Vitamin Shoppe Faces Healthy Store Growth Challenge

Vitamin Shoppe Industries faces the challenge of maintaining quality staffing and real estate, as well as intense competition in its vitamin, mineral and nutritional supplement retail market, according to Moody's Investors Service. The retail chain has grown to 116 stores over the past 25 years, and plans on opening 30-50 more stores a year, said Moody's analyst Richard Baldwin. "Can they find the managers and find the real estate?" he asked, explaining Moody's concern over these future tasks. He also commented on the congested market. "Every drugstore, and every Wal-Mart, and every supermarket sells [Vitamin Shoppe's type of product]" Moody's has rated the company's $125 million bank facility at B1, while its unsecured issuer rating is set at B2.

Bear Stearns Capital Partners II, L.P., is buying out Vitamin Shoppe with $110 million of the cash proceeds from a five-and-a-half year, term loan "B," with $152 million of equity and $42 million of unrated holding company payment-in-kind subordinated notes. A $15 million revolver will be set aside for liquidity, Baldwin said. Moody's noted that the value of the collateral probably does not equal the loan, due to a small balance of liquid assets and uncertain valuation of goodwill and leasehold improvements.

To the company's credit, Moody's noted Vitamin Shoppe's status as one of the largest vitamin, mineral and nutritional supplement retailers, with retail and mail-order purchases by a core of devotee customers. Furthermore, Moody's expects that the newly opened stores will become cash flow positive. "The stores historically opened very well-- always cash-flow positive within a year," Baldwin said, explaining that Moody's expects the newest stores to perform in the same manner. A new store requires a modest investment of $405,000, making it easier to become cash flow positive in a short amount of time. North Bergen, N.J.- based Vitamin Shoppe generated $263 million for the year ending last September. An official at Vitamin Shoppe did not return calls.