Vitamin Shoppe Q4 2009 Earnings Call Transcript

123jump.com Staff
17 Mar, 2010
New York City

Sales rose 13.5% to $162.4 million and net income was $970,000 or 4 cents a share. comp-store sales increased 7%. Gross profit increasing $5.9 million or 12.8%, to $51.8 million. Gross profit as a percentage of sales decreased to 31.9% for the quarter compared with 32.1% last year.

Vitamin Shoppe, Inc. ((VSI))
Q4 2009 Earnings Call Transcript
February 17, 2010 10:00 a.m. ET

Executives

Cosmo La Forgia - Vice President of Finance
Richard L. Markee - Executive Chairman and Chief Executive Officer
Michael G. Archbold - Executive Vice President, Chief Operating Officer, Chief Financial Officer and Principal Accounting Officer
Anthony N. Truesdale - President and Chief Merchandising Officer

Analysts

David Schick - Stifel Nicolaus & Company, Inc.
Meredith Adler - Barclays Capital
Alan Rifkin - Banc of America/Merrill Lynch
Radina L. Russell - J.P. Morgan
Peter Benedict - Robert W. Baird & Co., Inc.
Mitchell Kaiser - Piper Jaffray

Presentation

Operator

Good morning. And welcome to the Vitamin Shoppe’s Fiscal Fourth Quarter and Year End 2009 Earnings Conference Call. At this time, I would like to turn the conference call over to Mr. Cosmo La Forgia, Vice President of Finance at Vitamin Shoppe.

Cosmo La Forgia

Thank you. And good morning, everyone. As always, before we begin, I’ll review the requisite forward-looking statement disclaimers. Part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties.

Actual results might differ materially from those projected herein. The words believe, expect, plan, intend, estimate or anticipate and similar expressions, as well as, future or conditional verbs, such as should, would and could, identify forward-looking statements. You should not place undue reliance on these forward-looking statements.

We refer all of you to our filings with the Security and Exchange Commission, including our annual report on Form 10-K and quarterly report on Form 10-Q for a more detailed discussion of the risk and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

Please note that this call will use non-GAAP terms such as pro forma or adjusted shares. Our 10-K contains an explanation of why we use such terms and reconciliation to the most comparable GAAP numbers.

I will now turn over the call to our Chief Executive Officer, Rick Markee.

Richard L. Markee

Thank you, Cosmo, and good morning, everyone. I would like to welcome you all to Vitamin Shoppe’s fiscal fourth quarter and year end 2009 earnings call. As with prior calls, I’m here today with Cosmo; Mike Archbold, our Chief Operating Officer and ChieFinancial Officer; and Tony Truesdale, our President and Chief Merchandising Officer.

Just over three months ago, the Vitamin Shoppe completed a successful IPO. Today, we continue to post record results by recording our 17th consecutive quarter of positive same-store sales growth. Our success is attributed to our continued focus on the customer with our brand values of superior selection, knowledgeable associates, trust and everyday great value.

Our stores strive to have a personal relationship with our customers in order to provide them the help they need and they have come to expect when they shop in our stores.

Moving onto our results this quarter, the Vitamin Shoppe’s comp-store sales increased 7%. Comp-store sales are defined as sales from a store that has been in operation for over 410 days and does not include any sales from our direct-to-consumer business.

Net sales for the fourth quarter increased 13.5% over the comparable prior year period, driven by continued growth in specialty supplements, vitamins and multivitamins, sports nutrition and herbs. Our performance continues to demonstrate Vitamin Shoppe’s ability to grow our business successfully during both good and challenging economic times.

During the fourth quarter, we opened five new stores, compared with 28 in the fourth quarter of 2008. The total store count at the end of the fourth quarter was 438, compared with 401 at the end of 2008.

I will now turn over the call to Tony Truesdale, our President and Chief Merchandising Officer to discuss our direct business, marketing and merchandising.

