Vitamin Shoppe Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Vitamin Shoppe, Inc. (VSI)
by: SA Transcripts

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to The Vitamin Shoppe Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I would now like to turn the call over to Ms. Kathleen Heaney with Investor Relations.

Unknown Executive

Thank you, and good morning, everyone. Today's call is being recorded and will be available for replay later today. Information on accessing this replay is available in today's press release.

As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company's results and plans. These are subject to risks and uncertainties that could cause the actual results and implementation of the company's plan to vary materially.

The words believe, expect, plan, intend, estimate or anticipate and similar expressions, as well as future or conditional verbs, such as should, would and could, identify forward-looking statements. You should not place undue reliance on these forward-looking statements, and we expressly do not undertake any duty to update forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by law.

We refer all of you to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, as well as our quarterly reports on Form 10-Q for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

Earlier this morning, we released our results for the fiscal fourth quarter 2012. A copy of the earnings release and a recording of this call will be available on our website at www.vitaminshoppe.com in the Investor Relations section.

Making presentations today will be Tony Truesdale, Chief Executive Officer; and Brenda Galgano, Chief Financial Officer.

I will now turn the call over to Tony Truesdale, Chief Executive Officer.

Anthony N. Truesdale

Thank you, Kathleen, and good morning, everyone. Thank you for joining us. We have 2 key objectives this morning. First, we'll review our fourth quarter and full year results and provide some perspective on that performance.

Second, we'll give you some insights into how our plans for 2013 have changed, with respect to the integration of Super Supplements acquisition due to the change in the closing date.

I'd like to begin by recognizing our dedicated employees and extend a special thanks to all our Health Enthusiasts. It's their hard work and dedications that differentiates The Vitamin Shoppe and ensures our customers receive a superior shopping experience.

Now onto the results. Over the course of the year, we remain focused and successfully executed on key growth strategies that we laid out in the first quarter. We drove increased traffic into our stores, exceeded our previously stated expectations for annual and comparable sales growth, delivered profitable e-commerce growth, opened 2 small market prototype stores and opened our first 2 international stores and we significantly expanded our footprint in the Pacific Northwest with the announced acquisition of Super Supplements.

Our results reinforce our commitment to steady, thoughtful growth. For the full year, revenue increased 11%, gross and operating margins expanded, and net income increased 36%. With these results, we had some notable achievements and the challenge from Super Storm Sandy.

I will discuss a few of the highlights. Comparable store sales increased for the 29th consecutive quarter and were 5.2% in the quarter, which includes a 1.6 negative impact from Super Storm Sandy.

We haven't provided monthly comparable sales trends in the past, but to better help you understand the impact of Sandy, I will do so at this time. October comps were in line with our expectations. November comps bore the brunt of Sandy's impact. As we discussed in the last call, at the peak, we had approximately 160 stores impacted and there was one store that just reopened last week.

December comps rebounded and again, met our expectations.

Our comparable store sales for the year were 8.2%. This was on top of 7.4% comp increase in fiscal 2011 and was ahead of our previously disclosed guidance of 8% for the year. This was the best annual Vitamin Shoppe comp since 2003 and was the 19th consecutive year of positive comparable store sales.

Our solid performance in the fourth quarter was due to the strength across many product categories, including sports nutrition and weight management.

During the quarter, we continue with the aromatherapy rollout and 129 stores now have the full product line. We are pleased with the customers response.

Moving on to products plans for this year. We have an exciting line-up of multivitamins coming to market. First, our Multi-Pack, Mytrition, is in the stores right now and full marketing campaign will break on March 1. The launch date fell behind schedule due to manufacturing problems, but we are now full steam ahead, and we have received very positive feedback about this unique offering so far.

Second, our new $9.99 multi will be available for sale in April.

And third, we will introduce a K Free Multi. This is a niche product targeted to customers who, for various reasons, are unable to take a multivitamin that contains Vitamin K. Once again, this speaks to our understanding of the needs of our customers.

Now onto the stores. We opened 15 stores during the quarter and 54 in the year. The total store count at the end of fiscal fourth quarter was 579, up from 528 the year before. A key milestone for us during the quarter was the opening of our first stores outside the U.S. as we entered the Canadian market with the opening of our first 2 stores in the Greater Toronto area.

