TOP CONTRIBUTORS

Daniel Brenner

NTY AT A GLANCE

P/E ► 18.5 AVG EV/EBITDA ► 9.69 AVG ROA ► 9.3% AVG ROE ► 13.7% AVG Debt to Equity ► 0.738 AVG Current Ratio ► 3.08 AVG Interest Coverage Ratio ► 7.56 AVG

 

 

 

 

 

 

NBTY is the largest nutritional supplements manufacturer in the United States by sales, and it sells a portfolio of over 22,000 products through mass merchandisers, drug stores, and company-owned retail outlets in North America and Europe.^[1]

Unlike many of its competitors, NBTY owns its own retail outlets. However, much of what its factories produce does not go to NBTY's stores; instead, it is sold wholesale to third party distributors. 48% of sales came from this division in 2007, as supermarkets, pharmacies, and other retailers sell products under about a dozen of NBTY's brand names. ^[2] In 2007, a 10.4% increase in revenues from this segment was fueled by greater demand for health and wellness products among the third party distributors that sell NBTY's products.^[3] Over the coming decades, NBTY stands to benefit from the aging of the US population as this demographic turns to nutritional products for their perceived health benefits.

NBTY has also expanded wholesale operations across Europe, Latin America, and Asia as well - in 2007 international revenues increased 12.2%.^[4] Since the company does a large percentage of its business in Europe (30% of 2007 revenues), a weakening dollar actually benefits the company by increasing the value of its international earnings.

Overview

Business Financials

Brand names such as Nature’s Bounty, Solgar, Sundown, Osteo-Bi-Flex, Ester-C, and Rexall represent 20% of the company's sales and are sold at mass merchandisers, drug store chains, drug wholesalers, supermarket chains and wholesalers throughout the U.S. ^[5] The company's Net Income and Revenues have risen steadily from 2002-2007. In Fiscal Year 2007, NBTY’s revenues rose 7% to $2.014 billion, driven largely by a 10.4% increase in the WholeSale/U.S. Nutrition division. Net Income increased 86% from 2006 to 2007. ^[6] The increase in revenue has been driven by existing customers, new product introductions and promotions, aging U.S. population , increased E-Commerce, the weakening dollar, and increased consumer awareness of health and wellness.

The company is divided into four segments, WholeSale/US Nutrition, Retail, European Retail, and Direct Response/E-Commerce Retail. These account for 48%, 11%, 31%, and 10% of revenue, respectively.^[7]

Acquisitions

Since 1986, NBTY has acquired more than 30 companies, focusing on specific key markets. ^[8] In 2005, it acquired Le Naturiste, a chain of 103 Canadian retail stores to expand its presence in North America. That same year, NBTY acquired Solgar Vitamin and Herb from one of its competitors, Wyeth Consumer HealthCare. ^[9] Finally, in August 2006, NBTY acquired Zila Neutraceutricals, which manufactures and distributes Ester-C and which earned $18 million in net revenues in the nine months preceding April 2006.

Business Segments

WholeSale/US Nutrition: 48%

The WholeSale/US Nutrition distributes many of the company's products under brand names such as Nature's Bounty, Rexall, Sundown, Osteo-Bi-Flex, MET-Rx, Flex-a-min, Knox, and Ester-C.^[10] About 65% of sales in the WholeSale/US Nutrition division consist of sales to the mass market. NBTY serves many large-scale retailers including CVS, Wal-Mart, Walgreen Company (WAG), Target, and Eckerd Drugs. About 12% of sales come from the Natural and Health Foods/Specialty Store Channel. 21% of sales come from private label manufacturing services.

European Retail: 31%

The European Retail Segment generates revenue through 626 retail stores in the UK, Ireland, and the Netherlands, mostly under the brand name Holland & Barrett. Products manufactured by NBTY accounted for 43% of the stores' revenue.^[11]

North American Retail: 11%

The North American Retail Segment generates revenue through 537 stores open in North America. NBTY has been focusing on closing non-profitable stores and opening new ones in more favorable markets. Products manufactured by NBTY accounted for 71% of the stores' revenue.^[12]

Direct Response/E-Commerce Retail: 10%

NBTY offers discounted nutritional supplements and vitamins through mail order and e-commerce. It operates puritan.com, vitamins.com, and vitaminworld.com. Online net sales increased 19.4% in fiscal year 2006 as compared to fiscal year 2005. Growing US online sales represents an opportunity for the segment to boost its revenues.

Trends and Forces

An Aging World Population, including Aging Baby Boomers in the US, Increases Demand for NBTY's Products

^[13]

The aging of much of the world's population is sure to have a significant impact on many companies in the health sector, including NBTY. The United Nations estimates that by 2030, people over age 60 will account for 17% of the total world population as compared to 10% today. In the United States, estimates project that there will be 71.5 million seniors by 2030, are compared to nearly 40 million today.^[14] The U.S. government is bracing for an influx of patients into the Medicare system - and as an increasing number of senior citizens consume more healthcare dollars, many of these elderly consumers will also preventive medicines, including the dietary supplements made by NBTY.

