-- 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
-- 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.
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.
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
Specifically, our assumptions for Vitamin Shoppe over the next year include
-- 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.
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
-- 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.
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
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
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
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