Vitamin Distributor Bulks Up The Old-Fashioned Way: Acquisitions
BY MARILYN MUCH
INVESTOR'S BUSINESS DAILY
Like a lot of its customers, NBTY Inc. (NTY) is building muscle.
In July, the maker and seller of Nature's Bounty vitamins, herbs and nutritional supplements bought Rexall Sundown Inc. from Netherlands-based Royal Numico NV.
Rexall makes vitamins and nutritional supplements under Rexall, Sundown and other labels. Its products are sold through drugstores, mass merchants, grocers and convenience stores, but not at NBTY's Vitamin World stores.
Unlike NBTY, which has enjoyed four years of sales and earnings growth, Rexall was ailing at the time of the buy. Its parent was so eager to divest that NBTY paid only $250 million at auction for Rexall — despite the fact that Rexall logged $455 million in sales in 2002.
Over the years, NBTY has emerged as a major consolidator in an industry where many of its peers have fallen on hard times. Its strategy has been to buy struggling companies to get a good deal on price.
"Rexall Sundown was a perfect fit for us," said NBTY President Harvey Kamil. "We like to have a very motivated seller, and we believe we paid a fair price."
In buying Rexall, NBTY gained market share and enhanced its product line. Rexall boasts the biggest brand of vitamins and nutritional supplements in the U.S.
"It was a real watershed event for NBTY," said analyst Gary Giblen of CL King & Associates. "It was about a (40%) addition to NBTY'S revenue base, and it was extremely synergistic."
'More Leverage'
NBTY kept Rexall's sales force and folded it into the NBTY group to create a single team. It also laid off about 75% of Rexall's administrative staff, or some 320 employees. That resulted in a savings estimated at $25 million.
By gaining scale, NBTY increased its manufacturing prowess and shored up its buying power with suppliers of everything from ingredients to bottles and labels.
"As the big guys get bigger, they get more leverage and are able to reduce costs and compete on price," said analyst Scott Van Winkle of Adams Harkness & Hill. "This is a commodity business, and your ability to deliver good value is the only thing that differentiates you."
He says the acquisition should add about 60 cents a share on an annualized basis to NBTY's earnings within the next 12 months.
He expects Rexall's operating margin to double within the first year of the purchase.
But Rexall came with some baggage. Analysts say it failed to deliver good value to retailers because it was out of touch with consumers and their needs.
"Rexall didn't know what retailers really wanted," Giblen said.
That should change now that Rexall is under the NBTY umbrella. NBTY has the field's best market research data that gauge fast-moving products, Giblen says.
The company pretests products in its stores to understand consumer preferences. Once a cashier scans a purchase at a Vitamin World store, the information is sent to marketers who use it to identify hot sellers and product preferences.
NBTY will use the same approach with Rexall's products. After the acquisition closed, NBTY officials contacted all of Rexall's customers. They took inventory of the Rexall goods on the shelves, and replaced the slow-moving items with faster-selling merchandise.
Rexall's sales team also was trained on how to use sales-scanning data to determine which items they should keep in stock.
As NBTY's marketing team monitored sales trends and consumer reactions to pricing, it tweaked the lineup. Among other things, it replaced the 100-tablet bottle of Rexall-branded standard vitamins with a 130-tablet size Sundown product at the same retail price.
Healthy Growth
NBTY is about 80% done integrating the purchase, Van Winkle says.
Though expenses tied to the deal caused NBTY's earnings to fall in the fiscal fourth quarter, which ended in September, the firm returned to growth last quarter.
Its earnings for the quarter rose 42% to 34 cents a share. Sales moved up 60% to $385.1 million. Same-store sales at Vitamin World units grew 7% — high enough to push the business into the black after it lost money the prior quarter.
"Vitamin World is on the road to a healthy recovery," Kamil said. "It never made a lot of money, but we expect it to turn around and become a substantial profit center."
NBTY closed one poorly performing Vitamin World unit the past quarter. It'll shut more in the future.
Such efforts should help NBTY maintain profits. Analysts polled by First Call expect the company's full-year profit to climb 45% to $1.83, then reach $2.27 in fiscal 2005.
Even as the company continues integrating Rexall into the fold, Kamil says it's receptive to more acquisitions.
"We always have people approach us," he said. "If they're serious, we're open to any suggestions." |