In addition to the 2 Canadian store openings, we also opened 2 smaller market stores in the quarter.

In 2013, we plan to open approximately 50 stores. This number is lower than the previously discussed. Some proposed co-tenants in the developments with us are slowing growth and the developers won't start the project until all tenants are fully committed.

This development has caused a number of real estate projects to slip to the back half of the year and we felt it was prudent to lower our new-store opening expectations. Additionally, as a result of this, our new store openings will be more back-ended this year.

We are also on track to open our first franchise store in Panama by the end of March. The store is currently being merchandised and the Health Enthusiasts are being trained on specific product knowledge.

On the new store front, we have a lot going on this year, and when taking into account the Super Supplements acquisition, our store portfolio is set to expand by 81 stores in 2013.

Before turning the call over to Brenda, I want to provide a update on our acquisition of Super Supplements. We announced the acquisition at the end of 2012 and we closed on the transaction on February 14. I'm excited about the potential for the combined companies.

In the near-term, we see an opportunity to improve the profitability of the business by leveraging the Vitamin Shoppe's infrastructure and expertise and supply chain, and we also see the opportunity to learn from them.

Brenda will take you through the changes to the financials based on the revised timing of the closing.

In summary, I'm pleased with our Q4 and full year results. We are targeting consistent performance year in and year out, and 2012 was another strong

year.

Our balance sheet is healthy with no long-term debt and no borrowings under our revolving credit facility.

We will continue to grow our business and deploy the cash generated in value-enhancing ways to reward our shareholders. I look forward to building on our success in 2013, and with that, I'll hand the call over to Brenda.

Brenda M. Galgano

Thank you, Tony, and good morning, everyone. Thanks for joining us. I'll spend the next few minutes covering our fourth quarter results. After that, I'll walk you through our outlook for 2013 and provide an update on the financial impact of the Super Supplements acquisition.

As a reminder, the fourth quarter of 2012 was 13 weeks and the fiscal year '12 was 52 weeks, while the fourth quarter of 2011 was 14 weeks and the full year was 53 weeks.

The majority of my comments will focus on a comparable 13-week quarter and 52-week year and on an adjusted basis.

We have included a schedule of adjustments in our earnings press release, which should make it easier for you to keep track of the numbers I will be discussing.

Now onto the P&L. Let me start with our fourth quarter EPS results. The quarter was impacted by challenges related to Super Storm Sandy and increases in SG&A costs related to the Super Supplements acquisition, as well as Canadian startup costs. Reported EPS in the quarter was $0.32, but adjusted for the costs I just mentioned, EPS was $0.40 and on a 13-week over 13-week basis, EPS increased 29% over adjusted fourth quarter of '11 EPS.

Adjusted EPS for the full year increased 36% over 2011 to $2.11.

Overall, we continue to make great progress on our goal to deliver consistent growth, expand margins and generate healthy cash flow.

During the quarter, we reported total sales growth of 11.3%, with comparable sales growth of 5.2%. Once again, this is on a 13-week adjusted basis.

As Tony mentioned, our comparable sales were negatively impacted by about 1.6% from Super Storm Sandy.

In addition, the timing of the September Bogo promotion had an unfavorable impact of approximately 1% in this year's fourth quarter results.

Moving down the P&L. Reported fourth quarter gross profit, as a percentage of sales, was 34.9% compared to 34.7% in the same quarter of the prior year.

On an adjusted basis, gross profit, as a percentage of sales, was 35.2% compared to an adjusted 33.8% for the same period in the prior year.

In the fourth quarter of 2012, we continue to realize excellent leverage in occupancy at approximately 100 basis points on an adjusted basis, mainly driven by lower utility costs and real estate taxes. We also had leverage in warehouse and transportation and improved product margins.

As previously discussed, longer-term, we expect product margin to be flat as initiative to improve gross margin are offset by product mix and channel shifts in our business that are unfavorable to gross margin.

SG&A for the quarter was $59.9 million compared to $56.5 million in the prior year. This increase can primarily be attributed to an increase in depreciation and amortization expense, reflecting the larger store base and other investments to support the long-term growth of the business.

A portion of the fees for the Super Supplements acquisition of $1.3 million, startup costs for our Canadian stores of $0.4 million and $0.4 million related to the sublease of the closed EcoShoppe location.

