Vitamin Shoppe, Inc. (NYSE:VSI)
Q2 2016 Earnings Conference Call
August 3, 2016 8:30 AM ET
Daniel Lamadrid – Chief Accounting Officer
Colin Watts – Chief Executive Officer
Brenda Galgano – Chief Financial Officer
Peter Benedict – Robert Baird
Sean Naughton – Piper Jaffray
Joe Edelstein – Stephens
Stephen Tanal – Goldman Sachs
Phil Terpolilli – Wedbush
Simeon Gutman – Morgan Stanley
Shane Higgins – Deutsche Bank
Mark Wiltamuth – Jefferies
Chris Horvers – JPMorgan
Good day, everyone and welcome to the Vitamin Shoppe's 2016 Second Quarter Earnings Conference Call. Just to reminder, today's conference is being recorded. For opening remarks and introductions, I'll turn the conference over to the Chief Accounting Officer, Mr. Dan Lamadrid. Dan, please go ahead.
Thank you and good morning, everyone. Earlier this morning, we released financial results for second quarter 2016. A copy of our earnings release and a reporting of this call will be available on our website at vitaminshoppe.com in the Investor Relations section. Making presentations today will be Colin Watts, Chief Executive Officer; and Brenda Galgano, Chief Financial Officer.
Before we begin, I need to remind listeners that remarks made by management during the course of this call may contain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 about the Company's future results, plans, guidance, strategies and prospects. These are subject to risk and uncertainties that could cause the actual results and the implementation of the Company's plan to differ materially. The words believe, expect, plan, intend, estimate or anticipate and similar expressions as well as future or conditional words such as should, would and could identify forward-looking statements.
You should not place undue reliance on these forward-looking statements and 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. During this call we may refer to non-GAAP financial measures. We provided a reconciliation for these numbers in tables four and five in the press release which was issued earlier this morning and can be found on our website in the Investor Relations section.
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 direct bearing on our operating results, our performance and our financial condition.
I will now turn over the call to Colin.
Thank you, Dan. Good morning, everyone and thank you for joining us. On the call today, I'll start with the highlights of our performance over the past quarter and then provide an update on some of our reinvention initiatives. Brenda will then discuss the quarter's financials in more detail and provide an update and guidance. As always, we will then open the call to your questions.
Although we report a positive comps in the quarter, following two consecutive quarters of negative comps, overall Q2 was another challenging quarter and the third quarter is shaping up the same. We are generally pleased by the early positive impact of our new reinvention-based initiatives on our business results but we are continuing to face significant sector headwinds.
Let me give a high-level overview of the drivers of our performance in the quarter and then I'll dive into each driver in more detail.
In a nutshell, our performance for the second quarter can be characterized by one, a challenging retail competitive environment especially for the sports nutrition and weight management categories, contrasted by the underlying strength in our larger core VMS category.
Two, our promotional response to the competitive environment both online and at retail which will driving top line growth had a negative impact on our product margins. I want to emphasize that we are not happy with the returns on these promotions and plan to return to a more normalized promotional strategy going forward.
Three, positive contribution from our early reinvention initiatives including our new loyalty program continued growth in our private brand portfolio, improved to store level engagement from our health enthusiasts and another quarter of improved customer acquisition and first customer repeat business driven in large part by our digital initiatives.
Four, a negative drag to our gross margins due to continued turnaround challenges and Nutri-Force, particularly around their third-party manufacturing business and five, a relentless focus on improving our overall cost profile and product margins particularly within cost of goods sold and productivity which has been guided by support from outside consultants and which we estimate will meaningfully impact our cost reduction goals in 2017. Brenda will discuss more about this in her presentation.
So with that backdrop of the major drivers of Q2, let me get more specific about the each driver. During the second quarter competitive environment is more promotional than we had anticipated. Our biggest specialty competitor increase promotional activity both online and at retail significantly compared to the level of 2015 highlighted by almost three times the number of although off channel promotional days.
In addition we saw several online competitors also step up to promotional activity over the past couple of quarters. This increase level of activity is particularly evident in the sport nutrition category. Our top line financial performance improved versus Q1 with total comps a positive 1.6% compared to our Q1 comps of negative 1.9%. Our Q2 comps were comprised of retail comp a positive 0.8% and e- commerce, which accounts for about 10% of our sales which increased 9.4% in the quarter.
Comps in the quarter were driven partially by our increase in overall promotional activity in an attempt to increase customer traffic and capture a greater sale of customer spending which in turn had a negative impact on our overall margins.
Our comps also partially reflected the benefit of our new initiatives including the new loyalty program and improve digital and customer acquisition activity. We've carefully analyzed the impact of the more broad based all product promo activity that we introduced in the quarter and we have concluded that for our business model, these types of promotions have not driven the right balance of growth and profitability that we are seeking.
As a result, we are planning our upcoming promotional activity in a more targeted fashion, promoting our private brand portfolio and focusing on vendor funded promotional programs for our third-party brands.
While the positive comp in Q2 was encouraging, day today results are still experiencing a lot of variability based on the category headwinds I discussed earlier. As a result of these headwinds and the commitment to return to a more disciplined pricing and promotional strategy, we are revising our strategy for our comps to be flat to slightly negative for the full-year.
