CORPORATE FOCUS—Natrol Inc.

Fortunes of Vitamin Maker Suffer as Sector Gets Weak Bad press has caused vitamins and other nutritional supplements to fall out of favor. And that’s very bad news for Chatsworth-based Natrol Inc. The company’s stock has slipped from a high of $9.38 on Sept. 20 to an all-time low of $2 last week. “Our stock is getting hit by the overall sector in a big way,” said President and Chief Executive Elliott Balbert. Company officials and analysts say the declining price is an industry trend brought on by a softening in the consumer market. The supplements industry saw growth ranging from 20 percent to 40 percent a year between 1994 and 1999. But in 1999, industry growth slowed to around 12 to 18 percent and has since declined into the single digits, Balbert said. Earlier this year, research firm Adams Harkness predicted the industry would see growth of only 9 percent in 2000. “The answer is a mystery to a lot of people because this was a trend fueled by aging baby boomers, and there are more older baby boomers now than ever,” Balbert said. “I believe some of it is because of the negative press that has dampened enthusiasm. Between 1994 and 1999, you couldn’t pick up a magazine, paper, watch TV or listen to the radio without hearing something positive about supplements.” In 1998, the industry was so hot that pharmaceutical giants like Warner-Lambert Co. and Bayer AG entered the supplement market. But over the last few years, a number of studies have been released questioning the effects of everything from Vitamin C to St. John’s Wort. “The industry of nutritional supplements has weakened over the last several months,” said analyst Scott Van Winkle of Adams Harkness. “A lot of the (manufacturers have been forced) to take products back. Retailers have ordered product expecting to sell it, but instead it sits on the shelves.” Natrol hasn’t been forced to take as much product back from retailers as other companies, Van Winkle said. Even so, investors have turned from the stock because of the weakened overall market. Some analysts believe the market, and Natrol, will bounce back. Adams Harkness rates Natrol “accumulate,” believing the stock is undervalued and will rebound eventually. “We think the stock’s undervalued but we can’t tell you why to buy it,” Van Winkle said. “It may take a little while to get back up.” Balbert is confident the stock is undervalued and the company is snatching up its own shares so far, a very bad investment. In the second quarter the company bought back 500,000 shares at $4 each; the value of investment has dropped by about half since then. Some analysts still see trouble ahead. On Aug. 11, U.S. Bancorp Piper Jaffray downgraded Natrol’s stock from buy to neutral. The downgrade was based on market trends and the company’s second-quarter performance, which missed industry expectations of 11 cents in earnings per share by a long shot. Natrol reported a net loss of $2.4 million (18 cents per diluted share) for the quarter ended June 30, compared to net income of $1.9 million (14 cents) for the like year-earlier period. But the company continues to report increasing sales growth, with revenues rising 34.8 percent to $24.1 million during the quarter. Balbert blamed the net loss on several factors. First, the company lost $1.1 million in business after a customer for which it manufactures supplements under a private label dropped Natrol. The company also lost a portion of its inventory because it expired before the products could be sold, and saw an increase in product returns. Further, the company increased its spending on marketing and sales promotions. “Natrol is a solid company,” Balbert said. “Management is motivated and we’re very bullish about the business.” Van Winkle said the company remains financially solid. “They still have a good return on business,” he said. “Their revenue growth is strong, their results were just not up to expectations.” The company is continuing to expand into new product lines, including a recently announced women’s sports nutritional line, Cory Eversen’s Solutions, and a children’s line, Kids Companion. Last year, it acquired Prolab, a sports-nutrition supplement maker. That addition boosted sales by $6 million in the second quarter. “We’re creating new market segments, we have 37 products under development that we’ll be rolling out in the weeks ahead,” Balbert said.