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Vitamin Shoppe (NYSE:VSI)

Q2 2013 Earnings Call

August 06, 2013 8:30 am ET

Executives

Daniel Lamadrid - Chief Accounting Officer, Vice President and Controller

Anthony N. Truesdale - Chief Executive Officer and Director

Brenda M. Galgano - Chief Financial Officer and Executive Vice President

Analysts

Simeon Gutman - Crédit Suisse AG, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Brian Wang - Barclays Capital, Research Division

Karen F. Short - Deutsche Bank AG

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

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

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

Kate Wendt - Wells Fargo Securities, LLC, Research Division

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

Damian Witkowski - Gabelli & Company, Inc.

Mark Wiltamuth

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Vitamin Shoppe Second Quarter 2013 Earnings Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Dan Lamadrid. Please go ahead, sir.

Daniel Lamadrid

Thank you, and good morning, everyone. 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 second quarter 2013. A copy of our earnings release and a recording of this call will be available on our website at 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 over the call over to Tony Trousdale, Chief Executive Officer.

Anthony N. Truesdale

Thank you, Dan, and good morning, everyone. Thank you for joining us. During the quarter, total revenue increased 14%, driven by 2.3% comparable sales growth, a double-digit sales increase for e-commerce and growth from new and acquired stores. Gross and operating margin trends were in line with our expectations. Earnings per share in the quarter were $0.60 compared to $0.55 in the same period of the prior year. The integration costs from Super Supplements were offset by Superstorm Sandy insurance recoveries, which Brenda will discuss in more detail.

On a comp basis, the first 2 quarters were more challenging and volatile than they had historically been as we lapped last year's strong performance in sports nutrition, accelerated weight management growth and retail inflation, which peaked in the third quarter of 2012. While costs were at the low end of our expectations, this growth was on top of an 8.3% comp increase we reported in the second quarter of 2012. Notably, this represented the 31st consecutive quarter of positive comp sales growth.

Now on to the stores. We opened 10 stores during the quarter and 23 for the first 6 months. Total store count at the end of the quarter, which includes 31 Super Supplements stores and our 2 Canadian stores, was 630. On the new storefronts, similar to the first quarter, the majority of the new stores opened late in the quarter. We modified our grand opening plans, and we are beginning to see improvement in trends versus the prior quarter.

We are committed to opening 50 stores this year, which equates to a 9% increase in store base excluding Super Supplements, with new stores opening on average at 3,000 square feet. Our total weighted average square footage growth for fiscal 2013 is projected to increase approximately 7%.

Moving on to the new DC. We have made significant progress and are on track to open as planned. We began receiving inbound inventory at the end of June, and we expect to begin shipping outbound inventory in September. As a reminder, this is going to be a consistent and thoughtful rollout as we plan to start with shipping to approximately 25 stores. We expect it will take about 18 months before the DC reaches targeted productivity.

Finally, I want to touch on our e-commerce business, which is a significant growth opportunity for us. Our e-commerce business was strong this quarter, increasing 18.5% on a year-over-year basis in an environment that continues to be competitive. This represents our eighth consecutive quarter of double-digit growth.

Super Supplements contributed approximately 5.5% of this increase. As we have discussed in the past, our omni-channel customers are our best customers. Marketing activities, including social media, not only drive traffic to our stores but also drive traffic to our websites. And with our stepped-up activity during the quarter, we saw a significant increase in unique customers to our website. A -- as customers continue to refine the way in which they interact with the Vitamin Shoppe, new and exciting opportunities are emerging. Mobile has continued to grow as customers take advantage of the ease of access provided by their smartphones and tablets, and we are seeing an increasing percentage of sales and traffic coming from mobile. Clearly, this trend is representative of our consumers' shopping behaviors in this growing digitally enabled environment. And to better control our customer experience, we recently brought our mobile website in-house.

We continue to invest in all shopping channels to encourage the customer to experience the Vitamin Shoppe however and whenever they want. The key to growing our omni-channel customer base is to continue providing compelling products, superior content and a differentiated shopping experience.