Anthony N. Truesdale

Thank you, Rick, and good morning, everyone. While our commitment to our customers and their own health and wellness needs truly drives our business, we also had some exciting product launches and events that help round out our fourth quarter.

During 2009 and especially during the fourth quarter, the Vitamin Shoppe strengthened its position in homeopathic business. We launched our new merchandising strategy around homeopathic medicine and formulas, as well as, build new assortments into the category to capture specialty customers. Homeopathic sales have significantly increased since the rollout and are performing beyond our expectations.

We also tested a new natural bath and beauty set in 24 stores. Many new brands are now available on our shelves, including some very specialized names such as Beauty Without Cruelty and Masters Organics. We are encouraged by the initial results and will look to add these segments to more stores in 2010.

With the Vitamin Shoppe brand, we launched 20 new items during the fourth quarter. Our VIP customers were requesting larger sizes of our V.S. branded products and we have been able to deliver these within our assortment. We also added some product line extensions based on our in-depth customer data.

Moving onto our retail sales, the specialty supplement category, which is among the largest selling product categories in our mix, continues to experience significant growth in sales of a number of subcategories, including essential fatty acids, EFAs like fish oil, CoQ-10, probiotics for digestive health.

Product sales in the sports nutrition category increased at a greater rate than the overall increase in net sales for the 17th consecutive quarter. We expect this trend to continue based on the growth of the fitness conscious market.

Looking at our direct business, we are pleased with the momentum from the last quarter in our sales. Net sales to our direct customers increased 0.9% to $19.1 million for the three months ended December 26, 2009, compared with $18.9 million last year.

The overall increase in our direct sales was due to an increase in our Internet sales of $1 million, which was partly offset by a decrease in our catalog sales. We are encouraged by the improvements in our direct business.

We decreased inventory by approximately 0.8% in 2009 versus 2008, while supporting a 13.5% increase in sales. This improvement was delivered at the same time we improved customer facing in-stock to 95.9% in the current quarter from 93.4% in the comparable period last year. We also improved our inventory returns by 0.29%.

I will now turn the call over to Mike Archbold for a more in-depth review of our fourth quarter and year-end 2009 financial performance in our retail operations.

Michael G. Archbold

Thanks, Tony, and good morning, everyone. I’d like to walk through some of the financial highlights for the quarter. Net sales increased $19.3 million or 13.5%, to $162.4 million for the three months ended December 26, 2009, compared with $143.1 million for the prior-year period. Results, as you heard, were driven by an increase in our comp-store sales, new sales from our non-comparable stores and even an increase in our direct sales as well.

Retail sales increased $19.1 million to $143.3 million for this quarter, compared with $124.2 million for the prior year period. Our overall retail store sales for the fourth quarter increased due to new non-comparable store sales increases of $10.5 million and an increase in comparable store sales of $8.6 million or 7.0%.

Reflecting our diversified sales base, our overall sales increased in many categories, including specialty supplements, as Tony mentioned earlier, which increased 13.5% and sports nutrition, which increased 19%.

Further down the P&L, cost of goods sold, which for us includes product, warehouse and distribution, as well as, occupancy costs, increased $13.4 million or 13.8% to $110.6 million this quarter, compared with $97.2 million for the prior year. The increase was primarily due to increases in product costs and occupancy costs for the new stores.

This resulted in gross profit increasing $5.9 million or 12.8%, to $51.8 million for the three months ended December 26, 2009, compared with $45.9 million for the prior year period.

Gross profit as a percentage of sales decreased to 31.9% for the quarter ended December 26, ‘09, compared with 32.1% last year. Gross profit margin reflects a reduction in vendor incentives associated with the reduced number of new stores opened in the fourth quarter of 2009 versus the fourth quarter of last year. This negative impact was largely offset by the improved leverage on occupancy, warehouse and transportation costs.