Now I'd like to discuss our business product category perspective. Let's start with positives. The majority of our Vitamin Shoppe revenues and profits art driven by our core BMS categories including multivitamins, single letter vitamins, minerals, botanicals, probiotics, digestive care and homeopathy.
Overall, the BMS category has rebounded and delivered positive comps in the quarter. Product margins have been healthy and we are seeing good results from several new product lines introduced by our vendor partners in the past year.
As a mentioned earlier, the sports nutrition category continues to face challenges particularly in the sports protein segment. To offset this we are one looking more closely with several major vendor partners in this category. Two making changes to our assortment including greater emphasis on private brands. And three adjusting our overall marketing strategies.
Importantly for the first time in many quarters, we are seeing indications of an increase in innovation particularly in the pre and post workout categories that we think will benefit our customers in the coming months.
We'll encouraging it is still early and we are forecasting the sports nutrition category to be a net drag for the remainder of the year. Our on the go nutrition category also remained soft primarily due to weaker sales from the leading brand in the category.
However, we have seen strong double-digit growth in products from several new entrance in the past year and the level of innovation in this category expected in the next year has increased.
Finally, weight management continues to be a drag on our comps as customers continue to make fundamental changes to the way they are managing their weight as we have discuss previously.
Despite broader market challenges, we are encouraged with the early results from the initiatives linked to our reinvention plan which are having a positive impact on the business. When we began development of our reinvention program over a year ago, we undertook deep customer research in order to develop a unique plan that first meets today's customer requirements in the wellness market, as well as builds on our historical strengths to further differentiate us from the competition. Let me briefly discuss a few of the key initiatives launched thus far.
Let's start with our loyalty program. In April, we kicked-off the new program with the first mailing of our quarterly redemption certificates. We are encouraged the customer response with certificate redemption rates and lift comps ahead of the pilot program we ran in 2015.
We're also continuing to look for ways to leverage our loyalty program to be more personalized as well as touch our best customers more often and increase shopping frequency.
A good example of utilizing the new program for stronger relationship building with our customers came at the end of the quarter when the April issued certificates were nearing expiration. At that time a store health enthusiasts call their local customers reminding them that they had a coupon that was about to expire and to come by the store.
We saw an increase in redemption as well as strong customer satisfaction from this effort, so we plan to repeat this activity going forward. We also continue to be pleased with our private brands business. Growth in Q2 accelerated to 11% compared to 7% in first quarter. With the solid performance across the private brand portfolio, penetration increased over 100 basis points from same period in the prior-year to 22.5%, exceeding our expectations.
The improved sales performance was due to several factors, including better execution behind our annual April private brand promotion, increased marketing, and health enthusiasts focus behind the brands as well as an improved in stock position from Nutri-Force of key private brand SKUs.
We are pleased with the performance of our newly introduced integrated marketing approach behind our Q2 new Private Brand product launches. We successfully launched two new innovative products, Next Step AppeFIT anybody fit ready to drink leverage.
I would also like to highlight that in Q2 our Vitamin Shoppe flagship private brand saw a strongest growth in over three years. Our digital team has been leading the charge to build a relentless focus on our omnichannel customer as well as improving our overall repeat business within our 6 million customer database. We've rolled out new capabilities and programs in digital, focused on converting our customer base more aggressively to shop us on an omnichannel basis.
I will remind you that omnichannel customers defined as those who shop us both online and at retail during the year are our most valuable customers.
While they currently represent only 4% of our overall customer base, they are four times more valuable than an online customer, online omni customer and 2.6 more valued than a retail omni customer. While still early, we continue to improve our customer acquisition rate was solid double-digit growth for Q2, building our momentum from Q1 and driven partly by improved mobile conversions trends.
A good example of initiatives geared toward building the omnichannel customer base is our recently launched BOPUS capability. BOPUS buy online pick up in store as you will recall was launched in Q1 and is now available across a change and with all store level SKUs available. While still early, BOPUS accounted for 7.9% of Vitamin Shoppe.com orders in the second quarter. And the average basket sizes trading around 10% higher than the typical transaction placed in store.
Another good example of driving the omnichannel experience is our new health enthusiasts' expert platform on tablet computers that we introduced in the pilot testing in July. This new capability will put a significant amount of customer and product knowledge rate at the fingertips of our health enthusiasts helping to power up their level expertise and continue to build on making them the most trusted and valuable resource for wellness customers in all of retail.
The platform is flexible and our initial version deliver several valuable benefits including unique customer profile information, purchase history for both retail and online, loyalty sign-up endpoints progress data, full relevant and product knowledge for all SKUs and categories across our entire retail store.
And all of this is delivered in a simple easy to use tablet-based computer platform that our health enthusiasts can bring directly to the shelf in order to assist our customers. We expect that this digital platform will be expanded across our chain by early fourth quarter of this year.
Moving on to Nutri-Force, the business is in turnaround mode and now performing at a level we would like as sales were down 60% with profitability below expectations in the quarter. We expected to take a few more quarters before the turnaround is largely complete and we see a return to reliable profitable rose.
To understand the performance of the Nutri-Force business it is important to look separately at the two different components of our business our internal manufacturing performance and our external third-party manufacturing business at Nutri-Force.
On the positive side, Nutri-Force has significantly improved fill rate for our Vitamin Shoppe private brand portfolio and expected sale of products to BSI is ahead of our original expectations.