So in summary, we remain focused on our key growth strategies that I have discussed on previous calls. We have a great team in place in a culture based on continuous improvement. While facing some headwinds this year, our team is working hard to deliver another year of sales and earnings growth. And I would like to take this opportunity to thank all the health enthusiasts for their hard work and dedication to the Vitamin Shoppe.

I'll now turn the call over to Brenda to walk you through the second quarter financial results. Brenda?

Brenda M. Galgano

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

While this was a challenging quarter from a comp sales standpoint, our second quarter financial results demonstrate our ability to sustain profitability despite both the variability in sales as well as the additional costs we are incurring to support our growth initiatives.

Let me start with our second quarter EPS results. Reported EPS in the quarter was $0.60, which includes $0.02 a share for integration expenses associated with the Super Supplements acquisition. This was offset by $0.02 a share and insurance recoveries from Superstorm Sandy losses. We are pleased with the Super Supplements integration process to date and have already substantially completed the back-office integration. I'll speak more about this later in my presentation.

During the quarter, we reported total sales growth of 14.1% with comparable sales growth of 2.3%. Retail revenue increased 13.9% to $251 million, with the 31 Super Supplements stores contributing about $18 million. E-commerce continues to drive significant growth, increasing at a double-digit pace. Online sales were up 18.5% in the quarter, with Super Supplements contributing 5.5 percentage points to this growth.

The 2.3% comp in the quarter was up against a strong 8.3% comp in the same quarter of the prior year. Last year, as you all know, we benefited from above-average inflation and accelerated weight management sales growth. Retail inflation was close to 3% in the second quarter of 2012 versus flat this year. And last year's growth from weight management contributed approximately 2% more in comps last year than this year.

Even facing these headwinds, our mature stores are still comping slightly positive. As a reminder, the Super Supplements stores will not be included in the same-store sales until after 1 year.

When looking at our store model, more recently, there's been some divergence in store economics. We have been reducing the store size since 2011, and new stores now average approximately 3,000 square feet versus the company average of approximately 3,700 square feet. We are seeing these 3,000 square foot stores starting out a bit slower than the larger stores, but they are producing higher revenue per square foot, and they are comping at a higher level. As they reach maturity, our expectation is that the returns from these stores will be similar or higher than the larger-format stores.

Moving down to P&L. Gross margin performed in line with our expectations. Reported second quarter gross profit as a percentage of sales was 34.8% compared to 35.0% in the same quarter of the prior year. This reflects the inclusion of the lower-margin Super Supplements business.

With all the moving parts this year, let me summarize again our gross margin expectations for the rest of the year. The incremental cost from the new DC will occur over the next 2 quarters. As a result, we expect deleveraging from the new DC of approximately 40 basis points for the back half of the year. Also, we expect Super Supplements to delever margin by approximately 20 basis points for the rest of the year as anticipated flat margins from the Vitamin Shoppe stores are reduced by lower margins from the Super Supplements stores.

Now I will move on to SG&A. SG&A for the quarter was $67 million compared to $58 million in the prior year. This year's cost includes integration cost of approximately $900,000 related to the Super Supplements acquisition. This was offset by Sandy insurance recoveries of $900,000.

SG&A as a percentage of sales was 23.9% compared to 23.7% in the same period of the prior year. The inclusion of Super Supplements increased SG&A by approximately 30 basis points. This increase was partially offset by leverage in other areas, including corporate costs.

As I mentioned at the beginning of my presentation, we have substantially completed the back-office integration of Super Supplements, and we now estimate that the total integration cost for 2013 will be approximately $3 million, down from our prior estimate of $3.5 million.

Looking at net synergies identified to date, we are at an annualized run rate of over $1 million beginning in 2014.

Our total EBIT margin was 10.9% in the quarter, compared with 11.3% in the same period of the prior year. By segment, the retail EBIT margin was 20.4%, 40 basis points lower than the prior year and reflects the addition of the Super Supplements retail stores, which operate at a lower rate of operating income.

The EBIT margin for the direct segment was 18.3% compared to 19.2% in the second quarter of 2012. This reflects the inclusion of the Super Supplements' e-commerce business, which operates at a lower margin, and the impact of increased promotional activity.