SG&A, as a percentage of sales, was 27.4% compared to 26.3% in the same quarter of the prior year.

On adjusted basis, SG&A, as a percentage of sales, was 26.1% compared to 25.9% in the same quarter of the prior year. This increase in rate in the quarter was primarily driven by higher depreciation expense and the charges for the EcoShoppe location.

Staying on SG&A for a moment. As the acquisition of Super Supplements closed later than planned, some transaction costs, as well as additional costs related to the FTC investigation, will negatively impact SG&A in the first quarter of 2013. We estimate that these costs will be approximately $1.7 million.

On an adjusted basis, the operating margin in the fourth quarter was 9.1% compared to an adjusted 7.9% in the prior year. This 102-basis-point year-over-year increase was primarily driven by the improvement in gross margins.

For the full year, our adjusted operating margin was 10.9%, up from the adjusted 9.4% for fiscal 2011.

The tax rate was 40.8% in the quarter.

Going forward, we expect our tax rate will now be closer to 40%. This slight increase in rate is mainly related to our Canadian operations as, under the accounting rules, we initially can't record a tax benefit for losses incurred.

Moving on to the cash flow. We generated $17.4 million of operating cash flow in the quarter and $78.4 million for the year. CapEx totaled $12.2 million in the quarter and reflected the expenditures required to open 15 new stores, work on the development of new stores for upcoming quarters, as well as some investments for the new DC planned to open this summer.

Total CapEx for the year was $30.8 million and came in lower than our prior forecast, mainly due to the timing of payments for the new DC. We continue to estimate the total capital outlay for the new DC, including a new warehouse management system, to be approximately $23 million, of which approximately $5 million was spent in 2012 and $18 million will be spent this year.

While we continue to review and prioritize our capital needs, we remain committed to making the required investments in our company to help position us for long-term success.

Turning to the balance sheet. At year end, we held $81.2 million in cash and cash equivalents, had no long-term debt and nothing drawn on our revolver.

Subsequent to year end, as we announced on February 14, we closed on the Super Supplements acquisition, reducing our cash balance by approximately $50 million.

I'd like to now turn to 2013 and our outlook for the year. Starting with the Super Supplements acquisition. I already mentioned that there will be about $1.7 million in transaction-related costs in the first quarter. As you look to model the first year, based on our current expectations, sales are estimated to be approximately $65 million, representing sales from February 14 through year end, and integration costs are still projected at approximately $3.5 million, as we focus on completing most of the back office integration in the first half of this year. Another $3.5 million is projected for 2014.

As we discussed in our December call, although there are many similarities between The Vitamin Shoppe and Super Supplements, there are also many differences. Due to its smaller size, the company does not have the benefit of scale or supply chain efficiencies.

Also, advertising and promotional expenses, as a percentage of revenue, are higher for Super Supplements. As a result, the expected impact from Super Supplements to our financial results this year is an approximate 20 basis points decline in gross margin and an approximate 30 basis points increase in SG&A expenses, excluding transaction and integration costs.

Looking further into our operating expectations for 2013. As you update your models, I'd like to remind you of the key factors that will drive revenue. We expect comparable store sales growth in the mid-single digits. Non-comparable store sales growth will be driven by sales from Super Supplements, growth of our e-commerce business and new store openings.

As Tony mentioned, new store openings are expected to be more back-ended, with approximately 20 stores opening in the first half and approximately 30 in the second half of the year.

On the gross margin side, we expect several factors to limit the overall gross margin expansion as we move through the year. The first will be the negative impact of approximately 20 basis points from Super Supplements, as previously discussed. And the second will be the delevering of gross margins from the new DC of approximately 30 basis points, as discussed during the last earnings call. Partially offsetting this is the expected leverage on occupancy of approximately 30 basis point.

Given these factors, we foresee overall year-over-year gross margin rate declining about 20 basis points for the full year.

As noted in the press release, we expect the following for 2013: We plan to open approximately 50 new stores. We plan comparable store sales growth in the mid-single digits. We are planning capital expenditures of approximately $45 million to $50 million. Depreciation is expected to be approximately $28 million and includes the additional depreciation from the Super Supplements acquisition.

This figure is subject to change pending finalization of purchase accounting for the acquisition.