Customer Concentration in the Wholesale Segment Leads to Increased Risk

Two customers unidentified by NBTY accounted for a combined 26% of the WholeSale/US Nutrition Division’s revenues in 2007. One of these customers is likely to be Herbalife (HLF), which purchases protein powders from Nature's Bounty. ^[15]. Since NBTY's largest division is dependent on these two customers, it risks a major disruption to its balance sheet if one of these clients chooses another supplier, brings production in-house, or goes out of business. ^[16]

Fluctuations in Foreign Currency Exchange Rates Increase Revenues from Europe

Since almost one-third of NBTY's revenue is generated from its European Retail segment, NBTY stands to benefit from a weakening of The Dollar . As the dollar weakens, each sale in Euro or British Pounds can be converted into more dollars; hence, revenue increases. According to NBTY, from 2006 to 2007 its European Retail segment saw an increase in net sales of 55.3 million or 9.8% largely because of favorable trends in foreign currency exchange rates^[17] Additionally, from 2005 to 2007, the company increased its net sales denominated in non-US currency from 34% to 36%.^[18] If these trends continue it will have a positive effect on NBTY's net income.

The Collapse of Leiner Health Products creates an opportunity for NBTY to increase its Market Share ^[19]

Leiner Health Products is a major manufacturer of vitamins, minerals, and nutritional supplements. The company had revenues of 735 million in fiscal year 2007. However, the company filed for bankruptcy on March 11 following a quarterly loss and a product recall. ^[20]. If the company does not re-emerge from bankruptcy, its competitors, including NBTY, will try to increase their market share in the nutritional supplements market in the U.S. Leiner is also the largest supplier of vitamins and minerals to the US military. The Leiner bankruptcy represents an opportunity for NBTY to expand into new markets, particularly in sales to the military.

Litigation Threats Leads to Increased Uncertainty

NBTY has faced six lawsuits over the last six years. Most have accused the company of engaging in false advertising in the promotion of one of the company's products. Three of the lawsuits were settled without having a significant impact on NBTY's financial condition. The other three are still pending. ^[21] In 2004, NBTY recalled shark cartilage capsules because of a fear of salmonella contamination. The company recalled about two dozen products and announced that it would refund the recalls. The recall may lower the company's revenues and hurt the company's brand names - but no lawsuits have been filed related to this recall.

Competition

Since 1986, NBTY has acquired more than 30 companies. ^[22] This business strategy has allowed it to achieve vertical integration, which leads to increased efficiency and lower costs and sets it apart from many of its competitors. Additionally, NBTY sells over 22,000 products, including 1.2 billion tablets, 500 million capsules, 450 million softgels, and 14 million bottles in 2007^[23]. This diverse product portfolio minimizes damage to revenues in the case of a successful litigation or slow sales of any one product. Competitor (Wyeth's Effexor, for example, accounts for 18% of its revenue, exposing that company to significant risk if customers stop buying Effexor. Unlike many of its competitors, NBTY does not spend significant capital on researching and developing new products. ^[24]

The nutritional supplements market is highly competitive; the top three companies, NBTY, Wyeth (WYE) , and Leiner Health Products own about 35% of the market share.

Competitors

• Wyeth (WYE) -The company produces scientifically based food products for infants and toddlers under the Gold brand.
• Leiner Health Products - Manufactures store brand minerals, vitamins, and nutritional supplements which stores then sell under their own brands. The company filed for bankruptcy but could still restructure and reemerge.
• Pharmavite - manufactures herbal remedies, mineral supplements, and vitamins.
• Abbott Laboratories (ABT) - manufactures two well-known brands: Ensure, a meal replacement shake and ZonePerfect snack bars.
• Experimental & Applied Sciences - Distributes performance based nutritional supplements.
• Herbalife (HLF) - markets and distributes dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients.
• Bristol-Myers Squibb Company (BMY) - manufactures infant formulas
• Whole Foods Market (WFMI)
• Nature's Sunshine Products (NATR) - manufacturer and marketer of encapsulated supplements, including herbs, vitamins, minerals.
• Schiff Nutrition International - formerly, Weider Nutrition International, the company develops, manufactures, markets and distributes branded and private label vitamins, nutritional supplements and nutrition bars

References

1. ↑ NBTY 2007 10K, pg. 34
2. ↑ NBTY 2007 10K, pg. 39
3. ↑ NBTY 2007 10K, pg. 39
4. ↑ NBTY 2007 10K, pg. 39
5. ↑ NBTY 2007 10K, pg. 2
6. ↑ NBTY 2007 10K, pg. 34
7. ↑ NBTY 2007 10K, pg. 5
8. ↑ NBTY 2007 10K, pg. 5
9. ↑ [1]
10. ↑ NBTY 2007 10K, pg. 5
11. ↑ NBTY 2007 10K, pg. 5
12. ↑ NBTY 2007 10K, pg. 5
13. ↑ [2]
14. ↑ Silverbook.org, Number of Persons 65+, 1900-2030 (in millions)
15. ↑ HerbaLife 2006 10K, pg. 34
16. ↑ NBTY 2007 10K, pg. F-35
17. ↑ .NBTY 2007 10K, pg. 41
18. ↑ NBTY 2007 10K, pg. F-38
19. ↑ Leiner's Bankruptcy, Slow Economy and the Nutritional Supplement Industry
20. ↑ Leiner Health Products files for bankruptcy protection
21. ↑ NBTY 2007 10K, pg. F-28
22. ↑ NBTY 2007 10K, pg. 5
23. ↑ [3]
24. ↑ .NBTY 2007 10K, pg. 8