Moving on to cash flow. We generated $33.8 million of operating cash flow in the quarter. CapEx totaled $12 million in the quarter and primarily represents investments for the new DC, build-out of new stores, improvements to existing stores as well as the integration of Super Supplements.

Turning to the balance sheet. At quarter end, we held $54.8 million in cash and cash equivalents, had no long-term debt and nothing drawn on our revolver.

Now on to the remainder of the year. Similar to the second quarter, the third quarter faces retail inflation of approximately 3% last year, whereas this year, we are experiencing flat retail inflation. Therefore, we expect third quarter comp similar to the second quarter, while for the fourth quarter, we are expecting improving trends. The gross margin will be negatively impacted by 60 basis points in the back half of the year, 20 basis points due to Super Supplements and 40 basis points from the new DC.

Super Supplements will also weigh on SG&A cost, with an expected increase to rate of sales of approximately 30 basis points.

Additionally, we expect the following for the full year, which is unchanged from our previous outlook. We plan to open approximately 50 new stores. We expect low to mid-single-digit comparable store sales growth for the year. We are planning capital expenditures of approximately $45 million to $50 million. Depreciation is expected to be approximately $28 million and include the additional depreciation from the Super Supplements acquisition. The impact of the Super Supplements acquisition is expected to be slightly dilutive to earnings per share, which includes transaction and integration costs. And fully diluted shares outstanding are projected at 30.7 million.

As we look forward to the balance of the year and beyond, we are confident in our strategy and committed to delivering profitable growth.

Again, thank you all for joining us today. This concludes our prepared remarks. We'd be happy to take your questions now.

Operator, please open the lines to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Simeon Gutman with Crédit Suisse.

Simeon Gutman - Crédit Suisse AG, Research Division

Tony, we -- you mentioned last quarter that new stores were not opening as strong as hoped. It looks like this quarter's -- the adjusted productivity may be got a little bit better. Curious if you have a better diagnosis of what caused some of the opening. You mentioned some modified grand opening plans, but curious if you can elaborate on that, please.

Anthony N. Truesdale

Yes, I think we've made the correction that we needed to make. I was very encouraged by what happened in June. What we did is in the prior year, we had changed to a more marketing-focused grand opening versus a value brand opening, and we've kind of moved back to a more value. So it's the same dollars. We're just shifting them from bucket to bucket, and we've been much happier with the grand openings.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then just reconciling, so new stores weren't opening as strong, call it, in the early part of the year.

Anthony N. Truesdale

Right.

Simeon Gutman - Crédit Suisse AG, Research Division

I think Brenda mentioned that mature stores are still comping slightly positive.

Anthony N. Truesdale

Yes.

Simeon Gutman - Crédit Suisse AG, Research Division

And then there was also a comment that some of the store economics have changed and that they're producing higher revenue in the earlier years. So I was just trying to reconcile those 2 comments because I guess, in one sense, stores are not opening as good, but I guess on the other sense, some of the smaller stores are opening strong.

Brenda M. Galgano

Yes. Let me just clarify. They are producing higher revenue per square foot, but the first year dollars are lower than what we've seen in the past.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then -- and just looking forward, I guess, you do have easier compares that begin in the fourth quarter. And I guess, next quarter, it gets a little bit more difficult. And you said some of those factors are still there. Besides, I guess, is the improvement that you're expecting in the fourth quarter, I mean, is it a function of the compare getting easier, is it a function of other initiatives, anything else to point to on the business?

Anthony N. Truesdale

I think it's a combination of a couple of things. It's a combination of your cycling Superstorm Sandy, and you're also cycling some of the things that have been a drag on the business. So inflation, which we've talked about regularly, and the weight management starts to slow down from the Dr. Oz effect of the year before. So you take the combination of those 2 things along with Superstorm Sandy, and we feel very comfortable around the fourth quarter.

