Little known Vitacost.com (VITC) is a relatively tiny online retailer that's been battling with giants such as Amazon (AMZN), Walmart (WMT), and General Nutrition Centers. Even so, Vitacost is a leading pure play in Internet retailing and direct marketing of health and wellness products, such as vitamins and dietary supplements. And it has managed to grow robustly, topping Wall Street's sales and profit estimates in recent years.

As a result, its stock has doubled in just about two months, leaping from $6.95 a share on Nov. 23, 2009, to a 52-week high of $12.82 on Jan. 20, 2010. It has since slipped to around $11 a share, but some analysts believe the stock will continue on its upward spiral based on prospects of further sales and earnings gains in the years ahead.

Vitacost posted impressive fourth-quarter results that beat analysts' forecasts despite the economic downturn. Part of the reason, analysts say, is that the growing $25 billion vitamin and dietary supplement market is undergoing a fundamental shift to online shopping.

Steady Sequential Growth

Yearly sales growth of dietary supplements, for example, has been more than 20%, notes Frederick W. Moran, analyst at securities firm Benchmark Co., because of people's "increased focus on healthy living, a shift from care to prevention, greater acceptance of supplements and an aging population." Over the last few years, Vitacost has delivered steady sequential growth every quarter, says Moran, who rates the stock overweight.

Sales have been growing rapidly (fourth-quarter revenues jumped 32% from a year ago) partly due to the company's aggressive pricing strategy. Vitacost offers products at 30% to 60% below manufacturers' suggested retail prices. That enables it to compete with both the discounted prices offered by its bricks-and-mortar competitors, such as General Nutrition, as well as with its online rivals. So Vitacost is well able to sustain its 30%-plus revenue growth, Moran figures, and fatten its margins as it gains market share and advantages of scale.

Indeed, Vitacost "is well positioned for accelerated growth," affirms Elizabeth Pierce, senior research analyst at Roth Capital Partners, who rates the stock a buy with a 12-month price target of $15 a share. The analyst boosted her 2010 earnings estimate to 62 cents a share on revenues of $253.1 million, from a previous forecast of 53 cents on sales of $242.8 million. And for 2011, Pierce expects earnings to leap to 80 cents a share on estimated revenues of $305.1 million.

She increased her forecasts partly because of the company's scheduled expansion of its distribution facilities, which is aimed at doubling the speed of order processing to about 1,000 orders per hour. Vitacost expects to open a new distribution center in Nevada this month and will upgrade a facility in North Carolina by the end of the second quarter.

Still Cheap

Other products that Vitacost offers on its website include herbs, antioxidants, personal-care products and sports-nutrition and health foods. Vitacost's customers not only save substantially over retail prices but also benefit from "superior customer service and timely and accurate delivery," says Pierce.

In spite of the stock's fast rise, it's still considered cheap. Vitacost's valuation "remains attractive, particularly given our outlook for continued robust growth," says Joseph Altobello, analyst at Oppenheimer (it has done investment banking for the company), who rates the stock outperform. The stock trades at just 18 times his 2010 earnings estimate of 60 cents a share and 14.5 times his 2011 forecast of 75 cents, "despite our expectations for rapid top-line and bottom-line growth for the foreseeable future," says Altobello. In 2009, the stock's average price-earnings ratio was 21.

If online shopping continues to take a bigger share of total retail sales, betting on niche Internet retailer Vitacost could well be a good way to bag a Web winner.

Editor's note:
This story has been updated to correctly reflect Elizabeth Pierce's research and that Vitacost's North Carolina facility will get an upgrade.

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