- New store designs — smaller format which lends itself to fulfillment options, such as click-and-collect, on-demand delivery, and using the locations as micro-shipping points
- Partnering with other retail points to create “store within a store” opportunities — creates additional brand exposure for private label products outside “the four walls”
- International Expansion — Canada didn’t go well, but if they learned from that failure, they could create opportunities outside of the U.S. if they can increase their brand equity
What’s Next for The Vitamin Shoppe?
This brings us back to the acquisition and the name change of Liberty Tax to Franchise Group. The assumed reinvention phase now should include some type of franchise model. Is that international-only? Is that a similar blended model like GNC? Is that across all ~750 The Vitamin Shoppe locations? Honestly, I don’t have the full answer right now…
…but, if we look back at the acquirers business strategy…
“Franchise Group is focused on the acquisition of franchise-oriented or complementary businesses, including businesses that are not presently subject to franchising arrangements, but that have the potential to be franchised in the future.”
While this doesn’t give a 100% answer to The Vitamin Shoppe being franchised in the future, it does seem to be line up for an extensive change of business model and the pieces seem to be moving in place…
- Private label focus — better profitability
- Deleveraging real estate portfolio exposure — better cost structure
- International expansion — likely starts as a franchise-model through distribution (or joint-venture) like GNC