Operator

[Operator Instructions] We'll go next to Sean Naughton of Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

So a little bit of discussion out there about the consumer changing, being a little bit soft over the last few months. Is there anything in terms of the buying behavior or patterns that you're seeing with your customer that would suggest making a little bit more challenging? Or is it really more a function of some of the specific issues that you outlined? Or is there any additional impact, you think, on the consumer out there at this point?

Anthony N. Truesdale

Yes, I mean, you can cross it between -- I mean, I think it's the things that we've been talking about. And then when you rate -- relate those back to the database, which we get to look at each quarter and see how the consumer is going, I've talked before about that -- those low spenders. Some of those low spenders are less committed to the category, and we don't see them as frequently as we did in the prior year. And that's the piece that we're working on. But the -- our best customers, our top 2 segments, we feel very, very comfortable with those top 2 segments and their shopping behavior and their patterns and spends with the Vitamin Shoppe.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then just as a follow-up for -- just in terms of the Bogo that you guys run typically in September. Is that impact going to be more in the third quarter this year? Or is it going to be in the fourth quarter? Any color there would be helpful.

Brenda M. Galgano

In terms of the timing of the quarters?

Sean P. Naughton - Piper Jaffray Companies, Research Division

That's correct, yes.

Brenda M. Galgano

Yes. Well, last year, there was more of a timing impact due to the 53rd week in the previous year. This year, it's 1-day difference, meaning that we have 1 day short this year relative to last year. So it -- there will be a small impact but not nearly as significant as last year, which is 5-day impact. So just to put it into perspective, last -- just to -- I'll just add one more thing. Last year, was 5 days, had about a 1% impact. So if you were to do the math, then maybe it's about a 20 bp impact.

Operator

And we'll go next to Brian Wang of Barclays.

Brian Wang - Barclays Capital, Research Division

Great. I guess, the first question is if -- you talked about on the last conference call that April started off a little bit below plan. If you could just talk a little bit about the cadence of sales throughout the quarter and possibly any update on the quarter-to-date trend?

Anthony N. Truesdale

Yes, typically, we wouldn't talk about the current quarter. I did that last quarter because of where I saw April. I would say that April was the worst month in the last quarter.

Brian Wang - Barclays Capital, Research Division

Okay. And then just following up, I guess, a little bit on the competitive environment. I know you guys have cited the inflation and strength and weakness, I mean, categories as some of the reasons. But, I guess, obviously your biggest competitor out there, GNC, had their national rollout of their member pricing format. And do you guys feel like that's having any impact on your sales?

Anthony N. Truesdale

I think before they rolled it out, we said that we didn't believe it would have a significant impact on our sales. And after they've rolled it out, I still believe that they don't have a significant impact on our sales.

Operator

Our next question comes from Karen Short of Deutsche Bank.

Karen F. Short - Deutsche Bank AG

Just going back to the comp for a second. I know you gave some -- the color you gave on the inflation this year versus last year on the weight management, this year versus last year in terms of how it affected the comp last year. Even if I kind of back those out of last year's numbers and this year's to kind of look at the more neutralized number, you're still seeing a slowdown in your comp on a 1- and 2-year basis. So there -- is there something else you can point to that's contributing to it? Or any other color there?

Anthony N. Truesdale

I think those are the 2 factors that we've kind of focused on as the big contributors year-over-year. So I'll have to go look at it, Karen, but I mean, typically, we just look at the biggest contributors.

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

Okay. And then I guess just switching gears, in terms of your smaller market stores, the smaller-format stores, I know you had 2 at the last quarter. Any color you want to provide on how those are doing and what you think the opportunity is there?

Anthony N. Truesdale

Yes, we're going to open a couple more. So I wouldn't open a couple of more if I didn't think they were -- they're going to perform the right way. I think we still got to figure out the capital that we're putting into these particular stores. I believe the capital is still too high, and we've got to figure that piece out, but I think that's something that we can fix. So I still believe it's a viable long-term concept for the Vitamin Shoppe.

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

Okay. And any update on Canada?

Anthony N. Truesdale

The name is different up there. So we've had to really push the marketing side of it to get people to know the Vitapath name. We hired a merchant that's very, very sharp and talented from Target, and she's focused on managing the assortment promotions and really pushing that business. So we've got another store that opens in the first quarter of next year, and we're committed to being in Canada.

