3 Reasons to Take Your Vitamin Stocks

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Did you take your vitamins today? If so, you're certainly not alone. Sales of vitamins and other health and wellness products are surging. And where there's rapid sales growth, you can count on investing opportunities. GNC (NYS: GNC) and Vitamin Shoppe (NYS: VSI) are two specialty retailers you might want to consider as supplements to your portfolio. Here are three reasons why.

Conquering channels
Both companies sell health and wellness products including vitamins, minerals and herbal supplement products, sports nutrition products, and diet products through their retail stores. However, sales through other channels contribute significantly to the companies' bottom lines.

GNC received 11% of 2011 revenue from its relationships with other retailers such as Rite Aid (NYS: RAD) , drugstore.com, PetSmart, and Sam's Club. Better yet, these channels accounted for 19% of operating income with the highest operating margin of any GNC segment.


The Rite-Aid partnership is particularly intriguing. GNC sells products wholesale to Rite-Aid like it does with its other partners. It also generates revenues from more than 2,100 store-within-a-store Rite-Aid locations. GNC benefits as well by being the sole supplier of several Rite-Aid private label vitamins and supplements.

Vitamin Shoppe doesn't boast these kinds of partnerships, but the company garnered 10.5% of sales in 2011 via its direct online and catalog channels. These direct sales made up nearly 22% of operating income for 2011.

The online channel works well for GNC, also. The company markets online through GNC.com and LuckyVitamin.com, which was acquired in August 2011. GNC.com sales were up 37% in 2011.

Driving demographics
The 95 million Americans born between 1978 and 2000 make up the largest generation in American history. According to GNC, 43% of its customers are under the age of 35. These younger GNC shoppers tend to be well-educated with higher than average income levels, based on information from the company. They are also focused more on great products than obtaining the lowest prices.

Vitamin Shoppe seeks to capitalize on a different demographic trend -- the aging U.S. population. The company cites U.S. Census Bureau projections that Americans in the 45 and over age group will grow at a rate 1.6 times the overall population growth rate through 2020. It expects growth opportunities as people age and focus on prevention of medical issues through diet, supplementation, and exercise.

Both strategies share a common thread -- a focus on growing demographics with motivation to purchase health-related products.

Growing geography
More than 3,800 GNC stores are located across the United States. Vitamin Shoppe has 533 stores in the U.S. and Puerto Rico. Both companies think there is plenty of room for more.

GNC maintains that the U.S. market can support more than 4,500 of its stores. Vitamin Shoppe says that they could grow to 900 stores in their current store format. With both companies targeting rapidly growing demographic groups, those estimates appear to be realistic.

International expansion looks even more promising for GNC. The company already has more than 1,500 franchise stores across 53 countries. GNC is particularly focused on China. It forged partnerships with major Chinese retailers and is selling GNC-branded products through the Taobao.com online marketplace.

There's one geographic area that neither company has a presence -- Europe. That is welcome news for investors trying to avoid stocks with European exposure.

Take one or two?
Both GNC and Vitamin Shoppe appear to have solid prospects for continued growth. But should investors favor one over the other?

GNC's larger scale gives it an edge, in my view. The company has developed more avenues to sell its products than Vitamin Shoppe. It is better positioned to benefit from international growth.

Also, GNC is priced more attractively. It has a forward price-to-earnings ratio of less than 17, compared to Vitamin Shoppe's P/E of 24. With the company's excellent growth potential, that P/E level doesn't look bad.

If you're looking for a solid play to capitalize on the health-consciousness of the largest generation in U.S. history and the potential for emerging markets, GNC could be the vitamin stock to take.

And if you're wanting to chew on other ideas about stocks with international potential, take a look at The Motley Fool's special report, "3 American Companies Set to Dominate the World." To get your free copy, just click here.

At the time this article was published Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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