Markets

NBTY Counting on Wholesalers to Move Vitamins

By David Phillips

Updated on: December 3, 2008 / 12:59 AM EST / MoneyWatch

NBTY Inc., a leading global manufacturer and marketer of a broad line of nutritional supplements, said overall sales for its wholesale/U.S. Nutrition segment grew $183.6 million, or 18.8% to $1.1 billion for fiscal year 2008 ended September 30. Excluding the July 2008 acquisition of Leiner Health Products, organic sales grew 9.2 percent, or $90.3 million. A read of the 2008 10-K regulatory filing suggests, however, that the vitamin retailer is becoming more dependent on one customer and promotional programs and customer rebates to drive sales, which raises other concerns about consumer traffic trends and margin deterioration:

One customer, Wal-Mart Stores, Inc., represented 22% and 18% of the Wholesale/US Nutrition segment's net sales for fiscal 2008 and 2007, respectively. It also represented 12% and 9% of consolidated net sales for fiscal years 2008 and 2007, respectively. The loss of this customer, or any of our other major customers, would have a material adverse effect on our results of operations if we were unable to replace such customer.
We continue to use targeted promotions to grow overall sales. Promotional programs and rebates were $125 million, or 9.6% of sales for fiscal 2008, as compared to $89.1 million, or 8.2% of sales for fiscal 2007.

The Wholesale/U.S Nutrition business, familiar brands in this segment include Nature's Bounty, Solgar, Osteo Bi-Flex and Rexall, accounted for 53.2% of aggregate sales in 2008, up from 48.5% in fiscal 2007. Gross profit margin for this segment fell 290 basis points year-on-year to 38.5 percent, as higher prices charged to customers were not enough to offset higher raw material costs and increased promotional activities.

Although management said on its fourth-quarter earnings call that it planned to watch advertising expenses closely in coming quarters, sales allowances to customers tell a different tale. Going forward, NBTY's reserves for sales incentives offered to customers -- earned as specified sales volumes are achieved -- rose 60 percent to $43.9 million at year-end 2008, suggesting the company is prepared to offer additional promotional incentives to its wholesale customers to move nutritional supplements in an increasingly weaker economic environment.