As you will recall, the vertical integration of our private brand manufacturing was the primary rationale behind the acquisition of Nutri-Force. By contrast, Nutri-Force has struggled with its third-party manufacturing business due to significant shifts to its customer base.
We have lost some business from a few of our historical customers but have been successful in attracting new customers albeit at an overall lower margin rate. Additionally, Nutri-Force has faced some challenges on the order fulfillment rate for external customers, an issue which we are currently addressing.
As we continue to transfer more of the Vitamin Shoppe production to Nutri-Force, which will take a few more quarters. We would expect less volatility and more predictability from Nutri-Force. In turn, we expect profitability at Nutri-Force to improve as we move through the balance of this year and into 2017.
Finally, we were very pleased to announce the addition Jason Reiser to our leadership team as our new Chief Operating Officer. Jason joins the Vitamin Shoppe about three weeks ago from dollar tree where he was Executive Vice President Chief Merchandising Officer.
Prior to that Jason had a variety of senior roles in merchandising operations and regulatory at Wal-Mart and Sam's Club with almost 20 years with those organizations. Jason's retail acumen and executive expense will be the perfect complement to our leadership team.
So to sum-up, while overall performance of our business in Q2 was disappointing. We are pleased with the early progress we're making with our reinvention program. We recognized that we are undertaking this transformation in a challenging and volatile market but more than ever the customer in retail environment demands that we find new and more productive ways to drive profitable growth for our business and enhance overall shareholder value.
I will now turn the call over to Brenda to take you through the financial results.
Thank you Colin and good morning everyone. Thank you for taking the time to join us. I will begin by taking you through the specifics of the quarter starting with sales, provide an update on our cost-cutting initiatives and conclude with a discussion of our guidance for the full-year.
As Colin already discussed the quarter was characterized by more intense promotional environment and increased sales volatility. Total sales rose 3.2% in the quarter as an increase in retail and direct sales were partially offset by a decline in Nutri-Force revenue.
We reported a total comp of 1.6% which was comprised of a positive 0.8% contribution from retail and an eCommerce comp of 9.4%.
The sales volatility that we've experienced in the first half of the year has continued into the third quarter, with negative comps quarter-to-date. As a result, we anticipate the third quarter total comp will be negative and comps will be flat to slightly negative for the full year as we normalized our promotional strategy.
Nutri-Force's total sales were down about 16% in the quarter, a bit worse than our expectations due to the factors that Colin has early discussed as well as the timing of intercompany sales.
Moving down the P&L, on a reported basis, our gross profit margin rate for the quarter was about 120 basis points lower than the second quarter of 2015. This was below our expectations with the direct business being particularly impacted. There were many puts and takes which I will walk you through.
Starting with product margins; we reported a decrease in project margins of approximately 70 basis points this quarter, which was a change in trend from the last few quarters. We noted on the last quarter call that we did not expect to realize the same margin improvement that we reported in the first quarter. Nevertheless, the decline was more than we had anticipated.
This year-over-year decline was mainly driven by increased promotional spend as the external promotional environment was more intense than we had anticipated as well as an increase from higher loyalty redemptions. Partially offset by favorable category mix shift and higher private brands penetration.
As Colin mentioned, we are not planning for the same level of promotions for the balance of the year. As such, we estimate that the product margin will increase for the second half of the year.
Next, during Q2, the year-over-year impact on consolidated gross margins from Nutri-Force was a decline of approximately 50 basis points. This was primarily due to changes in customer and product mix and lower sales.
Lastly, occupancy deleverage approximately 10 basis points given the lower retail sales. Partially offsetting these declines was a leverage of approximately 15 basis points from a more efficient supply chain network.
SG&A for the quarter increased approximately 3%. Included in SG&A were costs of approximately $3.4 million for the following; closing the Canadian stores, charges primarily due to lease termination and outside consulting fees associated with the cost reduction initiative.
SG&A in the second quarter of last year included certain cost totaling $4 million. Excluding these costs for both years, SG&A as a percentage of sales increased about 20 basis points primarily from deleverage and store payroll and increased advertising partially offset by a reduction in corporate cost. The reconciliation to GAAP for these items is presented in table four in our earnings press release, which coming found on our website.
SG&A in the second quarter of this year also includes a number of costs associated with the execution of our reinvention initiatives, totaling approximately $3 million. This includes expenses associated with the marketing of the new loyalty program, improvements to the store network, professional service fees and increased people resources to support our key initiatives mainly for private brands, digital, category management, and health enthusiast development.
For the full-year, we expect the additional costs associated with our reinvention strategy to be approximately $10 million of which $5 million has already been incurred in the first two quarters. This estimate is on the low-end of the $10 million to $15 million range we had originally estimated when we laid out our 2016 reinvention plan as we continue to identify opportunities to work more efficiently.
Of this annual amount of $10 million, approximately $6 million is expected to be ongoing and relates primarily to additional resources and -- in key strategic areas such as private brands, digital, and category management. As we mentioned earlier in the year, we are focused on funding our growth initiatives through cost reductions. We continue to work on initiatives to reduce cost of goods sold and SG&A cost across the organization and have engaged outside consultants including AlixPartners to help identify and drive this in a number of barriers.
Based on were completed to date we expect additional cost reductions of at least $10 million annualized. A portion of the savings is expected to be realized later this year while the majority is expected to be realized in 2017. This $10 million is in addition to savings we have already identified resulting in a cumulative $22.5 million in analyzed cost savings. We continue to pursue additional opportunities and plan to update you as we progressed through the year.