SG&A, which includes operating, payroll and related benefits, advertising and promo expense, depreciation and amortization, as well as, other related expenses, increased $3.9 million or 10% to $42.6 million this quarter, compared with $38.7 million for the comparable prior year period. SG&A, as a percentage of net sales, decreased to 26.2% this quarter, compared with 27.1% for the prior year period.

The strong comparable store sales increase coupled with good expense control enabled us to drive leverage on a number of components of SG&A, including store payroll, advertising and depreciation and amortization.

In addition, fourth quarter SG&A reflects incremental costs associated with stock and incentive compensation, as well as, increased medical costs, which was more than offset by the improvements I just mentioned.

Turning further down the P&L, related party expense this quarter increased $0.8 million to $1.2 million, compared with $0.4 million for the prior year quarter. This was due in part to the $750,000 one-time management termination fee paid to Irving Place Capital associated with our initial public offering.

Income from operations for the fourth quarter increased $1.2 million or 17.8% to $8.0 million, compared with $6.8 million for the prior year period. Further down the P&L, interest expense declined $1.0 million to 19.6% or 19.6% to $4.2 million this quarter, compared with $5.2 million last year.

The decrease was due to lower interest rates experienced this quarter, as well as, the redemption of approximately $44.9 million of our notes that we redeemed in conjunction with the initial public offering.

Net income then tripled to $1.9 million for the three months ended December 26, 2009, compared with $0.6 million for the three months ended December 27, 2008. Net income for this quarter includes a pre-tax loss on extinguishment of debt of $1.8 million.

Net income for the period also includes a tax benefit of about $0.5 million resulting from favorable developments on certain outstanding tax matters, as well as, a true up of the tax provision for the full year.

Earnings per share for the quarter were $0.04 for both the basic and diluted shares outstanding, as compared with a per-share loss of $0.14 for both basic and diluted shares outstanding for the prior period.

On an adjusted basis, excluding the after-tax effect of the loss on extinguishment of debt, the termination of our management services agreement and the assumed completion of our initial public offering as of the beginning of the quarter, earnings per share for the quarter would have been $0.13 and $0.12 on a basic and diluted basis, respectively. Please keep in mind also that the preferred shares have now all been either redeemed or converted and are not expected to impact EPS on a go-forward basis.

Vitamin Shoppe continues to take steps to reduce its debt. As I mentioned a little earlier, we completed a tender offer for approximately $44.9 million aggregate principal amount of our outstanding floating rate notes in the fourth quarter.

Subsequent to the end of the quarter, with our strong cash flow from operations from 2009, we also completed the previously announced redemption of an additional $20 million of the notes. Accordingly, the company expects to report an additional pre-tax loss on extinguishment of debt of approximately $0.6 million in the first quarter of 2010.

Recapping our recent performance, our sales growth continues to be led by the success of our comp-store sales and our new store expansion initiatives. We remain committed to reducing our debt while leveraging our infrastructure.

We continue to have 100% confidence in our ability to maintain our dedication to the bottom line, while encouraging our health enthusiasts in the field to maintain their high levels of knowledge and engagement with our customers.

We’ve also continued our rollout of the Pay for Knowledge program to extend our knowledge leadership throughout the industry. It’s been very successful and has contributed to a reduction in our turnover rates versus the prior year. Keeping those experienced and knowledgeable health enthusiasts in our stores is just one way that we ensure that we continue to take care of our customers.

Let me conclude my remarks by summarizing our financial statements for the full fiscal year. For the full-year our net sales increased $73 million or 12.1% to $674.5 million, compared with $601.5 million for 2008.

Comp-store sales for the entire year increased 5.2%, marking our 16th consecutive year of growth in comparable store sales. Gross profit increased $21 million or 10.7% to $216.9 million versus $195.9 million.

Income from operations increased $5.7 million or 16% to $41.3 million in 2009 versus $35.6 million last year. Income from operations as a percentage of net sales increased to 6.1% versus 5.9%. And net income was $12.7 million for the fiscal year 2009, compared with $8.2 million for 2008.

