TEXT-S&P raises Vitamin Shoppe to 'BB'

Wed Sep 26, 2012 4:26pm EDT

Overview
     -- U.S. specialty retailer Vitamin Shoppe has improved its credit
metrics and sustained operational gains over the past year as its growth has
outpaced the industry average.
     -- We are raising our corporate credit rating on the company to 'BB' from 
'BB-'.
     -- The stable outlook reflects our expectation that the company will 
maintain its positive momentum of sales and profitability and that its 
financial policies will remain moderate, resulting in stable to modestly 
improving credit metrics over the next year.

Rating Action
On Sept. 26, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on North Bergen, N.J.-based Vitamin Shoppe Industries Inc. to 
'BB' from 'BB-'. The outlook is stable.

Rationale
The rating on Vitamin Shoppe reflects our assessment that the company's 
financial risk profile is "significant" and the business risk profile is 
"fair." The financial risk profile reflects Vitamin Shoppe's moderate 
financial policies, no funded debt, and its good cash flow generation. We view 
the business risk profile as fair, reflecting Vitamin Shoppe's position as the 
No.2 player in the highly competitive and fragmented retail vitamin industry, 
the company's deep product offerings compared to its competitors, our 
expectation of growth greater than the industry average, and the risks 
associated with its store expansion plans.

Credit measures have strengthened over the past year because of EBITDA growth 
and repayment of all funded debt. As a result, leverage improved to 2.6x for 
the 12 months ended June 30, 2012, from 2.8x a year ago, and interest coverage 
strengthened to 4.9x from 3.8x year over year. We expect total debt (which is 
only capitalized operating leases) to EBITDA to remain in the mid- to high-2x 
range in fiscal 2012, as continued growth in lease commitments will likely 
partially offset EBITDA growth. Although credit metrics may be indicative of a 
higher financial risk score, the absolute size of its cash flow is a limiting 
factor. 

Specifically, our assumptions for Vitamin Shoppe over the next year include 
the following:
     -- Revenue growth in the low-double-digit area, with same-store sales of 
more than 5%;
     -- Gross margin improvement of about 50 basis points (bps);
     -- Adjusted EBITDA margin in the mid-to-high teens, benefiting from 
continued leveraging of its economies of scale; and
     -- Capital expenditures in the $40 million to $45 million range.

We expect sales trends to remain positive as the company continues to grow 
faster than the industry because of its broad product offerings and market 
position. We attribute the improved performance to growth in a more 
fitness-conscious market, customers' increasing need for condition-specific 
products, and improved marketing efforts. In addition, comparable-store sales 
are benefiting from the maturation of Vitamin Shoppe's younger store base. We 
estimate that adjusted EBITDA margin improved by about 120 bps for the 12 
months ended June 30, 2012, to 16.7% from 15.5% in the prior year. In 
addition, the company's maturation cycle of newly opened stores, moderate 
promotional activity, and expectations for modest inflation in the near term 
should help manage cost pressures from raw materials and higher expenses to 
support the pace of its new store growth strategy. 

Liquidity
We believe Vitamin Shoppe's liquidity is "adequate." We estimate that the 
company's liquidity is sufficient to meet its needs over the next 12 months. 
Our view of the company's liquidity profile incorporates the following:
     -- We expect liquidity sources (including cash and availability under its 
$70 million revolving credit facility) to exceed uses by 1.2x or more. 
     -- We estimate that liquidity sources will continue to exceed uses, even 
if EBITDA declines by 15%.
     -- We believe that the company will maintain adequate availability under 
its revolving credit facility and do not expect any covenant compliance issues 
because covenants do not apply unless availability falls below 10%.
     -- We believe Vitamin Shoppe has a satisfactory standing in the credit 
markets.
     -- Also, we believe that the company has generally prudent risk 
management, given that the only debt it has is capitalized operating leases. 

As of June 30, 2012, sources of liquidity included about $50 million of cash 
and about $69 million of availability under the $70 million revolving credit 
facility, maturing on Sept. 25, 2015. There are no financial covenants unless 
the revolving credit facility's availability falls below 10%, which we do not 
expect to occur in the near term. 

We expect that the company will continue financing its store expansion with 
internally generated cash flow, and we expect operating cash flow to remain 
the primary source for capital expenditures, investment in infrastructure, and 
growth into Canada in fiscal 2012. By fiscal year-end, we expect free 
operating cash flow of about $64 million.

Outlook
Our outlook on Vitamin Shoppe is stable. We expect the company to modestly 
improve current credit metrics and margins due to sales leverage and growth in 
profitability, despite expectations for about 48 new stores in fiscal 2012. We 
expect adjusted leverage to remain in the mid-2x area, adjusted funds from 
operations to total debt in the mid-30% area, and EBITDA to interest in the 5x 
area. 

We would consider a downgrade if credit metrics deteriorate because of 
debt-funded shareholder-friendly initiatives, leading to adjusted debt 
leverage approaching the 3.5x area. Also, we estimate leverage could increase 
if operating performance declines due to adverse regulatory measures, negative 
publicity, or competitive pressures such that EBITDA declines by 30%. This 
could occur, for example, if revenue growth slows to the low-single digits, 
gross margins contract by 100 bps or more, or some combination of the two.

We could consider an upgrade if credit ratios demonstrate further improvement 
because of consistently strong same-store sales and EBITDA growth that 
outpaces increases in lease commitments. If positive operating performance 
enhances credit metrics such that leverage improves to below 2x and the 
company sustains this metric for several quarters, we could consider an 
upgrade. For this to occur, sales growth would have to be in the mid-to-high 
teens, and margins would have to expand by 200 bps or more or some combination 
of the two.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Key Credit Factors: Business And Financial Risks In The Retail 
Industry, Sept.19, 2008
     -- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Upgraded
                                        To                 From
Vitamin Shoppe Industries Inc.
 Corporate Credit Rating                BB/Stable/--       BB-/Stable/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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