Vitacost.com, Inc. (NASDAQ:VITC) Q2 2014 Earnings Conference Call August 6, 2014 10:00 AM ET
Kathy Reed - Director, IR
Jeff Horowitz - CEO
Brian Helman - CFO
Greetings, and welcome to the Vitacost.com’s Second Quarter 2014 Earnings Conference Call. At this time, all 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, Kathy Reed, please begin.
Good morning, ladies and gentlemen, and welcome to Vitacost.com's earnings call to discuss our results for the second quarter ended June 30, 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 second quarter of 2014. This table shows e-commerce metrics from our core Vitacost.com site and including sales through partnered channels. Further detail on our financial results can be found in today's press release and in our second quarter 2014 10-Q.
Before we begin, we would like to remind everyone that today’s remarks contains forward-looking statements. Any statements that are not statements of historical facts 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 second quarter performance and highlight upgrades made to our Web site. Brian will review our second quarter results with you in more detail, and we will then open the call for your questions.
The focus of today’s call is our second quarter results and we will not be answering questions regarding the proposed transaction with Kroger, and with that, I would like to turn the call over to the Company’s Chief Executive Officer, Jeff Horowitz.
Thank you, Kathy. We posted solid results in the second quarter with sales over a $100 million for the second consecutive quarter and we generated positive adjusted EBITDA as we realized improvement in our gross margin and achieved efficiency gains in our fulfillment and sales and marketing organizations. Our order volume remains strong as we shipped over 1.4 million orders. We ended the quarter with 2.3 million active customers up 8% year-over-year.
Let me now provide you with some comments regarding our product categories. Our top performing category continues to be our natural and organic food business the second quarter sales up 36% year-over-year on our Vitacost Web site. We added over 700 food SKUs during the quarter and now carry close to 11,000 healthy food items on our site. Sales of food accounted for 15% of sales up 3 percentage points from the second quarter of 2013. Food sales has benefited from media attention for specialty diets such as gluten free, organic and vegan and we’re in the process of launching a new portion of our Web site called the non-GMO experience which provides an easier shopping experience, increased information and recipes with non-GMO products.
Next, as many of you that follow the industry know sales of vitamins and supplements have been impacted by a slew of factors. We were not insulated from the pressure and sales of VMHS products on our Vitacost.com Web site were down 1% year-over-year in the second quarter. However, while we remain competitive we do not chase margin to the downside and actually increased VMHS margin slightly from the year ago period.
In addition, while VMHS remains an important part of our business it accounts for just under 57% of total sales in the second quarter, down 4 percentage points year-over-year and down 15 percentage points from the second quarter of 2011. As we have been successful in our efforts over the past several years to diversify our product mix into faster growing, complementary, healthy living categories. Sales of sports nutrition and beauty products were both up 10% year-over-year and our smaller categories, pets, babies and household collectively increased 6% year-over-year.
Now let me discuss our proprietary products, sales of proprietary increased 2% year-over-year in the second quarter of 2014 to $20.5 million. Proprietary sales were disproportionately impacted by the weakness in the supplement industry as VMHS represents 84% of total proprietary sales in the quarter down 6 percentage points year-over-year but still significantly higher than the 57% for our total company.
Over the past year we have emphasized launching proprietary products in non-VMHS categories and during the quarter introduced over 120 new SKUs including many new food items and have launched over 150 during the first half of this year. During the second quarter, we launched a line of gluten free baking mixes, our new gourmet food line, featuring oils, jams and mustards under the Sonoma Canyon brand name and added to our popular line of natural cleaning products just to name a few. Our new SKUs have performed well with second quarter sales of non-VMHS proprietary products up 67% year-over-year on our Vitacost.com Web site.
Moving on, our mobile business continues to perform well during the second quarter increasing 43% year-over-year to 13% of total company sales, up 4 percentage points from the second quarter of 2013. During the second quarter, we launched a new native mobile app for iPhone and Android devices offering an improved checkout experience, customer service capabilities, enhanced product search with additional features to be rolled out during the third quarter.
International sales increased 9% year-over-year in the second quarter to 8% of total company sales. Year-to-date we have focused our efforts on improving experience for international shoppers primarily through the offering lower cost, expedited shipping options in our key markets. Earlier this year we implemented this strategy in Canada having positive results with sales up over 80% year-over-year in the second quarter.
In mid June we expanded our delivery options to several of our other larger markets including Australia, Hong Kong and in Europe. This new service provides faster deliveries to larger size orders and full tracking capabilities which had not been available before.
Now let me provide you with an update on our TV advertising test. We continued 30 and 60 second national spots across multiple channels during April and May and concluded our testing during the first week of June. We spent approximately $400,000 slightly below the $450,000 to $550,000 we’d previously estimated and are currently evaluating our next steps.
