One of the more successful IPOs over the past few weeks has come from Vitamin Shoppe Inc. (VSI).  The stock was offered to investors at $17.00 and began trading on October 28.  Underwriters included JPMorgan Chase (JPM), Bank of America (BAC) / Merrill Lynch, and Barclays Plc. (BCS).  The stock traded sharply higher out of the gate, closing its first day of trading at $17.95 which was good for a 5.6% initial return.

Since the IPO, investors have gained more confidence in the stock, pushing it as high as $21.39 during the day on Tuesday.  That’s a potential 26% increase over the IPO price.  It’s encouraging to see additional strength in the open market for a growth opportunity in its early days of trading.  The positive movement points to liquidity which continues to show up in pockets of the market despite the economic uncertainty.

Investors were particularly pleased with the third quarter earnings release which came out last Wednesday, just a week after the IPO.  During the quarter, VSI reported sales of $168.4 million which represents an 11.3% increase over last year.  The company has opened 60 retail stores over the last year, brining their total locations to 434.  Comparable store sales were up 4.4% which is impressive given weakness in consumer spending.  Of concern was an increase in cost of good sold which were higher due to increased product costs and occupancy costs.

While there are certainly challenges in operating a retail shop in today’s market, VSI used the proceeds from its IPO to pay off debt, giving the company a better financial presence.  Of the $121.2 million received in the transaction, $72.5 million was used to redeem preferred stock, and $45.2  million was used to repurchase senior secured notes.  Now the preferred stock was essentially a way for the early investors in the company to get paid, but the lower value on the senior notes should help with long-term interest expenses.

The dynamics on this IPO are very positive for the time being.  A well managed deal has led to a higher stock price which will likely be supported for the next several months.  Aggressive traders could pick up stock on any dips into the high-teens with an absolute stop below $17.  If the stock breaks below this level, all bets are off and the picture could get ugly very quickly.  But as long as the stock remains above this level, the trading opportunities will be best from the long side.

Down the road, it will be important for the company to demonstrate superior growth characteristics.  Over the last 10 quarters, Sales have grown very steadily by roughly 10 to 12% but that number will need to pick up in order to justify the current stock price.  It appears that the first quarter is typically a strong earnings quarter for the company so that will be the first major data point for investors to analyze.

It is often a major challenge for management teams to transition to publicly traded dynamics.  Transparency is extremely important and the reporting issues can be burdensome.  Currently, the company does not appear to have an extremely transparent setup with balance sheet information less than accessible.  As management becomes more talented at disclosure and keeping the necessary systems and processes in place, they will need to refocus on driving growth in order to create value for shareholders.  I believe the long-term prospects are good, but challenges must be overcome quickly in order to maintain a premium stock price.

FD: Author does not have a position in VSI

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