Operator

Next, Chris Horvers of JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Can you talk about the new store productivity? How the 2012 class is performing, how the 2011 class is performing as they have ramped up? And if there's a difference in terms of the 3,000 square foot versus the previous -- some of the larger boxes, what could be the explanation for the difference presumably if your location's still as good as it was previously? You wouldn't -- you would see higher sales per foot, but the dollars would relatively be in line.

Brenda M. Galgano

Not generally. I think it -- generally speaking, smaller stores would yield slightly lower sales, but again, the revenues per square foot would be higher. And therefore, we'd expect overall a comparable, if not higher, return. As we look at the -- to answer your first question around how the stores from the last couple of years are performing, we're continuing to see an improvement in the comps in that second and third year relative to what we've seen in the past if we look at older classes. So at one point, on average, the comps in that second year were generally around 25%. Now we're seeing it closer to 30% in that second year.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. So then as a follow-on to that, I mean, if you run the store waterfall, you would think that you should put up a 4% or 5% comp pretty consistently based on the aging and the migration of the store base towards maturity. So as you dig in to the details and the numbers, where do you see -- what's driving the disparity versus what the model would suggest?

Brenda M. Galgano

Well, in terms of the overall -- the past couple of years, we still don't have the -- we still don't have all the history yet to determine where they actually settle at. So we believe, based on the trends that we're seeing, that they will still yield similar, if not higher, returns, but time will tell on that.

Anthony N. Truesdale

I mean, if we had historical inflation like we've had for the, probably, last 3 or 4 years, that 2%, 3% will be somewhere around a 4%, 3% if you'd add that 1% to 2% kind of inflation that we typically have plus the drag on weight management. So I -- that's why I said I think we're -- after the next quarter, we're pretty much through what we went through with Dr. Oz weight and inflation from last year. But we're not seeing any retail inflation at this moment in time as we historically would see.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And -- perfect. And so then what was the actual inflation in the fourth quarter of '12? Did that get cut in half? Or where do that 300 basis points fall to?

Brenda M. Galgano

It was still above 2%, but it had come down approximately 50 basis points from the third quarter.

Operator

And our next question comes from Matt Fassler of Goldman Sachs.

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

A couple of questions. First of all, you referenced low spenders or I guess, sort of casual supplement consumers as tracking a bit softer relative to trend. If they are the source of incremental weakness, do you have a game plan for getting them back into the business whether it's promotions or assortments or anything else to essentially recapture that customer?

Anthony N. Truesdale

Matt, that's a great question. We do have a game plan. We just wouldn't talk about it publicly.

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

Has that game plan kicked in yet? And kind of what's the timing of it?

Anthony N. Truesdale

Again, we're -- you're constantly refining it and pushing it. We discovered that at the end of the first quarter. We started some activities in the second quarter. We'll continue those activities in the third quarter and so forth. I believe we're headed in the right direction.

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

Got it. And the second question I want to ask you relates to real estate. And sort of just thinking about what the runway really is for the business, if you think about the fact that for the first time at least in recent memory, you completed a sizable acquisition to facilitate growth. You've taken the size of the store prototype down by 15% or so. I just want to make sure that -- I want to ascertain whether we should be drawing any kind of conclusions about capacity and about the growth, the unit growth trajectory of the business based on those positions.

Anthony N. Truesdale

Yes. Matt, I wouldn't draw those conclusions. I mean, the Super Sups was an opportunity that made sense for the business, helped really between the 2 businesses, and the models are very similar to each other if you've been in them. So that made good sense, and then the size of the store is really a prudent thing for you to do. As you know, any retailer that gets further down their development stage -- a lot of retailers have built stores that are too big. And building a smaller store is actually the prudent thing to do given that for year 1, sales will be a little lighter as you get to the end of your store portfolio.

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

And so is that a function at all of the availability of sites that are slightly smaller? Or is that unrelated?

Anthony N. Truesdale

No, that's not related at all.

