J.P. Morgan Reiterates Overweight Rating on Vitamin Shoppe (VSI)

J.P. Morgan is out with a research report this morning, where it reiterates its Overweight rating on shares of Vitamin Shoppe Inc. VSI; it has a $28.00 price target on the stock. The JPM analysts said, “Vitamin Shoppe will report 2Q10 EPS on July 22 (BMO), and we are modeling 7.0% SSS growth and EPS of $0.28 – $0.02 ahead of the Street. In our opinion, despite uncertainty around a weakening consumer backdrop and concerns that discretionary spending has slowed, we think shares of Vitamin Shoppe continue to look attractive given the company’s (1) solid sales momentum, (2) margin expansion potential, and (3) attractive sq. ft. growth profile. Moreover, given the recent pullback in the stock (VSI down 6.0% last 2 weeks vs. SPX up 3.6%), we see valuation as reasonable for a high-growth retailer – trading at 17.7x our FY11E EPS. All told, we reiterate our Overweight rating ahead of 2Q EPS as well as our $28 December 2011 Price Target.” They noted, “Breaking down our $0.28 EPS estimate, we see a total sales increase of 11.8%, driven by 12.5% retail growth (7.0% SSS, 8.5% sq. ftg. growth) and 6.0% direct (primarily Internet) growth. On the margin we see 110 bps of EBIT expansion (1/3 GPM expansion, 2/3 SG&A improvement) resulting in an overall EBIT margin of 8.2%.” The J.P. Morgan analysts further noted, “We are modeling a 7.0% comp for VSI in 2Q, which on a 2-year stacked basis implies an 11.3% increase – in-line with the company’s 1Q trend. We have confidence in our outlook for three reasons: First, based on respectable lateral datapoints from vitamin retail peers (NTY, GNC), we believe growth in the overall vitamins, minerals, and supplements industry remains firm (say 4-5% annual growth). Second, we think Vitamin Shoppe’s bi-annual sales promotion this past April (50% off all Vitamin Shoppe brand product, discounts on select third-party brands) likely helped to boost traffic in 2Q. Third, recall on May 17th, Vitamin Shoppe provided an intra-quarter sales update, indicating that SSS during the first 7 weeks of 2Q10 had exceeded the 1Q trend of +6.2%.”