Adjusted operating income in the second quarter was $24.1 million compared to an adjusted $27.5 million in the same period last year with margins of 7.2% in the second quarter of 2016 compared to 8.5% in the same period last year.
We reported interest expense in the quarter of $2.4 million reflecting the cash and non-cash charges for the December 2015 convertible debt transaction as well as interest from our credit facility. The tax rate was 43.2% compared to 39.1% in the same period last year.
The higher rate largely reflects the non-tax deductible portion related to the closure of the Canadian stores. The tax rate is expected to be closer to the prior year's rate going forward.
Now a few comments about cash flow and balance sheet. Cash flow from operating activities was $55 million for the first six month period of 2016, enabling us to fund our CapEx with internally generated funds. Capital expenditures were $9.3 million in the quarter and $21 million for the six-month period. We opened nine stores in the quarter and 18 year-to-date.
Overall sales performance of the 18 stores opened this year are ahead of our pro-forma expectations. Additionally, newer stores continue to mature at the historical waterfall team.
Given the changes, we'll be testing new stores to improve the customer experience. We have slowed our rate of new store growth this year with approximately 30 new stores planned. Although we are not prepared to provide specific guidance for next year is likely we will further reduce our rate of new store growth as we deployed more capital to remodel and other high return investments.
Our balance sheet continues to be solid providing the financial resources to continue to fund our growth initiatives as well as buyback shares. During the quarter, we repurchased 305,000 shares for a total cost of $8.7 million. These were completed via open market purchases.
There is a balance of approximately $45 million from the three programs totaling $300 million of authorized by the board over the past two years. As we remain keenly focused on driving shareholder value we will continue to evaluate capital allocation alternatives consistent with what we've done in the recent past.
Before opening the call for questions, I will provide a quick overview of our guidance. As reminder 2016 is a 53 week year.
Total comp sales are expected to be flat to slightly negative for the year. Adjusted earnings per share are expected to be in the range of $2.10 to $2.30 for the year. This reflects the lower second quarter results and assumes ongoing sales volatility.
On a GAAP basis, EPS is expected to be in the range of $1.83 to $2.03. And as reminder, a reconciliation between adjusted and GAAP EPS can be found in table five in our earnings press release issued earlier this morning.
We plan to open approximately 30 new stores, and plan capital expenditures of approximately $40 million, which are targeted at new stores, supply chain, digital and other IT investments.
This ends our prepared remarks. We'd be happy to take your questions now. Operator, please open the line for questions.
Thank you, Brenda. [Operator Instructions] And we'll go first to Peter Benedict with Robert Baird.
Hi, guys. Thanks for taking the questions. I'll just ask one on Nutri-Force. Just trying to understand, it sounds like a case of bringing in VSI product and how's is going well. Just a kind of what you did on where you think that can be a year or two from now. Are you still thinking $40 million, $45 million the business there? And then on the gross margins for Nutri-Force obviously down a bunch in this quarter, how are we thinking about the gross margin profile of that business as we look to the back half of this year and into next year? Where do you think that stabilize? Thank you.
Okay. Good morning, Peter. I will take that question. With respect to where we think Nutri-Force can go, at this point Nutri-Force is supplying approximately 30% to 35% of our private brand business. And we had estimated that --originally that we would be producing 40% or plus.
As we look at the business today we think there is opportunity beyond that. Certainly I would expect that we should be able to produce at least 50%, and potentially more. We will continue to monitor that and update you as time goes on. With respect to gross margin impact, we continue to believe that over the long-term, Nutri-Force will be accretive to gross margin. Given the lower third-party sales, there are many items within gross margins where we have lost leverage and we actually delivered.
As we continue to grow that business and we continue to transition more to the Vitamin Shoppe, we do expect that it will be accretive, for the back half of the year. I do expect we will continue to have some pressure but not to the same degree as in the second quarter.
Okay. That's helpful. And then if I have one follow-up and just a housekeeping item, looks like G&A was down sequentially Q2 versus Q1 anything unusual in there, or if the $9.6 million is a new run rate quarterly for G&A. Thank you.
Yeah. I think it's really timing at certain assets roll off the schedule and others get out it. We are launching currently our new direct to consumer functionality within the New DC. We recently launched our new warehouse management system in the Virginia DC. So those will get added into the depreciation going forward. So we would expect a little bit of a stepped up rate of depreciation going forward.
Okay. Thanks so much Brenda.
We go next to Sean Naughton with Piper Jaffray.
Yes. Good morning.
Good morning. Just a clarification on the guidance, just wondered just kind to get some better clarification there and realizing the 53rd week year we gear can you just give us an idea of how much you think that the extra week is going to add overall in Q4? And then maybe as well just give us an idea of what you're putting in there for the average share count for 2016 just given the fact that guys have been pretty aggressive on buybacks?
Yeah. Sure. So with respect to the 53rd week, we estimate that that contributes approximately $0.07 to EPS. And on share buyback, at the end of the third quarter, we had $24 million shares -- 24 million shares as we look at the remainder of the year we may be purchasing up to another 2% of shares is outstanding but if we somewhere in that 24 million to maybe slightly less.
Okay. And that's kind of for the full year what you are thinking about on average.
