Natrol Battles Competition In Focus on Core Markets By JACQUELINE FOX Staff Reporter Natrol Inc., the Chatsworth-based manufacturer of herbal and dietary supplements, continues to face fierce competition for shelf space from national retailers stocking up on their own brand of products. The company’s traditional markets vitamin centers, health food stores and specialty grocers remain loyal and relatively strong outlets, offering Natrol some relief. In addition, returns and reimbursements for damaged or outdated items for the company in 2002 represented only 8.7 percent of gross sales compared to 2001, when returns amounted to approximately 14.5 percent of gross sales. Nonetheless, Natrol has been operating in the red for the last two years and it doesn’t appear as though 2003 will wind up much different. The company lost $6.1 million on revenues of $70.3 million in 2002, compared to a loss of $20.3 million on revenues of $76.2 million in 2001. For the third quarter ending Sep. 30, Natrol lost $392,000 on revenues of $17,599. Natrol’s stock on the other hand has shown promise. After hovering at just above $1 a share for much of the first half of the year, the stock hit a high of $3.55 in September and remained at around $2.65 for most of the third quarter. The company’s stock closed at $2.65 on Dec. 18. “The competition from private labels remains very tough for us,” said Dennis Jolicoeur, Natrol’s vice president and chief financial officer. “However, we do see our core business solidifying, which we think is positive. Our rate of returns on products we are unable to sell has also declined substantially, down from 16 percent in 2001 to roughly 5 percent in 2002 and we are pretty happy with the stock price.” Closing units Natrol’s strategy has been to delete slower-moving and unprofitable products and reduce competition with private label “house” brands. In addition, Natrol also shuttered all but its warehousing and distribution units at its Prolab operations in Bloomfield, Conn. in August, slashing about 10 jobs and bringing some executives back to Chatsworth in order to consolidate operations for that division, which develops sports nutrition and performance enhancing products for athletes and others. “We have more people here in Chatsworth and more resources and by bringing folks out here we won’t have people working in isolation,” said Jolicoeur. “The impact of the Prolab consolidation won’t show up for 2003, but we do expect it to have an impact on our growth in 2004. We think the operation will be more successful here because our efforts will be much more coordinated. So, we are cautiously optimistic that we will see some moderate growth in the next year.” Natrol also manufactures Laci Le Beau Teas, as well as a number of products under its Essentially Pure Ingredients and Annasa lines. In addition to concentrating on core markets, company officials and others tracking the industry are hoping that beefed up legislative oversight of the sector may also help Natrol strengthen its numbers going forward. Several years after federal legislation was first introduced to toughen up regulations of the industry, the U.S. Food and Drug Administration has begun to crack down on unscrupulous manufacturers making false claims on their products, a phenomenon that ran rampant in the 1990s that resulted in an outpouring of negative coverage in the press. Industry standards “Laws have called on the FDA to come up with good manufacturing standards for the industry, and in March of this year they finally came out with a proposal for doing just that, but it took nine years to get here,” said Jon Benninger, director of business development for Natural Products Industry Insider, a Phoenix-based trade association for the industry. “When these new guidelines were first established earlier this year it was projected that 25 out of every 100 companies out there wouldn’t be able to fully comply. So the people who are going to be impacted are those who are operating illegitimately, and that will benefit the upstanding companies, such as Natrol.” Analysts that once covered Natrol have put the company on their back burners to essentially allow time for the industry to reconstitute itself. But Benninger says, despite Natrol’s financial woes, there are strong indicators the company will still be standing firm, once the dust settles.