The net impact of Super Supplements acquisition is expected to be dilutive to earnings per share by approximately $0.03, which includes transaction and integration costs. And we expect fully diluted shares outstanding of 30.7 million.

We again, delivered strong results. We believe that our strong and unique retail model, management team, Health Enthusiasts and our capital structure provide flexibility to continue to deliver profitable growth.

This concludes our prepared remarks. We'd be happy to take your questions now. Operator, please open the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today will come from Mark Miller, William Blair.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Brenda, on the Super Supplements acquisition, what is the comp growth assumption to get to the $65 million revenue contribution for 2013? And can you tell us how that compares with the recent trend of the business?

Brenda M. Galgano

We have not provided historical data on Super Supplements, so we are not prepared to give that data out.

Mark R. Miller - William Blair & Company L.L.C., Research Division

All right then. Let me substitute a different question. On product development, you talked about favorable feedback from Mytrition. Any sales read yet? Or is it just too early? And then, I know the pipeline for product development, it takes 1 year or 2 years to develop products. So can you just give us a little bit longer-term perspective on what kind of product launches we can see over time?

Anthony N. Truesdale

Yes, Mike, this is Tony. It's too early to tell with Mytrition. It just got in the stores about mid-February, so we're starting to see some early numbers, but it's really too early kind of give you any feedback on how it's doing. The other thing is, is we've got 2 other lines under development, but we haven't put a date on when those 2 particular lines will launch. So we've got 2 other things in the hopper.

Mark R. Miller - William Blair & Company L.L.C., Research Division

But Tony, can you say -- is it expected to be a bigger contribution to sales as you move forward with these lines come out and then 2014?

Anthony N. Truesdale

I think our expectation would be -- these would be additive to the sales and positive for the company, long-term.

Operator

And next, we'll hear from Matthew Fassler, Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

We're really just focused on a couple of financial details. First of all, when you back out some of the one-time items and you look at each of the corporate and direct segments, it looks like profitability or operating margin was down year-on-year. Any color on each of those segments and what might have driven the delta from a margin perspective, please?

Anthony N. Truesdale

Yes, Matt, this is Tony. I'll talk to the e-commerce piece of it. We saw some increased competitive activity during the quarter and we reacted to that in a number of different ways. So that's why you see a little bit of compression in the contribution on the direct side of the business.

Brenda M. Galgano

With respect to the corporate costs after adjusting for the items disclosed, we did also see higher depreciation expenses, as well as the EcoShoppe charge of $400,000. So those 2 corporate costs expensed a little higher this quarter.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Got it. And then just by way of follow-up. Tony, in addressing your comments on e-commerce, any indication of the source of that competition? Was it traditional sources, non-traditional sources? And with that in mind, if you could kind of characterize any changes in the competitive or promotional environment across the business would be very helpful.

Anthony N. Truesdale

Yes, I mean, I think we -- all of last year until partway through the fourth quarter, it was a pretty consistent environment on the web. And we saw a number -- a couple of different players make some changes that we reacted to in the -- late in the fourth quarter.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Have those persisted into Q1?

Anthony N. Truesdale

Matt, typically, we wouldn't comment on the current quarter.

Operator

And next is Mark Wiltamuth, Morgan Stanley.

Mark Wiltamuth - Morgan Stanley, Research Division

I wanted to focus on the comp trend. If you add back the adjustment for Hurricane Sandy and even if you add back the 1% adjustment for the Bogo timing, the adjusted comps still kind of slowed sequentially, and even the 2-year stack trend slowed. If you could really talk to us about what's going on there, if you think there's any underlying theme to the slowdown, if you could let us know?

Brenda M. Galgano

I would also note as -- in the third quarter, we reported comps as 9.6%, which did benefit the 1% -- by 1% for the Bogo. So just to be clear, we're really starting with an adjusted run rate in the first quarter of 8.6%, and that would compare to in the fourth quarter of 7.8%.

Mark Wiltamuth - Morgan Stanley, Research Division

Right. So that is a slowdown. Is there anything going on there in the categories that slowed for you? Or anything notable that happened in the quarter?

Anthony N. Truesdale

Yes, I think, we saw -- I mean, you've got Sandy impact in there, so it's a little bit muddled because of that. But when we look at the general trend of the categories, we were comfortable with the trends of the individual categories.