Yeah, for the remainder of the year.
Yeah, got it. Now that makes sense. And then just and in terms of the segment margin, you guys obviously provide some good detail on retail versus direct, it looks like direct took a pretty big hit. Just could you help us think through and I know you want to be a little less promotional in the back half but what is the right type of margin to think about in that direct business and do you feel like you need to makes more investments in that direct business to remain competitive? Or can you get back kind of the historical average margin in that business? Thanks.
I think that certainly yes, that segment was particularly impacted by our more promotional activity. As Colin noted, the external environment was particularly promotional in the e-commerce business.
As we look out where we think the margins will go overtime, I would say that we should expect to see at least a 200 basis point improvement. Having said that, I think it's also important to understand that overtime two segments between retail and direct really get more blended.
So for example we talked about the – BOPUS business. Although we are attracting that customer through our direct to segment and we have advertising cost embedded in that P&L. We really are giving the benefit of the sales to the retail business. So therefore gets a little blended. I will tell you that we are reevaluating or reporting internally and that may have an impact on how we look at this externally overtime.
Okay, but you still think that clearly the Q2 rates for the segment margin in direct is not the right run rate moving forward. You guys feel like there is opportunity there.
Yes, we have taken steps to make sure that we can get the promotion cadence more normalized on that part of the business. It's a more competitive channel, there is no questions asked. So I think it's going to continue to be competitive. Our goal is to get the right mix and we think we can improve versus where we were in second quarter.
Okay, that is helpful. Thank you.
Again ladies and gentlemen one question and one follow-up we will go next to Joe Edelstein with Stephens.
Hi good morning everyone.
Good morning Joe.
You didn't talk about the additional $10 million run rate on the cost savings. I was hoping, you can just help us to better understanding the timing of when those expenses are going to come out, I know you said it's not until 2017 but is that the expected run rate at the end of that year or perhaps halfway? Just a little clarification there would be helpful.
Sure. So, the $10 million is really comprised of both some SG&A savings as well as cost of goods sold. More than half of that is on the cost of goods sold side. We do expect to see some benefit in the back half of this year, primarily with respect to the SG&A portion.
The cost of goods sold side is a bit more of a longer process. It starts with the negotiation of our vendors with many vendors, and once we are through that and we are realizing lower cost, it then takes time for the inventory to turn and for that to show up in the P&L.
I do expect that we will start to see some of that benefit right at the start of 2017, and certainly we will give you more guidance around this as we go further through this process. But I think for now it's safe to assume that by the middle of next year, we should start to see the full value of this in the run rate.
Okay. That's helpful Brenda, I appreciate that. And just related to Nutri-Force and your efforts there in terms of product development and innovation, how big is that team today, and is there actually going to be a need to add more head count, more capability there that might offset some of the cost savings we just talked about?
I don't think it's going to be a meaningful addition that's going to offset. I do think we are assuming on our private brand area overall that we have already aims up that team we have some plans to add some additional critical position.
Some of this really is -- we've been able to grow our pipeline of new Product Development quite markedly on a year-to-date basis. And really what we are focusing our time and effort on is to balance between internal resources and in some cases external resources to help us to get the Product Development done, so that then we can run those products through Nutri-Force and in some cases through some external third-party manufacturers.
We are very pleased by the ramp-up we're seeing on the Product Development on that front, but a lot of that really had been balancing out the resources that were down in Miami Lakes at the Nutri-Force facility with some of the resources that we actually had in Product Development up here in New Jersey, and we think we are getting very close to get in the right mix
Okay. Thanks and good luck.
We'll go next to Stephen Tanal with Goldman Sachs.
Good morning, guys. Thanks for the question.
I guess just to start I love to understand what you're seeing today on the promotional front. Do you think things have gotten a little more rational or are you still seeing kind of similar things out in the market, whether it's online or in the stores.
By today you mean in the third quarter Stephen?
I -- it's a little hard to tell, because really a lot of the promotional activity happens and burst by key players. It's hard to say whether it's really ramped down or ramped up. I would say it's a mix I haven't seen quite as aggressive sort of logo activity that we had seen in second quarter.
Obviously in July there was some big online activity that we all know about. But I would say in balance I would say it's fair to moderate let's put it that way.
Got it. Okay. And you know I think we were thinking about the loyalty changed to quarterly loyalty reward redemptions is 100 bps it -- it sounds like you said it was a little bit more than that. Have you guys been able to quantify that?
Yeah. It's difficult to get an exact number but based on the different metrics we believe that the benefit to comp was a little over 1.5%.
Got it. And just lastly on that point, it's sound as like it came through late in the quarter may be called some of your clients and sort of call -- told him that their rewards are expiring. Given that comment, would you give us some color on the cadence of comps in the quarter?
Well so let me correct the fact I didn't mean to imply that the redemptions all came at the end of the quarter. I meant to imply that we were actually finding given that we are now going to a quarterly redemption cycle, new ways of improving frequency in our stores. We actually saw the bulk of the redemption happen in the month that the certificates were delivered, which is very much in line with what we've seen on our annual certificate historically.
So when we deliver the certificates to market they are the equivalent cash in the hands of our customers and we see them often either jump online or come into stores in order to make sure they take advantage of redemptions. In terms of cadence of the overall comps for the quarter was variable. It is hard to talk one way or another on it. It bounced around a little bit in terms of how it went.