Operator

And our next question comes from Mark Miller of William Blair.

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

Can you create a bridge for us from the current performance of the business with low to mid-single-digit comps to your long-term plan of mid-single-digit? So do you need more inflation or do you need more traffic to be there? And then looks their current progression is about flat margin. If I'm understanding, underlying performance x the DC and x Super Supplements. And so also, a walk from that to, I think, you want approximately 50 basis points of margin improvement. Is it all in the comps? Or does something also need to happen on the expense side relative to where the business is currently tracking?

Anthony N. Truesdale

Well, I would tell you, I'll take more transactions any day, and I'll take a little bit of inflation every year as a retailer. So those 2 things I'd take in combination in -- if they were available and appropriate. Second part of the question?

Brenda M. Galgano

Yes. So well, with respect to comps, too, and as we think about the comps we're running at today and sort of what, say, more normalized comps, we said that typically, inflation runs at 1% to 2%. We're flat today. So if you take that midpoint of 1.5% at a normalized inflation rate, you would see 1.5% higher in comps. And then I also mentioned during my piece of the prepared remarks that weight management last year was -- the growth was very, very high. And if you look at the contribution to comps for weight management last year and you compare that to this year, that's about 2%. So once you get to our normalized growth rate for weight management, I do expect to see that there'll be some improvement in the comp. So that's how I get, I mean, in my mind long term more of that mid-single-digit normalized run rate. With respect to margin improvement, couple of things. One is occupancy leverage. As I've said in the past, typically, we start to lever occupancy when our comps get to around 3%. And at the -- that mid-single-digit comp rate, call it 5%, we would generally see occupancy leverage of around 30 basis points. And then on the SG&A side, we would expect to see leverage in SG&A again when we get to that mid-single-digit comp rate, primarily due to corporate cost. If you look at our SG&A performance in the second quarter, we had a drag of 30 basis points from Super Supplements. That was offset by around 10 basis points of leverage in other areas, and that's at a 2.3% comp.

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

Yes, retail analysts, we're very simple-minded around the comp, but it does appear in this case that that's the key driver to get into your long-term growth. And then one other question, on new product development. I might have missed it, but I didn't hear any commentary on that. I mean, is it doing okay? Or might I infer from that, that it's been a little slower than you hoped?

Anthony N. Truesdale

No. Actually, we've had probably the best half of the year that we've had in a long time with the products that we've launched. We've launched 33 products in the first half of the year, which is the most we've launched in a really long time. And those -- all of those products are performing at or above expectations. So we've actually got some good momentum in that part of the business.

Operator

Our next question comes from Kate Wendt of Wells Fargo Securities.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

First question is given that your direct business is holding up a little stronger, do you think you need to replicate some of the strategies that you've been using online, such as lower prices or promotion to help drive the retail business?

Anthony N. Truesdale

That's a good question, Kate. I mean, we continue to analyze what we're doing on the web emails against the retail emails and trying to figure out which ones work with the retail customers to drive the retail customers to the store. But we continue to look at those and test those along the way when we see that divergence in performance.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay, got it. And then just a quick one following up on Chris' question from earlier. Just trying to clarify Brenda on the mature stores, I'm obviously glad to hear they're comping positive. But I'm just trying to reconcile how that -- how the math works there when you're still doing the maturity benefits from newer stores ramping up. Historically, that's been at least in the 3% range in terms of the benefit, and it sounds like that's maybe even stronger right now. So if you could just maybe talk about that and help us understand the dynamics there.

Brenda M. Galgano

Sure. So last year, when I talk about the mature stores comp, I said they were -- given the strong comps from last year, the mature stores were more in the mid-single digits. And I've talked that in a normalized year, we do see mature stores comping positively but in that lower. So even with the 2.3%, they are comping positively, but I did say slightly positive. So although it -- overall, they are positive, they are on the very low end of that positive.

Operator

Our next question comes from Peter Benedict of Robert W. Baird.