Operator

Shane Higgins with Deutsche Bank is next.

Shane Higgins - Deutsche Bank AG, Research Division

Tony, could you break down the traffic and the ticket in the fourth quarter?

Anthony N. Truesdale

Yes. The majority of it was traffic in the fourth quarter.

Shane Higgins - Deutsche Bank AG, Research Division

Great. And how are your new stores performing? Are you guys still seeing kind of 25%, 30% type comps in year 2?

Brenda M. Galgano

Yes.

Shane Higgins - Deutsche Bank AG, Research Division

Okay. Great. And anything to call out about the consumer? Are you guys seeing any kind of impact from the increase in the payroll taxes?

Anthony N. Truesdale

Yes, I mean, I would say every retailer is talking about the macroeconomic environment today, and the impact of that is going to play itself out over the next couple of months. So we'll see what happens.

Operator

And our next question comes from Christopher Horvers, JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

First, one nuance question, so on the DC deleverage, is there a particular timing of that? That opens up mid-year. Is it -- is that 30 basis points waived to the first part of the year?

Brenda M. Galgano

Yes. It's consistent with what I had said on the last earnings call, which is we expect most of that impact to be in the second and third quarter as we open the warehouse with DC this summer.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. Sort of a silly question, but I think a lot of people are asking about a tax refunds a lot. I think, the other piece of the story is also the weather from a year ago for a lot of retailers. I mean, do you think -- we know that Diet really accelerated in the past 2 years, and it sounds like it did really well at the beginning of last year. As you look back to first quarter of last year, do you think the warm weather got people out there and focused on appearance and on diet earlier than it typically happens?

Anthony N. Truesdale

I mean, typically, weather is not something that I would focus on. But if you recall in our call, I talked about the media attention around weight management and then that we had the inflation from protein prices. So if you look back to the first quarter of 2012, those were 2 highlights that I talked about in the call.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So the answer is perhaps that, for whatever reason, diet, I saw an earlier uptick than you would normally expect last year?

Anthony N. Truesdale

Yes. I would say that last year, we had a call out on the weight management growth as a category that had grown faster than other categories.

Operator

Next, we'll hear from Sean Naughton, Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Just a quick clarification on the comp guidance for 2013. I think, you had mentioned 1% to 2% for inflation on the prior call. Just wanted to double check to see if that's still consistent. And then secondly, on the op margins, obviously, done a great job here over the last 4, 5 years. Can you talk about where you think that number can be ultimately for the long-term and how you're thinking about that from a modeling perspective internally?

Brenda M. Galgano

Okay, I'll address those, Sean. First of all, with respect to our 2013 comp guidance, we are reiterating the mid-single digit for the year and that does include an assumption of 1% to 2% of inflation. With respect to longer-term operating margins, 2013, given the acquisition of Super Supplements, we do not expect that there will be significant operating margin expansion. As we work through that acquisition, we do believe that it will begin to be accretive in 2014. At this point, we're not prepared to give a specific long-term number for operating income margin. As we work through the year and we complete our integration planning for Super Supplements, we'll provide more guidance around that.

Operator

And Karen Short, BMO Capital, has our next question.

Karen F. Short - BMO Capital Markets U.S.

Just a couple of questions on your unit growth for this year. I guess, maybe can you provide a little more color on why there is a slowdown? Is it, I mean, a function of your smaller -- your 3000-square-foot prototypes? And I guess, just in general, I was confused a little bit because you tend to be kind of standalone or endcap. So I would -- just thought you'd more control over the opening schedule.

Anthony N. Truesdale

Yes, Karen, I mean, we do a mix of standalone and then we're in with 1 other player or 2 other players at the front of a center. So what we've seen recently that we haven't seen before is a number of other retailers, not ourselves, but other retailers in a project with us that have either not signed their lease or are slowing down their process, which is causing what we had for dates for the store to open to move. So that shifting has caused us to reevaluate the portfolio, and we felt comfortable with 50, given the number that we've seen slide. But remember, we're going to have 81 stores that enter the pool this year, which would be the highest in this history of the company actually, for Vitamin Shoppe. So we're going to take on quite a growth rate with the Super Supplements acquisition, plus the 50 we're going to build ourselves.

Karen F. Short - BMO Capital Markets U.S.