Got it. Okay. Thanks a lot.
We go next to Phil Terpolilli with Wedbush.
Hi. Yes. Good morning.
You mentioned earlier you're taking steps -- steps to get the promotional cadence more normalized here. I guess sort of what gives you confidence this won't hurt comps than what you have now baked into the forecast and some of the commentary from your peers that sounds like they will do whatever it takes to drive their comps and clearly it is pretty aggressive out there in a commerce so just kind of the thoughts on the puts and takes there.
I guess what I would start to say is we are forecasting for the balance of this year was in line with the way that we saw the business performing prior to the amp up in promotional activity that we did in second quarter.
So I think what we are doing is we're looking at the underlying trend, we're basically separating out what we thought it was the incremental pop that we saw from the promotions we did. And we are assuming a return to that level.
In terms of competitive situation, I'm not sure I would characterize, fill the way you would characterize it. I think we are seeing the overall market realizing that there had been a level of promotional activity that might have been excessive and I think everyone is currently looking at it, obviously everybody is going to fight for share of the customers wallet and I don't -- we don't expect it will necessarily decreased markedly.
But I think right now we hope that it will be a more normalized approach for us certainly we are going to be disciplined in the way that we are going about doing promotions and pricing ourselves.
That's fair, it's helpful. So then just a follow-up on the innovation side, I was -- it was encouraging to hear some of the commentary by category. Maybe there are some things in the pipeline coming soon. Is there any sense there may be the opportunities you could talk about with any of those products potentially being exclusives with some of your third-party suppliers? Thanks.
Sure. So actually we just got back from our annual product education conference and during the conference we bring together over almost a thousand of our field teams, all of our store managers in the field as well as most of our major vendors come together.
So both Jason and I got a chance to meet with a lot of the senior vendors that were on the ground there. I was actually really pleased back to your point about exclusives. We are starting to negotiate some exclusive line extensions with key competitors.
I think when we look at the innovation that we see in front of us, we really want -- we have had the historical reputation and we want to continue to own the reputation of being the retailer of choice, it’s really launch new innovation this category.
We think that's where specialty retailers particularly shine and we know our health enthusiasts really enjoy and do a great job of taking new innovation, getting it into the hands of customers, getting them excited and really converting.
So we are going to look for ways to be able to maximize that point of difference as we move forward and we are working closely with our vendor partners to make sure that we can get out there share if not better our pressure of the pie of the new innovation as a comes forward.
Okay, great thanks. Good luck on the quarter.
We will go next to Simeon Gutman with Morgan Stanley.
Hi good morning. Following up on that last question, Colin I think you mentioned pre and post workout in the prepared remarks as far as innovation. Is this – is that Vitamin Shoppe led innovation or is there something category wide and can you just get little bit -- give us a little more detail I guess if there is sensitivity, if it is exclusive we will get limited but if -- what is so exciting that's on the horizon in those categories?
Yeah, I mean Simeon, I think it's -- first of all those categories have been in the area over the last couple of years where there has been a bit more activity than in the straight up Whey Protein area. And so I think what we are seeing now is that there is a lot of both current incumbents that are recognizing that a way to diversify their overall line is to focus a little less on the straight-up sports protein and start to think about the full system of pre and post.
It's a natural opportunity for the customers who obviously many of them are on a regimen where they use protein, and then they are looking for things to help their work out on the pre and post basis.
We are also doing -- I would point particularly to our Betancourt business which is one that we acquired when we acquired Nutri-Force. That is a very strong player in that area, but as are also as we've gone through trade shows and we've seen in the last several months that there is a lot of activity in that particular area. So very pleased by that and as I mentioned we are planning on putting a lot of focus on that in our stores as we move forward.
I guess. And then my follow-up will touch on that and then a second topic. Is it new ingredients that you are seeing or is it just -- new formulas of existing ingredients. And then the follow-up we've kind of touched on it, but how do you know, how do you measure what you're doing on the reinvention versus the [indiscernible] promotion, and I guess you've quantified it, but it seems like -- unless you know that you borrowed some customers that don't normally shop from you, I think that would be a clear indication but what gives you confidence that you can measure that appropriately given what was a pretty noisy quarter?
Yes, great question. So first of all, I don't think we've seen emerge some type of breakthrough ingredient that hasn't been in the market before. On the other hand, I will say that there is a lot of R&D work that's going on in general in the sports nutrition category, and we are seeing more creative formulations, some new flavoring, some new overall systems that are coming forward that are pretty exciting. We think we'll please the customers as they hit the market.
In terms of separating the wheat from the chaff, if you will around, what was promotional versus what was innovation driven or trying back to our reinvention activities, we went into the quarter and we will be going into every quarter with very clear success metrics for our new initiatives. And we track those, not just in an overall comp level, but we track them very specifically in terms of uptake in the database. In some cases where it's appropriate, we're looking at incrementality in terms of first use versus repeat.
And what we are seeing is that we are -- I would necessarily say it's about attracting new customers, but I feel very confident that several of our new initiatives are clearly doing a better job of winning share of wallet and the whole point of this reinvention was really a balancing that. It wasn't just a let's try to bringing a whole bunch of new customers into the category part of it was how do we win more than our fair share for the current customers that shop at the Vitamin Shoppe and we think we are doing both.
We go next to Shane Higgins with Deutsche Bank.