Earnings per share for fiscal 2009 were $0.31 and $0.28 for basic and diluted shares, respectively. And for fiscal year 2008, the loss per share was $0.08 for both basic and diluted shares outstanding.

I’ll now turn the call back over to Rick.

Richard L. Markee

Thanks Mike. We are pleased to report that the positive trends that we discussed around the time of our IPO have continued through the rest of 2009. The company’s outlook for 2010 continues to be very positive.

In 2010, Vitamin Shoppe expects to open approximately 42 new stores and spend approximately $22 million in CapEx, a cheap comparable store sales growth in line with continued industry growth in the mid-single digits, improve operating margin, largely reflecting leverage on selling, general and administrative expenses have an effective tax rate of approximately 40%, have 27.8 million diluted weighted average shares outstanding for the year and grow inventory at a rate less than total sales growth.

And lastly, generate excess cash flow, which by the end of the year would be used to continue to reduce debt. We look forward to updating you with continued positive results as we begin 2010.

I’d now like to turn it over to Josh, our operator, for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press star followed by on your touchtone telephone. If your question has been answer or wish to withdraw your question, please press star followed by two. Please press star one to begin.

And our first question comes from the line of David Schick of Stifel Nicolaus. David, you may proceed.

David Schick - Stifel Nicolaus & Company, Inc.

Hi. Good morning.

Cosmo La Forgia

Good morning, David.

David Schick - Stifel Nicolaus & Company, Inc.

Two questions, really, first, your new store productivity continues to look very strong on a relative and versus your past and versus typical. Could you talk about that, is that locations? Is there something changing? Is it markets and infill and so the customer knows you’re there and is waiting for the store? So what are your thoughts on new store productivity?

And second, you talked about some of these categories, -- probiotics, homeopathic that are working or taking off. Is it, I understand that would be helpful. Is this bringing in a new customer who is discovering Vitamin Shoppe and the experience or is this a customer who is adding new things that they shop for, new categories that they shop for to an existing regular customer? Thanks.

Richard L. Markee

Hi. Thanks, David. This is Rick. I’ll take the first half of that first question and I’ll turn it over to Tony for some follow-up on the second. With respect to new store productivity, all things are in line as we had stated before. We feel really good about the performance.

As I stated a minute ago, we’re intending to open 42 stores in 2010. Over three quarters of those are -- have leases that have been signed and we’ve already started to open. I think we’ve already opened four stores this year. So we’re excited about what we’re seeing already.

Almost every store, I believe every store is in existing markets. We have some fill-back into some markets like Minneapolis where we had only had a couple of stores. But the rest of the stores are all in traditional markets that we’ve been successful in so far. So Tony?

Anthony N. Truesdale

David, the category work that we’re doing really focuses on the customer and there’s two things that are taking place. One is we’re discovering items that our best customers wanted that we didn’t carry that we’re adding to the mix that are helping sales with our existing customer base and building the basket.

The second thing is we’ve found some items that we weren’t carrying that were causing people to shop elsewhere that we’ve added to the mix that are helping us get some new customers. So it’s a little bit of both.

David Schick - Stifel Nicolaus & Company, Inc.

Great. Thanks a lot.

Cosmo La Forgia

Thanks, David.

Operator

And our next question comes from the line of Meredith Adler of Barclays Capital. Meredith, you may proceed.

Meredith Adler - Barclays Capital

Hey, guys. Congratulations.

Cosmo La Forgia

Thank you.

Meredith Adler - Barclays Capital

A couple of questions, first, do you think that that 7% comp included any benefit from the flu and people trying to protect themselves from the flu?

Richard L. Markee

You know, what I think, clearly, Meredith, there was some help. But we don’t really look at that. As Mike had stated, you saw that the increases were very strong in sports nutrition and in supplements. So we think that we were very positive about the increase in our business in almost every category. So I think it was minimal but clearly it was probably a little influence there.