Yes, no question. And then, I guess, just turning to 2014. I mean, can you guys kind of plan ahead knowing that this phenomenon may be taking place on your unit growth to make sure you reaccelerate in '14?

Anthony N. Truesdale

Yes, Karen. We know who the co-tenants are that are the issues, and we can certainly avoid those in future developments and that will help us along the way.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then just a second question. Any -- you didn't really comment on what your current thoughts are on rebranding Super Supplements. Any thoughts there on rebranding, if any?

Anthony N. Truesdale

As we've said, we're really focused on -- I mean, they've got very high-volume stores, as you've seen. And we like the volumes that they have in the stores and the customer experience they deliver. We're really focused on driving the synergies in the back half of the year. So no comments today on what we're going to do with the branding.

Operator

We have Simeon Gutman with Crédit Suisse.

Simeon Gutman - Crédit Suisse AG, Research Division

Regarding hurricane, not to dwell on this, given that you have a bunch of top-performing stores in this market, was there a shift that you could see that you saw the business moving more direct for that period of time that could have robbed a little more business from the store side?

Anthony N. Truesdale

You got to remember that people didn't have power here in the east. So it was hard to get on the Internet. So a lot of them weren't connected and were trying to find places to go to actually get on the Internet. So we did not see that phenomenon. Had there been power, I think you probably would have seen more of that, but because of the lack of our power here in the East, you didn't see that happen.

Simeon Gutman - Crédit Suisse AG, Research Division

Got it. Okay. And then, on -- back to gross margin. I think, Brenda mentioned the 30 basis points of deleverage from the DC, offset by occupancy and then Super Supplements piece. On occupancy, it looked like the run rate accelerated a little bit on what looked like was a little bit of a weaker comp. And so can you speak to that because -- is there opportunity for potentially better leverage on the occupancy line? And then second of all, after the DC -- I'm sorry, the other piece on the DC, once it opens, is there an opportunity once the purchasing power of the business increases? Could that help?

Brenda M. Galgano

Yes. So with respect to occupancy, we have, the past couple of quarters, seen some nice leverage there. The third quarter was primarily driven by the 9.6% comp. In the fourth quarter, there are really 2 main drivers of the leverage in occupancy. One was lower utility costs, and I believe, that was primarily driven by weather. And the second was lower real estate taxes. And over the past year, we've really made a strong effort to file for real estate tax appeals and the like and we saw benefits from that in the fourth quarter. I would not expect that, that would be an ongoing run rate type of item, though.

Karen F. Short - BMO Capital Markets U.S.

Okay. And if I can sneak one more in -- on Canada, I think, last quarter, there was mention about the start-up costs. I think, it was mentioned again this quarter, but has the dollar amount changed? Has the timing amount changed at all with regards to the ramp and start-up cost period?

Brenda M. Galgano

Yes. Last quarter, we said approximately $1 million. And at this point, that is still our best estimate.

Operator

Next is Brian Wang, Barclays.

Brian Wang - Barclays Capital, Research Division

The first question is actually a follow-up related to the last question about Canada. Can you just -- are they -- are those investment costs, are those just sort of marketing and brand-building efforts because you're entering a new market?

Anthony N. Truesdale

Yes, you've got marketing, you've got brand-building and then you've got some overhead that's attributable to that marketplace. So you've got a merchant, you've got a district manager, so you've got some overhead associated with the Canadian market as well, which is an expense to start off.

Brian Wang - Barclays Capital, Research Division

All right, great. And then just one follow-up, I guess, or maybe even a couple of follow-ups on the unit growth, the slowdown. So it sounds like you're going to try and avoid some of those problem retailers that caused the delay in fiscal '13. So do you expect to return the 10% unit growth by 2014?

Anthony N. Truesdale

Yes. I would say that, that would be probable.

Brian Wang - Barclays Capital, Research Division

Okay, great. And then, just for 2013, I don't know if you guys have given this, but what your plans are for smaller stores and also stores in Canada?

Anthony N. Truesdale

We opened one small prototype early in January, so we've got 3 that are opened. We may have 1 or 2 more this year, but -- that are in the hopper. we'll have to see how that pans out, given the conversation we had earlier about developers. And then Canada, we've got, if anything happens, it will happen late in the fourth quarter.