Yeah. Good morning.
Just wanted to jump in and focus in on the BOPUS initiative. How was that -- how many stores actually have that today? And I believe you said it was about 7.9% of online orders during the quarter where do guys expect that by the end of the year and what kind of comps lift is that driving on the retail side?
Yeah. So Shane, I will comment on what is going on with the initiative and I spend my comment a little bit what we are expecting out of that but I would start with the cadence on BOPUS was we turned it on for the first time in February. We started with a limited number of SKUs that was available in order to make sure the customer expense was positive, make sure that our systems can handle it with a deadly ramped up the number of SKUs that were available.
So that it's now our complete set of retail SKUs that were available to buy online and pick up on store that was our entire fleet as you know we are 100% Company-owned. So we -- we really don't care whatever store you go into we are perfectly happy if you go into any of our stores to get the benefit.
In terms of lift, I would say we have been happy and very surprised wave a number of people with taken advantage of the BOPUS capability. I think largely our qualitative research would suggest that the reason for that is our customer, our target customers used to BOPUS in other retailers and some ways we are a little late to the party in terms of BOPUS capability. But it is something unique in this particular category.
And I think for some of our products, whether it's refrigerated product or a product where a customer wants to get quick pick up, can been into BOPUS and a chance to interact with our health enthusiast when they come into the store, is a pretty positive overall experience. So for a customer it is a win/win as they go forward.
In terms of comp expectations, it's a little pup to judge. I will offer to Brenda and I will get my thoughts and Brenda my jump on them but right now it is achieving our expectations. We are in the process of chasing out exactly what its contributing in terms of incremental comp lift. Right now what we do know is we know that the orders that are coming through BOPUS are bigger than the typical order that we get in the retail.
We also know that largely the people that are taking advantage of BOPUS are our current customer base. It’s not necessarily bringing new customers. It's a higher degree of convenience and really that's what is designed to do.
We are testing some promotional approaches to BOPUS to see if there are ways for us to be able to further leverage it. We think it's an opportunity for us another [indiscernible] around driving more omni-channel relationships with Vitamin Shoppe -- relationship we know if we drive that, we ultimately we win in terms of the business. Anything you would add Brenda?
Yes, I agree with everything you say and I would just say in terms of the math, if you were to assume that all purpose is incremental, that would suggest another less than 50 basis points of comp, probably close to that but not quite 50 basis points but again that's not all incremental.
Yes, Got it. Thanks for the color. And just as a follow-up, how many mobile apps have been downloaded to date?
We have not – we do not have a mobile app. So BOPUS is available right now slowly through our website. We have talked about the fact that our intention is to move towards a mobile app later on this year or early 2017.
Got it, thanks a lot.
We will go next to Mark Wiltamuth with Jefferies.
Hi Good morning. Wanted to get little more on the additional cost savings. At this point, do you think you are going to be in net positive territory where this will flow through to the bottom line or you still expecting this to just fund the reinvention strategy?
We should be in that positive territory. As I said in our prepared remarks, we are expecting to spend approximately $10 million in reinvention cost and as we look at that, we believe that approximately $6 million of that is ongoing. As we look at the cost savings that we've identified today, it exceeds that. So we believe that next year it will be a net contributor.
Okay. And then you said over half there was going to be from lower cost of goods sold. Are you pairing this with SKU rationalization, so you can concentrate the buying on more suppliers and get some better rates from them? Or what's really the strategy and getting the better rates?
Yeah, I think it's a combination. Yes, we announced as part of our reinvention that we announced in first quarter that we were going to be doing a more aggressive category management approach; in some cases that's a SKU rationalization and in some cases that's taking our best brands in giving them a bigger presence within their stores.
We are also introducing both digitally as well as in our stores several new marketing capabilities and so really the discussion that we had with the market, with our vendors as recently as a couple weeks ago was we want to be a retailer where they can invest more in.
And we think that we are giving them more opportunity to build their business with us. It's great to have Jason on Board because this has really been sort of Jason's bread and butter carrier-wise, both at Dollar Tree as well as prior at Wal-Mart, so Jason is going to be starting to taking up the baton of really driving a lot of that initiative in the coming weeks and months.
And then the other half of the savings on the SG&A front, what buckets with that fall into?
Really, there's a lot of work that we are doing around store performance, and some of that quite frankly is not just about cost reduction and it includes taking a hard look at things like incentives which we plan to modify as we continue to work through our reinvention initiatives. It also does include looking at things like labor scheduling and the like, so there are some savings embedded within the stores, and there is some savings as well as incorporate.
Mark, let's just clarify when we talked about that 50/50 split, you are talking about the incremental $10 million that we are talking on this call. It's not the characteristic of the total $22.5 cumulative. But it is fair to say that and not surprisingly, frankly, as we've done work particularly with AlixPartners to take a look quantitatively at areas of efficiency both at headquarters but in particular in the store area. We've been able to identify some ways that we can go about servicing our stores in setting our stores up to service our customers in a more efficient way without taking away from the critically important job that the health enthusiasts have a building a relationship with our customers.
Okay. Thank you very much.
You are welcome.
And we go to next to Chris Horvers with JP Morgan.
Thanks good morning.
As you think – as you think about the -- your comp expectations in the back half, is there much difference in terms of your third quarter versus fourth quarter outlook? And how much the loyalty card benefit is embedded that in the back half numbers?