Meredith Adler - Barclays Capital

Okay. That’s very good. Can you comment on the trend that you’re seeing so far in the first quarter or do you prefer not to do that?

Richard L. Markee

You know, what I’ll let Mike -- Mike is smiling here. I’ll let Mike grab that one.

Michael G. Archbold

As you know, we haven’t given any updates past the quarter and are -- we have a policy that we’re not going to discuss the current trends.

Meredith Adler - Barclays Capital

Okay. That’s cool.

Michael G. Archbold

You know, just keep in mind that we’ve continued to perform in good times and in bad and performed through the cycle, so we…

Meredith Adler - Barclays Capital

Yeah. An accelerating comp, so and then a question about, you have a lot of new stores that will enter the comp phase in the second quarter. Is that right?

Michael G. Archbold

Yeah. We do.

Richard L. Markee

Yeah. That’s true.

Cosmo La Forgia

Yeah.

Meredith Adler - Barclays Capital

Right. So, would it be fair to assume that the comp is going to actually accelerate a little bit as a result of that?

Michael G. Archbold

I think the way to look at it is in that mid single-digit comp because you’ve got two things that are in there. One, you do have the introduction of the new stores. But keep in mind that the introduction of those new stores also creates a cannibalization effect, which is netted in our comps-for-sales number.

Meredith Adler - Barclays Capital

Got it. Okay.

Richard L. Markee

And remember Meredith, last year, I mean, in the fourth quarter in which we just experienced a 7% comp, we were up against the lowest comp performance that we had had last year in 2008.

Meredith Adler - Barclays Capital

Right. And then just a couple of other questions, it sounds like you’re not looking at the gross margin as changing very much in this coming year. With sports nutrition growing quickly that’s probably a bit of a dampening factor. Is there anything else pros or cons that impact the gross margin in this coming year?

Richard L. Markee

I’ll just give -- I’ll give a quick comment, though and I’ll let Tony or Mike opine on this one. But one thing that we had stated during the IPO that we were going to do a better job of managing our promotional spending and we did a great job of that in the fourth quarter.

And as we’ve approached all of 2010, a mix, of course, as you said, is a critical part of how we manage margin. But, also, we are – we’ve continued to dial back our promotional stance ensuring that we’re competitive every day. Tony or Mike?

Anthony N. Truesdale

Yeah. I think, when I look at the marketplace, we see a pretty consistent presentation from the competitive set that we compete against. So I don’t see any downward pressure at this point in time.

Michael G. Archbold

And what we have seen in our past and expect to continue to see is some leverage on the other pieces that are in our external gross, which is occupancy, warehouse and transportation.

Meredith Adler - Barclays Capital

And so, those things would balance out against mix shift?

Richard L. Markee

Yeah. We believe that’s the case.

Meredith Adler - Barclays Capital

Okay. And then my final question is you did mention an increase in healthcare costs. Is that, I mean, something that you feel that you need to address at some point, making changes in your benefits programs or this is just something that you can absorb?

Richard L. Markee

Mike, why don’t you take that?

Michael G. Archbold

Sure. And the answer is we are always addressing it. So every year we actually look at the structure of our plan. We are a company that’s about health and wellness and we continue to encourage our associates to stay well. And in conjunction with that, we are always looking at our deductibles, at the contributions that we’re making, making sure that it’s affordable.

So we like so many other companies continue to keep adjusting our plans to make sure that they are effective in controlling cost and in promoting wellness amongst our associates. In the past year, we’ve actually put in place wellness checks for our associates where they can go online and actually do questionnaires that will help them.

And we think that that’s actually been good for our associates and helped us to really control our costs. But you’ve still got the background of the increase in medical costs that’s going on that’s, that we’re not impervious to.

Meredith Adler - Barclays Capital

And so, you would expect this coming year that would continue to be a pressure?

