Vitacost.com second-quarter net sales increase 14.1% to $54.0 million

Aug 16 2010

Vitacost.com, Inc. (NASDAQ: VITC), a leading online retailer and direct marketer of health and wellness products, today reported financial results for the second quarter ended June 30, 2010.

• Net Sales increased 14.1% year-over-year to $54.0 million, compared to $47.3 million for the second quarter of 2009
• Back Orders improved to normalized levels by the end of the quarter

Second Quarter 2010 Results

For the second quarter of 2010, net sales increased 14.1% to $54.0 million from net sales of $47.3 million for the second quarter of the prior year. This increase was driven primarily by both of the Company's main sales categories; propriety and third party products. Excluding advertising and fees earned from affiliate programs, sales of third party products increased 18.9% year-over-year in the second quarter of 2010. Sales of the Company's proprietary brands increased 4.7% year-over-year in the second quarter.

Despite growth on a year-over-year basis in both primary sales categories, second quarter reported revenue declined 5.6% sequentially from the $57.2 million in revenue reported in the first quarter of 2010. In addition, second quarter revenue was below prior Company expectations for revenue to be in the range of $57.2 to $58.2 million. Sales were negatively impacted in the early part of the quarter as the Company continued to work through the manufacturing logistics issue, previously disclosed in the first quarter. During the process of reducing the level of back orders to normalized levels, the Company reduced marketing spending to not exacerbate the fulfillment issue on its proprietary products.

Sales were also negatively impacted in the latter part of the second quarter from an increased competitive environment as many companies offered deep discounts. Vitacost responded and increased promotional spending including offering "free shipping" with various order sizes and product combinations.

Gross profit for the second quarter of 2010 decreased 5.5% to $14.3 million, compared to $15.1 million in the second quarter of the prior year. The Company's gross profit margin decreased 550 basis points to 26.4% in the second quarter versus 31.9% in the second quarter of 2009. Gross margin was negatively impacted by a negative mix shift with roughly 70.0% of total product sales stemming from lower margin third party revenue in the second quarter of 2010 compared to 67.3% in the second quarter of 2009. In addition, gross margin was also negatively impacted by increased shipping expenses due to continued high levels of split shipments as the Company worked to decrease back orders to normalized levels in the early part of the quarter, as well as the introduction of "free shipping" promotions which began in June in response to the competitive environment.

Fulfillment expense was $3.8 million compared to $2.0 million in the same period last year. As a percent of sales, fulfillment expense increased 270 basis points year-over-year to 7.0% compared to 4.3% in the same period last year. The year-over-year increase on a percentage basis, was partially due to the lower sales base. As previously communicated, the Company expected fulfillment expenses to be higher in 2010 due to the expansion of its distribution centers in Las Vegas, NV and in Lexington, NC. In the early part of the second quarter, the Company operated duplicate distribution centers in Las Vegas to ensure there were no disruptions to service levels as it transitioned over to the new facility. The Company expects the North Carolina distribution center expansion and upgrade to be complete in 2011.

Sales and marketing expense increased approximately $2.0 million, or 62.9%, to $5.1 million for the three months ended June 30, 2010 from $3.2 million for the three months ended June 30, 2009. As a percentage of sales, sales and marketing expense increased to 9.5% for the three months ended June 30, 2010 from 6.7% for the three months ended June 30, 2009. Sales and marketing expense both on a dollar basis and as a percentage of sales increased sequentially as the Company moved throughout the quarter and began to increase marketing spending as the proprietary out of stock issue was eliminated and in response to increased competition. The increase in sales and marketing expense was primarily due to increased spending on renting of certain customer lists of approximately $650,000, increased on-line advertising of approximately $600,000 and an increase in staffing levels in our call center to meet increased call volume of approximately $200,000.

Total general and administrative expense was $7.3 million in the second quarter, up $3.3 million year-over-year. Depreciation and amortization expense increased from $863 thousand in the second quarter of 2009 to $1.3 million in the second quarter of 2010 primarily related to the Las Vegas distribution center. Total general and administrative expenses also included an estimated $1.4 million of expense associated with the contested proxy solicitation and other non-recurring items. Excluding depreciation and amortization, and the $1.4 million in one-time legal/non-recurring expenses, general and administrative expenses were $4.7 million, compared to $3.2 million in the same period last year. The majority of this increase was due to increased costs associated with being a public company.

The Company reported an operating loss of $2.0 million for the second quarter of 2010 compared to operating income of $5.8 million in the same period a year ago. Due to the net operating loss, Vitacost reported a tax benefit of $692,000 in the quarter. Excluding the $1.4 million in one-time legal and other non-recurring items in the quarter, the company would have reported a tax benefit of $247,000 in the quarter.

Reported net income for the second quarter of 2010 was a loss of $1.4 million or $0.05 per share calculated on a weighted average basic share count of 27.7 million shares versus net income of $3.5 million or $0.15 per share for the comparable period last year calculated off a base of 23.5 million shares outstanding. Excluding the $1.4 million in one-time legal and non-recurring expenses previously mentioned, the Company would have reported a loss per share of $0.02. We are using basic shares outstanding in our EPS calculation as the quarter was anti-dilutive. Second quarter 2010 earnings per share came in below prior company expectations of $0.09 to $0.10. Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and related non-cash compensation expense) for the second quarter of 2010 was a loss of $484 thousand, compared to $6.8 million in the previous year.

Balance Sheet/Cash Flow Highlights

The Company ended the second quarter of 2010 with cash, cash equivalents, and securities available for sale of $40.4 million as of June 30, 2010 compared to $44.4 million as of December 31, 2009. Cash flow from operations for the six-months ended June 30, 2010 was $7.4 million, up $1.6 million from the same period a year ago.

Strategic Business Review and Management Change

As previously announced on July 30, 2010, the Board of Directors has undertaken a strategic review of the business and will provide updates as appropriate. As a result, the Company will not be providing updated guidance for the remainder of this year. Separately, the Board has named industry veteran and the former founder and CEO of Vitamin Shoppe, Inc., Jeffrey Horowitz, as the company's interim Chief Executive Officer effective immediately.