We would expect a -- we would continue to expect a benefit from loyalty. Probably not to the same degree as in the second quarter but we had talked previously about that 1% I would expect that we would see at least that in the third and fourth quarter as we look at comps for Q3 versus Q4.
I would expect that it's likely we would get a little bit more of a list in Q4. Especially as we look at this on a -- to your staff basis recycling a little bit easier comps in the fourth quarter so we are baking some of that into our forecast.
Chris we also as we been having the conversation with our vendors we have engaged them on improved them promotional cadence for their business. And I think we are counting on the fact of fourth quarters going to be a strong quarter from that side as well with them.
And so you have done this Mac. So it's going to be April, it would be issued again in this Mac and then.
Yes, sort, going.
So issuing the additional part at the end of the year?
Good question. It's a quarterly approach, so it's the first month of each quarter so it's April, it July, it will be in October. In each these certificates have an expiration that is three-month expiration on them. So they get used up in the quarter as well. Some bleed over but not much. So you will see three hits basically this year in the calendar year.
And the experience in July is it similar to what you experienced in April?
As Brenda pointed out, it's been -- it's still very, very strong. We are not as aggressively promoting it in the third and fourth quarter as we did when we launched it. And second quarter that was by design because basically the key to this is to get customers into the habit is shifting from an annual expectation to more of a quarterly expectation.
So the idea and second quarter was get as many folks as possible to get a chance to enjoy a quarterly certificate so as when we deliver in July as well as in October we don't have to promote it as aggressively. We continue to see strong redemptions on the certificates.
It’s okay and one less one. So as you think about the profitability of this new -- the new loyalty redemption timing, do you – would you expected to be turn out of this advertising investment the higher than the old program and then as you think about the margins earned on the new loyalty program is there a difference versus the old program?
Yeah. So yes we do expect that the return will be higher as we look at the margins, we expect there will be pretty neutral for the most part. We did note that in the second quarter, some of the year-over-year decline did relate to loyalty. And that was mainly because we aggressively promoted and in some cases we increase the value with some of our customers and as we evaluate each of these different initiatives we are going to not repeat some of them.
So as we look at this over the long-term, it definitely has a return, had a return in the second quarter just a little bit of a hit to the margin, but if I look at gross margin dollar benefit in the second quarter it was definitely accretive.
And ladies and gentlemen we will take our last question today from Sean Kress [ph] with Barclays.
Good morning. Thank you for taking my questions. Can you discuss the new COO appointment or Jason add up in the business launch just for the opportunities, there is PC to drive stronger operational execution?
Great question Sean. So Jason is only been on board three weeks. But our goal when we were out recruiting for this position was to find somebody who had strong history of working for top retailers and frankly a strong background in transformational management of retail experience.
Jason brings with him whether it was at Sam's, at Wal-Mart, or at Family Dollar, Dollar Tree a track record of really delivering on the businesses he has had responsibility for. He is going to have our merchandising business, our store operations business as well as our supply chain and IT reporting up through him.
I think it's very early endings for Jason but in some ways it couldn't be a better time to bring somebody with his kind of background. We mention the fact that we are in the midst of a very aggressive category management and vendor renegotiation.
I know that Jason run that playbook several times in his career. I think he is coming in and feeling really good about the direction that we're going on that front. So already been out to several stores put in several days’ worth of time, working the source of the folks in the field, spend a week down in our product education conference with a 1000 of our employees.
And I think he fits in great. I didn't mentioned but we did mention in the press release Jason is a pharmacist by training comes from a family of Pharmacists. This guy is a guy who really understands wellness and understands the wellness customer. So for the direction also that we're going both culturally as well as where we are going overall with our mission statement in the direction of the business, and he is going to be a great leader for the business moving forward.
But just to be very clear, what we are were looking for the top of the house to work with me, with Brenda is somebody who is -- somebody who brings a very strong operational background and a breadth back on delivering results and I think Jason is coming into the organization with that on his shoulders and he is playing on delivering in spades.
And for my follow-up, can you provide an update on local market activation initiatives? It wasn't really discussed much on the call, but just sort of what was done on the quarter, what type of traffic bumps did a provide and what is planned for later in the year?
Yeah, great. So we continue to do local market activation activities. In second quarter, we provided a new training manual to all of our stores. We've also been doing local marketing through various different tradeshows. Sampling programs and being more aggressive with our sign up for our loyalty programs which is a big area of focus for us is when we do local market activation, getting more people to join our loyalty program because we know that properly converts and allows us to start to campaign those customers from marketing standpoint moving forward.
What we've seen and in fact anecdotally last week when we were meeting together as a team, this has been a really great shot in the arm for our health enthusiasts at a store level. We are planning on continuing to drive local market activation, although what we are trying to do now is take our best practices from the first half of the year and make sure we really focused our dollars and our energy to doing those things that we know will best impact the business.
I expect [Technical Difficulty] local market activation on an ongoing basis as a Company because we think that's really implant to get our [Technical Difficulty] out there in market and to show we do this kind of work and we're getting a lot of [Technical Difficulty] other local market vendors, other Companies that we can work with to successfully drive it, so all good.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the conference back to Colin Watts for closing remarks.
So, I just want to thank everyone again for joining us this morning and we'll look forward to talking to you in the next quarter.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect your line.
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