Michael G. Archbold

We expect -- our plans foresee that we’ll have a health care cost trend rate that will be significantly in excess of inflation.

Meredith Adler - Barclays Capital

Okay. Great. Thank you. Those are my questions. Appreciate it.

Richard L. Markee

Thanks, Meredith.

Operator

Ladies and gentlemen, again to ask a question, please press star followed by one. And our next question comes from the line of Alan Rifkin of Banc of America. Alan, you may proceed.

Alan Rifkin - Banc of America/Merrill Lynch

Thank you very much. Mike, with your platinum customers representing such a significant portion of your revenue stream, can you maybe comment on any growth that you saw in that category? And how was the comp performance for the platinum customers relative to your reported comp?

Anthony N. Truesdale

Alan, this is Tony Truesdale. We continue to see strong double-digit growth in our top customer quartiles. So we had a great performance in the fourth quarter and we were happy with that.

Alan Rifkin - Banc of America/Merrill Lynch

Are you seeing, Tony, more customers enter that segment or the existing customers just spending more in their basket?

Anthony N. Truesdale

We’re seeing strong growth in the number of customers entering that segment, which is -- which leads to our breadth and depth of assortment.

Alan Rifkin - Banc of America/Merrill Lynch

Okay. Thank you. Rick, with respect to the 42 stores that you articulated you’ll be opening in 2010. How many of those leases are already signed and relative to what you were expecting six or nine months ago? Are you seeing more or less favorable lease terms for these soon-to-be-open stores?

Richard L. Markee

Yeah. To be exact, Alan, 34 stores are already signed and we don’t feel -- we have no concern about getting to the additional eight. With respect to cost, we’re seeing some decreases in rents.

We’re working hard to find the primary locations. As you know, that’s one of the pillars of our strategy, is to get the appropriate location that is important for us because so much of our advertising effort is really driven by our location strategy.

So we’re working hard throughout the country to look for the primary locations and because of that, we’re never going to pay the bottom rents. But we are clearly seeing some decrease in average rent.

Alan Rifkin - Banc of America/Merrill Lynch

Okay. Rick, I know that you said one of your goals in 2010 was to generate excess cash flow to further reduce your debt levels. Do you have a targeted debt level that you’d like to be at the end of 2010 and are you willing to share that with us?

Richard L. Markee

Yeah. You know what, Mike, why don’t you jump on that one?

Michael G. Archbold

Sure. The expectation is that we would be able to generate excess cash flow in 2010, similar to what we did in 2009. As you recall, Alan, we had the pay-down associated with the IPO, which was like $45 million. But then, in addition, we redeemed an additional $20 million in debt. So the expectation going forward is that we would be able to generate sufficient excess cash flow to pay down about $20 million in debt in 2010.

Alan Rifkin - Banc of America/Merrill Lynch

Okay. And one more if I may and then I’ll pass it on. The pre-opening expenses obviously continue to be an expense in the quarter in which the stores are opened. You only opened up five stores versus 28. What are your pre-opening expenses running per store?

Michael G. Archbold

Extremely low, in the $10 to $15,000 per store range is all it is. And it, for us, it’s really about the pre-opening training payroll. So it’s really very small.

Alan Rifkin - Banc of America/Merrill Lynch

Okay. Thank you very much.

Michael G. Archbold

Thank you.

Richard L. Markee

Thank you, Alan.

Operator

And our next question comes from the line of Charles Grom of J.P. Morgan. Charles, you may proceed.

Radina L. Russell - J.P. Morgan

Hi. This is Radina Russell on for Charles Grom. I wanted to back up and just touch back on the comp for a minute. Is it possible for you to breakout traffic versus ticket of the 7%?

Richard L. Markee

You know, Radina, this is Rick. We won’t break it out exactly for you. But I can tell you this, that our comps -- our customer count has, clearly, we mentioned this during our IPO has been greater than our overall comp store sales increase.

