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Vitacost.com, Inc. (NASDAQ:VITC)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 am ET

Executives

Kathleen Reed - Director of Investor Relations

Jeffrey J. Horowitz - CEO

Brian D. Helman - CFO

Analysts

Operator

Greetings, and welcome to the Vitacost First Quarter 2014 Earnings Conference Call. At this time, all the participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Kathy Reed, Director of Investor Relations for Vitacost. Thank you, Ms. Reed. You may begin.

Kathleen Reed

Good morning, ladies and gentlemen, and welcome to Vitacost.com's earnings call to discuss our results for the first quarter ended March 31, 2014. On the call with me today are Jeff Horowitz, our Chief Executive Officer; and Brian Helman, our Chief Financial Officer.

By now, everyone should have access to the financial release we issued this morning, which provides details on the Company’s operating performance. If you have not received the release, it is available on our Investor Relations Web-site at investor.vitacost.com. We have also provided an updated table of our e-commerce metrics, which can also be found on the home page of our Investor Relations Web-site, which now includes data for the first quarter of 2014. This table shows e-commerce metrics from our core Vitacost.com site and including sales through partner channels. Further detail on our financial results can be found in today's press release and in our first quarter 2014 10-Q.

Before we begin, we would like to remind everyone that today’s remarks contain forward-looking statements. Any statements that are not statements of historical fact should be considered to be forward-looking statements. Forward-looking statements which includes statements regarding the Company’s growth prospects, product introduction plans and mix, customer acquisition strategy, expectations regarding the growth of the Company’s proprietary products and expectations regarding technological improvements involve known and unknown risks and uncertainties which may cause the Company’s actual results in current or future periods to differ materially from those anticipated or projected herein. These risks are more fully described in the Company’s filings with the Securities and Exchange Commission including the Company’s Form 10-K for the year ended December 31, 2013, and in the Company’s subsequent filings with the Securities and Exchange Commission.

On today’s call, Jeff will provide an overview of our first quarter performance and provide an update on our television ad campaign. Brian will review our first quarter results with you in more detail, and we will then open the call for your questions.

And with that, I would like to turn the call over to the Company’s Chief Executive Officer, Jeff Horowitz.

Jeffrey J. Horowitz

Thank you, Kathy. 2014 is off to a solid start as we posted record sales and shipments this quarter and early results from our TV advertising test are encouraging. We crossed the $100 million mark for the first time in the Company's history as we posted revenue of $105 million and shipped over 1.5 million orders. We ended the quarter with 2.3 million active customers, up 8% year-over-year.

Now let me provide you with some comments on our product categories. Our natural and organic food business continues to be our fastest growing category with first quarter sales up 42% year-over-year at our Vitacost Web-site. We added nearly 900 food SKUs during this quarter and now carry close to 11,000 healthy food items on our site.

Sales of food accounted for 50% of sales, up 3 percentage points from the first quarter of 2013. Sales of sports products increased 16% year-over-year, beauty was up 12%, and our smaller categories, primarily pet, baby and household, increased 4% year-over-year. Collectively, sales of non-VMHS products accounted for 42% of the sales on our Vitacost.com Web-site, up 4 percentage points year-over-year due to successful product diversification efforts.

Sales for VMHS were up 1% year-over-year. VMHS remains our most competitive category and we were aggressive this quarter in order to maintain market share. As a result, gross margin in VMHS was down approximately 1 percentage point from the first quarter of last year. However, we realized significant gross margin improvement in our other core categories of beauty, food and sports. Although sales of VMHS products was softer this quarter, as one of the largest online companies in this space, we believe we are well-positioned over the longer term to capitalize on the channel shift as consumers increasingly move their purchasing online.

Let me now discuss our proprietary products. Sales of proprietary products increased 6% year-over-year in the first quarter of 2014 to a record $20.5 million. Over the past year, we have emphasized launching of proprietary products into non-VMHS categories, and during the quarter introduced a total of 32 SKUs including many new food items. Our new SKUs have performed well with the sales of non-VMHS proprietary products, up 75% year-over-year during the quarter on our Vitacost.com Web-site.

Similar to total Company VMHS sales, proprietary VMHS growth was negatively impacted by heightened competition, with sales flat in the quarter. Going forward, we'll be accelerating the pace of new product launches beginning in the second quarter by expanding our proprietary beauty and pet lines, launching new personal care, baby products and introducing many new proprietary food SKUs including our line of gluten free flours and mixes, just to name a few. Proprietary remains an important part of our business and we'll be launching new proprietary SKUs across all our major categories throughout the year.

Our mobile business continues to perform well during the first quarter, increasing 57% year-over-year to 13% of total Company sales, up 4 percentage points from the first quarter of 2013. During the first quarter, we released a new version of our mobile site and in June we're releasing new versions of our mobile app. Enhancements include improving the ease of mobile shopping, such as improved checkout experience, customer service capabilities, enhanced product service, and the ability to market specifically to the mobile community.

International sales increased 11% year-over-year in the first quarter, to 7% of total Company sales. We are focused in 2014 on improving the customer experience, primarily through opting lower-cost expedited shipping options in our key markets. We had already implemented this strategy in Canada and have seen positive results. In addition, we have seen strong results as of late from some small international markets such as Russia, Japan, Israel and South Korea and we'll be increasing our online marketing efforts in these countries as well.

Now, let me provide you with some initial comments regarding our TV test which began in late February to increase our brand and Company awareness and target a wider group of consumers to shop on our site. We ran 30 and 60-second national spots across multiple channels for approximately six weeks during the first quarter, and hope many of you had the chance to see our commercial either live on TV or on YouTube.