Operator

Next we'll hear from Peter Benedict, Robert W. Baird.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Tony, how are you guys going to market the Mytrition product? You said the marketing is really going to kick in, I guess, this weekend. Can you give us a sense of what you're going to do on that front? .

Anthony N. Truesdale

Yes. There's a number of different ways market that we're going to market that, but we're not -- we haven't publicly talked about that at this point in time. So we just -- we don't want to talk about that with competitors that may or may not be listening to the call.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Okay, fair enough. We'll just wait a few days. And then the -- maybe just -- Brenda, can you talk about the product mix and channel shift headwinds that you expect to weigh on gross margin. I mean, I understand big picture what's going on, but maybe -- how has that been the last couple of years? And is your expectation that going forward, it's going to be more severe, and if so, why?

Brenda M. Galgano

With respect to the product shift, it's primarily driven by the shifting in the categories. We've talked about the sports nutrition category outpacing other categories that a lower-grossing category, and we would expect that trend to continue going forward. And then with respect to channel shift, as our e-commerce business outpaces the retail business, and as our Catalog business declines, we do get pressure on margin. And we also expect that to continue. As I've said before, we expect product margins going forward to be flat, as there are a number of initiatives that we have to offset some of those, including the inbound transportation program we discussed in the last quarter.

Operator

Next we'll hear from Kate Wendt, Wells Fargo Securities.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

I was just wondering if you could talk a little bit about the projected floor model in Canada, assuming that there are maybe higher RUGs up there and perhaps, also higher SG&A costs in the stores. I know you're testing some more experienced personnel up there. Would the stores be expected just to take longer to payback? Or do you think because perhaps, less competition out there that this might offset that factor?

Anthony N. Truesdale

Well, I think, Kate, long-term, we expect it to be as profitable, if not more profitable than the U.S. stores. But there are number of different things that you change, so the rents are higher because the tax structure is higher out there. So you shrink the size of the store. So it's really about driving the productivity of the store. We're testing a couple of things that are investments, nutritionists in store that are full-time employees. So we're going to have to let this play out over a period of time and we're going to change some things as we learn. Certainly, we didn't get it 100% right out of the box, but we're going to change some things, and we think, long-term, we're going to be successful there.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Great, got it. And then just for Brenda, on the adjustment related to Sandy, how much was the actual costs related to damages versus lost sales?

Brenda M. Galgano

We had some write-offs related to fixed assets of approximately $200,000 and the rest of that was really related to lost business.

Operator

Next, we'll hear from Damian Witkowski, Gabelli & Company.

Damian Witkowski - Gabelli & Company, Inc.

I wanted to get a historical perspective. A year ago, you guys guided to up mid-single digits for 2012 in terms of same-store sales. So I'm just wondering, just looking back, what did better than you expected? And then, as we sort of sit here today and you're guiding again to up mid-single digits, do you expect the category overall, the industry to slow or certain categories? Just wondering if I could get some perspective on that?

Anthony N. Truesdale

Yes, I think, I'd just come back to my comments from the first quarter call last year where I talked about the strength of weight management and sports nutrition. Sports nutrition supported by inflation in protein costs that benefit the comp. And then we had weight management, which had a tremendous amount of media attention last year in the first and second quarters. And again, those 2 things were probably the things, looking back, that we didn't know about a year ago.

Damian Witkowski - Gabelli & Company, Inc.

Okay. And then just on cash. I mean, I know that obviously, the cash has now -- the cash balance is lower, about $30 million, I guess, post the acquisition. But the uses of cash going forward remain the same, I guess, is it just sort of building up and then looking at acquisitions that are sort of the same size that you just made?

Anthony N. Truesdale

Yes, I think, Damian, we'll continue to look at a number of different alternatives to use our cash that improves shareholder return. So I think, we're always going to look at the best use of cash. That could change over time depending on where we are as a company.

Damian Witkowski - Gabelli & Company, Inc.

And taking on debt would not be accretive at this point?

Brenda M. Galgano

At this point, no. Taking on that debt would not be accretive. However, we'll continue to evaluate that on an ongoing basis.

Anthony N. Truesdale

Okay. Great. It looks like -- I don't think we have any other questions in the queue. Thanks for joining me this morning, and we look forward to updating you next quarter. Talk to you soon.

Operator

And that does conclude today's conference call. Thank you for your participation.

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