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Vitamin Shoppe, Inc. Acquisition Supplements Growth; Reiterate Outperform and Raise EPS Estimates

Monday evening, December 17, Vitamin Shoppe announced it has agreed to acquire Super Supplements, a 31‐store retailer specializing in nutritional products, for $50 million cash. Based in Seattle, Washington, Super Supplements operates retail stores (and one distribution facility) in Washington, Idaho, and Oregon, which overlap nicely with Vitamin Shoppe’s 17 stores in the Pacific Northwest region. The transaction is expected to add $75 million in revenue (7% of 2013 base) and be neutral to slightly accretive to EPS including integration costs in 2013. Overall, the acquisition appears to make strategic sense because it not only bolsters Vitamin Shoppe’s presence in the Pacific Northwest but also gives it an attractive asset from a financial perspective with room for further improvement.

On its conference call Tuesday morning, the company indicated the purchase price represented 10 times expected EBITDA for 2012. The sales per store for Super Supplements is higher than the average Vitamin Shoppe store, but margins are lower (key differences: no benefit of scale, higher marketing spending). Comps are also running positively on the acquired assets (driven by traffic) but are slightly lower than core Vitamin Shoppe. In the near term, the company will not rebrand the stores
or alter Super Supplement’s pricing strategy but are evaluating possible options. In addition, given margins on the acquired assets are lower, Vitamin Shoppe expects a 20‐basis‐point adverse impact to gross margin and a 60‐basis‐point increase in SG&A
in 2013. This should abate over time as margins on the acquired assets are improved and integration costs phase out.

For 2013, the transaction is expected to add $75 million in revenue and be neutral to slightly accretive to EPS including integration costs. The company expects $2.2 million of transaction costs in fourth quarter 2012 and $7 million of total integration costs split evenly over the next two years. Meanwhile, synergies in finance, IT, and the supply chain are expected in the second half of 2013. We estimate the acquisition could add $0.02 to EPS in 2013 if we assume $3.5 million of integration costs, and synergies equal to 1% of acquired revenue (recognized in the second half of the year). EPS accretion could step up in 2014 to nearly $0.10 (representing a 4% lift to EPS), and the accretion should be greater in 2015 as integration costs phase out. Also of note, Supper Supplements has a distribution facility in the region, which should add additional synergies as additional capacity flows through it (the distribution center can handle 20 to 30 more stores).

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