I wanted to now highlight some of the Web enhancements we have unveiled as we continually strive to deliver a superior customer experience; first, we are beginning to make the Vitacost.com Web site smarter by making it responsive to the device its being viewed upon. The Web site will automatically adjust itself to give customers the optimum user experience regards of whether they’re shopping on their desktop, phone, or tablet device. This technique is called responsive design and we believe we are one of the few online retailers today utilizing this technology. In addition, we improved the convenience of utilizing promotional codes, streamlining and simplifying the process to customers.
Finally, I wanted to mention that Vitacost recently was ranked top-5 among online retailers by Stellar Service survey which measured order lifecycle. This metric combines total days to deliver which calculates total days to when an order is submitted online to when the package arrives and total days to refund process which measures days elapsed from when an item is returned to when a refund is posted to the customer’s credit card statement. Vitacost ranked number 5 among all the online retailers surveyed and was number one among vitamin and supplement companies.
Over the past year, we have made a concerted effort to improve the efficiency of our fulfillment organization including adding regional carriers to increase the speed of delivery to our customers. We also launched our customer service portal Service Central during the latter part of 2013 which allows customers to instantly request a refund or replacement product by logging into their account and completing a few simple steps. This has helped automate and further enhance the post-sale experience. We are very proud of this achievement and I would like to personally thank all the Vitacost employees for their hard work and dedication as we view customer satisfaction as a critical measure of Vitacost’s success.
Now I’d like to turn the call over to Brian to provide more detail on our second quarter results.
Thanks Jeff. In the second quarter of 2014 total net sales increased 7% over last year to $104.2 million, as third-party product sales grew 9% and proprietary product sales grew 2% in the quarter. Revenue from freight decreased 8% year-over-year due to an increase in the percentage of orders that qualified for free shipping. Amazon accounted for 3% of total company sales.
In the second quarter we shipped 1.3 million orders from our Vitacost.com Web site up 4% over the last year. Average order value on Vitacost.com was approximately $77.39 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 247,000 new customers to our Vitacost.com Web site flat with the prior year and ended the quarter with 1.8 million active customers on Vitacost.com which is up 5% from last year. As we discussed in our prior calls, we continue to face tougher comparisons this quarter and we modified a promotional strategy in the second half of last year to bring in higher quality customers.
Moving on to gross profit. Second quarter 2014 gross profit was $24.4 million, a 12% increase over last year. Gross margin in the quarter was 23.4%, up 1.1 percentage point year-over-year, due to higher product margins partially offset by a reduction in our freight margin due to an increase in the percentage of orders that qualified for free shipping versus the year ago period as I mentioned earlier. Growth in product margin was primarily driven by reduced promotions.
Now on to fulfillment. In the second quarter of 2014, fulfillment expense was 8.2% of sales compared to 8.9% of sales in the second quarter of 2013. As we have stated in the past, included in fulfillment expense are fees related to our freight savings program, which expired in mid-June. Excluding these fees, fulfillment expense was 7.8% of sales for the second quarter compared to 8.2% of sales in the second quarter of the prior year. Fulfillment cost per order, again excluding fees related to the freight savings program, was down 3% year-over-year due to productivity initiatives in our fulfillment centers.
Next, sales and marketing expense was 7.8% of sales, down from 8.9% of sales in the second quarter of 2013. Variable customer acquisition costs, excluding Amazon related fees, decreased 3% year-over-year on a per customer basis due to increased efficiency in our online spending partially offset by spending on our TV tests. Excluding the investment in TV, variable customer acquisition costs were down 9% year-over-year.
Moving on, reported G&A expense was 9.1% of sales flat with the year ago quarter, however this includes approximately $600,000 in expenses associated with the Kroger transaction. Excluding these expenses G&A was $8.9 million relatively flat with the year ago period for 8.5% of sales a decrease on a percentage basis from the second quarter of 2013 due to increased sales leverage.
Turning to our bottom-line performance; adjusted EBITDA for the second quarter of 2014 was $1.5 million after adding back approximately $475,000 in fees related to our freight savings program, and $600,000 in merger related expense compared to a loss of $1.5 million in the second quarter of 2013. Excluding these items net loss for the second quarter of 2014 was $700,000 compared to a net loss of $3.7 million in the prior year. This translates to a loss of $0.02 per share for the current quarter compared to a loss of $0.11 per share in the second quarter of 2013.
Now moving on to the balance sheet. We ended the second quarter with cash and cash equivalents of $28 million, a $1.1 million decrease from March 31st. Inventory increased $1.7 million from March 31st. Inventory returns remained healthy in the quarter with third-party turns at 11.4 times and proprietary turns at 4 times. Total inventory turns were 8.7 times in the second quarter relatively flat with the first quarter of 2014. Total CapEx for the quarter was $300,000, with approximately half spent on our fulfillment centers and the balance on IT infrastructure and software development.
That concludes our prepared remarks. Now we would be happy to take your questions regarding our second quarter results, operator?
Thank you. At this time, we’ll be conducting a question-and-answer session. (Operator Instructions) At this time, I’d like to turn the floor back over to Kathy Reed for any further or closing comments.
Thank you all for joining us today to discuss our results for the second quarter of 2014. Thanks.
Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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