Although still early, we are encouraged by initial results and believe television presents a long-term opportunity to attract a larger base of healthy living shoppers that are unfamiliar with our attractive value proposition. As we stated on our last call, we are closely monitoring performance and adjusting our campaign accordingly. We spent approximately $400,000 in the first quarter and are budgeting TV expense of approximately $450,000 to $550,000 in the second quarter.

Finally, I want to highlight some of our Web enhancements we evolved this quarter as we're continuing to strive to deliver a superior customer experience. First, we launched a new tool called Promo Pocket which stores all of the promotions a customer is entitled to use in one easy to find place. This includes coupons personalized to a specific customer and those that everyone can use, thus creating a tailored experience unique for the user and also having to simplify the many great deals offered on Vitacost.com Web-site.

Next, we launched a new recipe microsite which includes more than 500 recipes, offering customers inventive ways to use the healthy foods we sell in their daily cooking. The Recipe Center also offers an 'Add to Cart' feature which allows customers to purchase ingredients featured in her selected recipe with one easy click.

Finally, we launched a single page checkout in early March, have seen a measurable decline in the rate of cart abandonment. This feature streamlines the checkout process and enables customers to complete the order process in just a few seconds. We are pleased with the enhancements we have made to our Web-site, with many more to come throughout the year.

Now, I would like to turn the call over to Brian to provide more details on our first quarter results.

Brian D. Helman

Thanks Jeff. In the first quarter of 2014, total net sales increased 7% over last year to $104.8 million, a new quarterly record, as third-party product sales grew 8% and proprietary product sales grew 6% in the quarter. Revenue from freight decreased 5% year-over-year due to an increase in orders that qualified for free shipping. Amazon accounted for just under 4% of total Company sales.

In the first quarter, we shipped 1.3 million orders from our Vitacost.com Web-site, up 5% over last year. Average order value was approximately $75.55, up 2% year-over-year. Product AOV was up 3% year-over-year, partially offset by the decline in shipping revenue as I mentioned earlier. We added 266,000 new customers to our Vitacost.com Web-site, down 2% year-over-year, and we ended the quarter with 1.8 million active customers on Vitacost.com which was up 7% year-over-year.

As we discussed on our prior call, we continue to face tough comparisons this quarter as we modified our promotional strategy in the second half of last year to bring in higher quality customers. The first quarter of 2013 was an especially tough comparison as we brought in the highest number of new customers in the Company's history due to numerous site-wide sales in the year ago quarter. Unfortunately, we found that these customers were highly motivated by promotions and did not repeat as well as other customer cohorts.

Moving on to gross profit, first quarter 2014 gross profit was $23.1 million, a 2% increase over last year. Gross margin in the quarter was 22.1%, down 1 percentage point year-over-year, due to lower VMHS product margins which Jeff discussed earlier, combined with a reduction in our freight margin. As I mentioned previously, we saw an increase in the percentage of orders that qualified for free shipping versus the year ago period.

Now on to fulfillment. In the first quarter of 2014, fulfillment expense was 8.8% of sales compared to 9% of sales in the first quarter of 2013, excluding severance paid to our former Chief Operating Officer in the year ago period. As we have stated in the past, included in fulfillment expense are fees related to our freight savings program which is set to expire at the end of the second quarter. Excluding these fees, fulfillment expense was 8.2% of sales for the first quarter of 2014, flat year-over-year. Fulfillment cost per order, again excluding fees related to our freight savings program, was down 1% year-over-year as productivity improvements were partially offset by bad weather negatively impacting our North Carolina operations during March.

Next, sales and marketing expense was 8.3% of sales, down from 8.6% of sales in the first quarter of 2013. Variable customer acquisition costs, excluding Amazon related fees, increased 13% year-over-year on a per customer basis due to the launch of our television advertising test and increased marketing through Google Product Listing Ads. Excluding the investment in TV, variable customer acquisition costs increased 7% year-over-year.

Moving on, G&A expense was 8.7% of sales compared to 8.5% of sales in the first quarter of 2013. The increase was primarily due to greater professional and legal fees as well as additional IT expenses.

Turning to our bottom line performance; adjusted EBITDA for the first quarter of 2014 was a loss of $700,000 after adding back approximately $700,000 in fees related to our freight savings program, compared to a positive $300,000 in the first quarter of 2013. Net loss for the first quarter of 2014 was $3.9 million compared to a net loss of $2.9 million in the prior year. This translates to a loss of $0.11 per share for the current quarter compared to a loss of $0.09 per share in the first quarter of 2013.

Now moving on to the balance sheet; we ended the first quarter with cash and cash equivalents of $29.1 million, a $4.3 million increase from December 31. Inventory decreased $1.5 million from December 31, as we placed greater focus on increasing our inventory turns. Third-party inventory turned 12.5x, up from 11.7x in the fourth quarter of 2013, and proprietary inventory turns were 3.7x, up from 2.8x in the fourth quarter of last year. Total inventory turns were 9x in the first quarter of 2014 compared to 7.5x in the fourth quarter of 2013. Total CapEx in the quarter was $655,000, with approximately $100,000 spent on our fulfillment centers and the balance spent on IT and software development.

That concludes our prepared remarks. Now we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Ms. Reed, I'd like to turn the program back over to you for closing comments please.

Kathleen Reed

Thank you everyone for joining us this morning and we look forward to speaking with you again on our next quarter call. Thanks.

Operator

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.

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