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

A little longer-term question maybe. A lot's happening in the business this year, obviously, you guys with the DC, the Super Supplements acquisition. Tony, help us just think about the payoffs here as we have moved into 2014 and beyond. Where should we expect to see the greatest benefits across the P&L from everything you're doing this year? And is 2014 the year that we should be seeing it or should we be thinking longer than that?

Anthony N. Truesdale

Well, I think you're going to -- I think it's an incremental thing. You're going some of it in '14. You're going to see some of it in '15 and beyond, right? So you got the DC that takes 18 months to ramp up the productivity, and we've been very, very pleased with the supply chain's ability to execute against this really, really big project. So far they've done an amazing job. And we're a couple of weeks away from starting to really ramp up the outbound side of it. So I feel very good long term. We're going to be in a position that we can start to utilize that distribution center. Today, we're at a capacity where we can't add any categories to our web business. So if we wanted to add new categories to our web business to facilitate sales growth, we don't have the capacity in the current distribution network. So that allows us to expand the long tail and expand some things that we're not doing today. It allows us to leverage the Super Supplement website asset that we've purchased. I mean, so we've got some assets now that starting from scratch, would've been really difficult that we can utilize in different ways in the marketplace. And I feel pretty good that we're in the right place. And we've also -- we've ramped up our private label growth, and we're going to see some benefits from that. I think this is the first year that we've really performed well. I expect next year to be even better and the years after that to be better than that. So I'm pretty comfortable with the future.

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

That's great. And in terms of Super Supplements, I mean, any way to frame some of the payoffs you're expecting from that as we look out to '14?

Anthony N. Truesdale

Well, I think Brenda started to give you some of the synergies. We just completed the infrastructure. We're just starting to see some data. I can tell you that the merchants have added 5 SKUs to the Vitamin Shoppe mix that they were selling, that we hadn't picked up on. They were really good sellers. They're adding a couple of things they've picked up from us. So I think net-net, we're going to like the long-term answer as we work together as a team to figure out what's the right mix for both of us.

Brenda M. Galgano

Yes. When I talked about the synergies, that was for SG&A. That does not include volume synergies. So we will expect some improvement in their gross margins as they benefit from our scale.

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

Okay, great. And then just one follow-up. I guess, Brenda, can you help us with the gross margin components in the second quarter, just how it flowed across product margin, occupancy and warehouse distribution?

Brenda M. Galgano

Sure. So looking at the base Vitamin Shoppe business, product margins were flat, occupancy was flat, and warehouse and transportation was all flat. So base Vitamin Shoppe business was flat, and the decline in gross margins was driven by the addition of the Super Supplements business.

Operator

[Operator Instructions] We'll take our next question from Damian Witkowski of Gabelli & Company.

Damian Witkowski - Gabelli & Company, Inc.

Is there a way to look at your IDs, excluding the weight management's head from last year?

Brenda M. Galgano

So -- what were last year's...

Damian Witkowski - Gabelli & Company, Inc.

I guess, I'm not sure how big...

Brenda M. Galgano

I think...

Damian Witkowski - Gabelli & Company, Inc.

Weight management has. I think it's probably 10%, maybe more of your total sales. But if you look at -- that's obviously performed. That was going up against the tough comps. So it seems like it performed worse. But if you exclude that, how did the rest of the business to?

Brenda M. Galgano

So that was worth around 2%.

Damian Witkowski - Gabelli & Company, Inc.

Okay. And are you actually -- are you able to -- the more casual user, I guess, that sort of isn't shopping as often or as much as you would like them to, do you have a way of knowing whether they're just dropping out of the category altogether or are they going somewhere else?

Anthony N. Truesdale

You don't have visibility from our database. We'd have to do a body of research. A defector survey would probably get you to that level of detail, and that's a long -- kind of a long-tail study that you'd have to do to get to that level of detail. We don't have anything internally that would give us that.

Damian Witkowski - Gabelli & Company, Inc.

But would it be fair to say that they're probably more value-oriented than anyone else, the rest of your consumers?

Anthony N. Truesdale

Yes. I don't know whether I would say that. I'm not proud to make that statement. Sometimes, low-value customers is really a convenience play versus a value play. Some of your other customer segments can be more value-orientated.