So its customer count is still very strong and based on that, our average ticket has been pretty flat all year, inflation being minimal. So those are the how I would characterize it.

Radina L. Russell - J.P. Morgan

Okay. And are you seeing an uptick in number of items in the basket as well or has that been relatively flat?

Richard L. Markee

No. It’s been relatively flat.

Radina L. Russell - J.P. Morgan

Okay. And then if you could touch maybe on some of the reasons that it might be performing better or worse than average?

Richard L. Markee

You know, we don’t again give total regional breakouts. What I can tell you is that all regions had positive comps in the fourth quarter.

Radina L. Russell - J.P. Morgan

All right. And then just switching to the SG&A drivers a little bit, I know that during the IPO process you all spoke about this Pay for Knowledge program. And it could have the potential to weigh on, I guess, your operating and payroll expenses going forward. Is that something that has materialized at this juncture or is that still ahead of us?

Richard L. Markee

Mike, you want to grab that?

Michael G. Archbold

The answer is we’re in the middle of it. We’ve already been absorbing some of it and we expect to absorb it in the context of the model that we’ve got out there. So we don’t expect any significant adverse impacts.

In fact, we expect positive from it because, if we’re paying for knowledge that level of knowledge is going to do two things. It’s going to improve the customer service that our customers are going to get in the stores and actually reduce our turnover, which is one of our biggest costs in terms of running the stores.

Radina L. Russell - J.P. Morgan

Okay. And then, just lastly on advertising, has there been any significant changes, I guess to your overall go-to-market advertising strategy?

Richard L. Markee

Tony, why don’t you grab that?

Anthony N. Truesdale

Yeah. There’s been nothing, we’re still on the, basically the similar type of advertising and marketing program using our customer database that we were on in all of last year.

Radina L. Russell - J.P. Morgan

Okay.

Richard L. Markee

You know, the beauty is, is our customer database grows and our ability to continue to mine that effectively, I think we’re getting -- we have clearly increased our capability and capacity. Because, we do quarterly are doing a better job all the time of managing that database. The tactics continue to be the same.

Radina L. Russell - J.P. Morgan

Okay. All right. Thank you very much.

Michael G. Archbold

Thanks, Radina.

Operator

And our next question comes from the line of Peter Benedict of Robert Baird. Peter, you may proceed.

Peter Benedict - Robert W. Baird & Co., Inc.

Great. Thanks. A couple follow-ups. First, Mike, on the plans for the debt pay-down this year, just to be clear, you’ve already done $20 million, I think in January. Are you expecting to do another $20 million over the balance of the year or are you done for 2010?

Michael G. Archbold

No. It’s really over the balance of the year we expect an addition -- we expect about $20 million per year. So just keep in mind that it’s out of the cash flow that’s generated in 2010. So that pay-down would be towards the end of 2010.

Peter Benedict - Robert W. Baird & Co., Inc.

Understood. Okay. Great. And then just on the CapEx front $22 million for next year is a little below what we had modeled. I guess, maybe Alan’s question got to it, but are you seeing, I guess, a little bit of a decline here in kind of the maybe the cost to come to new market with stores?

Michael G. Archbold

The answer is we’re always reworking our model and it has a lot to do with two things. One, we rework our model to bring down the cost and make sure that we value engineer it so there’s been some benefits associated with that.

There’s also some benefit associated with the mix of stores, as you know, Peter. Because, depending upon whether we take an as-is location that we need to gut and pay for on our nickel versus we get what we refer to as a vanilla box, which is really all fitted out and we just got to drop in our fixtures. So some of it is a little bit of mix but we’ve also seen some benefits associated with our value-engineering of our model.

Peter Benedict - Robert W. Baird & Co., Inc.

Okay. Great. And then last question, would you guys want to discuss any recent developments on the regulatory front that which bear watching? I think you’ve seen in the news recently John McCain introduced a bill which, I guess, could potentially have some implications for the supplements business. How should we be thinking about that and those types of things?

