Corporate Focus: Natrol Relies on Acquired Niche to Stabilize Revenue By CARLOS MARTINEZ Staff Reporter Two years ago, dietary supplement maker Natrol Inc. was looking forward to 2001, anticipating its biggest year ever. In 2000, with record sales up more than 20 percent over 1999, the Chatsworth-based company could do no wrong as mass-market retailers like Wal-Mart Stores and Rite Aid Corp. added more and more shelf space for Natrol’s herbal dietary products and vitamin supplements. But as quickly as revenues went up in 2000, they plummeted in 2001. Retailers saw the same opportunity Natrol did in the increased popularity of herbal supplements like Echinacea and St. John’s Wort and began developing their own brands, pushing out Natrol’s to make room for theirs, said Scott van Winkle, an analyst with the investment banking firm Adams, Harkness & Hill in Boston. The effect was clearly felt by Natrol the company lost $20.3 million on $76.2 million in revenue in 2001, compared to a year earlier when it lost $5.2 million, due in part to the estimated $6.5 million in costs and expenses associated with the $28.5 million acquisition of sports supplement-maker Prolab Nutrition in October 1999. Natrol reported $87.1 million in total sales in 2000. Van Winkle said that, besides the shelf space issue last year, a weakening overall in the dietary supplement market impacted the company. But it gets worse. Natrol suffered through a difficult fourth quarter last year, when it recorded a $23 million loss on $14.9 million in sales, due mostly to a $20 million write-down on goodwill related to its Prolab acquisition. Goodwill is the amount by which the purchase price exceeds the net tangible assets of the acquired firm. Without the one-time charge, Natrol would have lost $3 million. Thanks in part to the products Prolab brought with it in the acquisition in 1999, Natrol has rebounded in the last two quarters and managed to break even on $17.5 million in revenue in the first quarter. It was followed by a nearly identical $17.8 million second quarter (breaking even again on net income), still down from the same period last year when the company reported $920,000 in net income on $20.3 million in sales. “The (supplements) category continues to be a challenging industry overall, but Natrol’s outperformed their competitors in being able to generate profits,” van Winkle said. That, however, hasn’t helped its stock price much as Wall Street remains skeptical about an industry dogged by controversy, such as ongoing court cases against Panda Herbal International, Western Dietary Products Inc. and others over allegations they made false claims about their supplements. The company’s stock price hovered around $1.10 last week, very close to its 52-week low of $1. Prolab’s products have allowed Natrol to market to sports nutrition enthusiasts through an aggressive advertising campaign in niche publications. “It’s an area that’s not economically sensitive and it continues to grow,” van Winkle said of sports nutrition consumers. Elliott Balbert, president and chairman of Natrol, said the company isn’t done either with trying to snag more of that particular market share. “Our Prolab division will launch a new meal replacement product (this month) which is core to the sports nutrition arena,” he said. On another front, to battle the decline in shelf space, the company launched an Amway-like direct marketing network of individual distributors last month. The effort, Balbert said, will give the company the added boost of a network of distributors that can directly market its brand to consumers on the neighborhood level. Balbert said the company will begin shipping products to some of these distributors this month, with a national rollout scheduled for January. Van Winkle said Natrol’s leadership has managed the company well despite the downturn in revenue over the last two years. “It’s very difficult to change your business after you improve revenue by 20 percent one year and your numbers go down the next,” he said. Van Winkle projects 5- to 10-percent revenue growth in the next year. “They don’t have any blockbuster products out there, but they have nice sales results so far,” he said.