Damian Witkowski - Gabelli & Company, Inc.

And then just lastly, are you seeing anything from -- there's been some negative articles on omega 3s and even others. Do you think any of it has affected your business?

Anthony N. Truesdale

I mean, certainly, any -- I've talked about this many times in the past whenever we get a negative article on supplements. It does have an impact on that particular category when you see a negative article for a period of time, and then the category tends to bounce back.

Operator

We'll take our next question from Mark Wiltamuth of Jefferies.

Mark Wiltamuth

Brenda, how many stores are in that smaller store prototype that are giving you the more volatile performance?

Brenda M. Galgano

I'm not sure that the small store prototype that we've said is giving us more volatile performance. But we do have 3 small market stores at this point. Overall, it's not just the small market stores that are bringing down the higher average store size overall. Even our traditional format stores are much smaller than they were a few years ago.

Mark Wiltamuth

So it's really just that trend towards opening a smaller prototype in general, not so much a class of small stores that's causing issue?

Anthony N. Truesdale

Yes. I think what we've done is we've created a better prototype that allows us to merchandise the same 8,000 SKUs in 3,000 square feet and 2,500 square feet, which allows us to take the rent number down, the capital down. So theoretically, you're going equal to or better returns long term by doing that if you can drive the sales volume through that smaller box.

Mark Wiltamuth

Okay. And on the light spenders, who have been a little soft on the sales performance, are there certain categories where they are more present?

Anthony N. Truesdale

No, I'd say it's pretty much across the board.

Mark Wiltamuth

Okay. And switching over to your e-commerce side where you did have some good comp performance, just give us an update on some of your newer projects there and things you're doing to kind of drive some of that performance.

Anthony N. Truesdale

Yes. I think one of the big things that I talked about in the script is we brought the mobile website in-house, and we're managing it in-house. We've totally revamped it. We're seeing a dramatic change in traffic and in conversion in that particular business by just starting to figure out the differences between what a customer that is on a phone wants and what a customer on a tablet wants and how do you do that differently. So that's been a huge win. We've done a lot of different small projects. Every month, we do a release on the web that has individual tactical projects that improve the performance of the business along the way. We've hired 2 or 3 new team members within the team, and we keep investing in the human capital on that side of the business. So we're pretty pleased with where we're going. We've got some new people on the emails side. So overall, I think we've done a lot of different things that have improved that business.

Mark Wiltamuth

Okay. And any change to the tenor on the e-commerce side on the competition? And -- has there been any change out there on how competitive it is?

Anthony N. Truesdale

I think it's been similar to the way it's been through the last 3 quarters or so.

Operator

We'll take our next question from Kurt Frederick of Wedbush Securities.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

First one, on the store closures that have taken place in the last couple of quarters, is that the Super Supplements/Vitamin Shoppe overlap?

Brenda M. Galgano

No. Those are primarily stores where the leases expired, and we were able to open stores in similar locations but -- in similar areas but better locations.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Okay. And then I think at a time of the acquisition, you talked about the inventory. We're going to take out a lot of that working capital. Is that why you're talking about -- mentioning the back office has done? Is that essentially complete now?

Brenda M. Galgano

First...

Anthony N. Truesdale

Well, you're going to see on the inventory side, you're going to see because you got the new DC in there, right? So we just turned on Super Supplements onto our replenishment system just recently. That will build inventory before it will take it down because they will go after the sale first, and then it will take the inventory, the unproductive inventory down over time. What's going to happen on the new DC is you're going to have this build of inbound, so you're going to have this bubble of inventory that, by the end of the year, we believe will be back where we thought we would be. So you've got 2 different dynamics going on in inventory. I wouldn't expect leverage on inventory until you get into the first quarter of next year.

Operator

And with no further questions in queue, I would like to turn the conference back to Tony Truesdale for any additional or closing remarks.

Anthony N. Truesdale

Well, thanks for joining me this morning, and I look forward to updating you on our next call. Talk to you soon.

Operator

This does conclude today's conference. We appreciate everyone's participation.

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