Richard L. Markee

Well, Peter, one thing, first, it’s just a bill. So there will be clearly an opportunity for the industry, manufacturers, retailers along with all of the trade groups in the dietary supplement industry to work with members of the senate.

Number two, we and many of the dietary supplement industry members are supporters of DSHEA and the current regulations surrounding that including GMPs.

So we feel pretty strongly that there is the proper regulatory environment. What really needs to happen is to have the proper resources for the FDA to enforce it. So, at this time, we’re going to wait and see and we’ll work with our industry partners.

Peter Benedict - Robert W. Baird & Co., Inc.

Okay. Great. Thanks a lot.

Anthony N. Truesdale

Thanks, Peter.

Operator

And our next question comes from the line of Mitch Kaiser of Piper Jaffray. Mitch, you may proceed.

Mitchell Kaiser - Piper Jaffray

Thanks, guys. Good morning. Nice quarter.

Richard L. Markee

Thanks, Mitch.

Mitchell Kaiser - Piper Jaffray

Could you talk, certainly, the new store productivity looked pretty good and I know timing plays into that. But could you just comment a little bit about what you saw from the new stores?

Michael G. Archbold

Sure. I mean, just two things, so you’re right on. Some of it is always timing and in any given quarter, the number of weeks that you have stores open impacts the view of the new store productivity. So we were successful at getting our stores open earlier in Q4, which helps the number.

The other thing that has actually helped the performances is as Rick mentioned earlier, we’ve really been opening up our stores in existing markets and our existing markets tend to perform better out of the box than new markets. So, if you go back to 2007, we went new to Minneapolis, to Kansas City, to Madison, Wisconsin. So we…

Richard L. Markee

Hawaii.

Michael G. Archbold

… went to Hawaii.

Richard L. Markee

Yeah.

Michael G. Archbold

So we went to a whole bunch of new markets. That didn’t happen in 2009. And on a go-forward basis, we expect 85% of all of our new stores to be opened up in existing markets.

Mitchell Kaiser - Piper Jaffray

Okay. And you mentioned, that’s great, you mentioned cannibalization. Have you given a number of what you think that impacts the comp or how should we be thinking about that on a go-forward basis?

Michael G. Archbold

Yeah. Built into our assumptions that we’re giving is an estimate for cannibalization, which we tend to manage to be in total 1% or less on our comp number.

Mitchell Kaiser - Piper Jaffray

Yeah.

Richard L. Markee

Yeah. We of course do it location by location.

Michael G. Archbold

Right.

Mitchell Kaiser - Piper Jaffray

Okay. Great. You know, certainly, it’s early that’s, as you think about the cash generation of the company and the debt pay-down. How should we think about how you view the capital structure of the company, Mike?

Michael G. Archbold

Well, right now, if you look at us on a trailing 12-month basis on a lease-adjusted basis, we’re still close to five times leverage. So the in the near-term the primary use of excess cash flow will be used to pay down debt. Somewhere in the future, as we get to a lower leverage number that we’ll announce a targeted capital structure. But for the near future it’s pay down debt.

Mitchell Kaiser - Piper Jaffray

Okay. But, yeah, it assumed that you probably cut that in half before you start thinking about that?

Michael G. Archbold

Balance sheet debt?

Mitchell Kaiser - Piper Jaffray

Well, the adjusted debt to EBITDA something along those lines maybe.

Michael G. Archbold

It could be something a lot less than where it is now. So you start getting into threes and fours, then we’ll have a discussion about a targeted capital structure.

Mitchell Kaiser - Piper Jaffray

Okay. Very good. Thanks, guys. Good luck.

Michael G. Archbold

Thanks.

Richard L. Markee

Thank you.

Operator

And at this time, we’re showing no further questions available. Rick Markee, you may proceed.

Richard L. Markee

Well, once again, guys, thank you for joining us this morning. We look forward to continuing to update you on our progress and more to come. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.