Cost Cutting a Remedy for Dietary Supplement Maker.

LIKE others in the health supplement business, Natrol Inc. spent some time in sick bay last year, as a negative press and consumers' generally tight pocketbooks weakened the industry. Now, after some surgical cost cutting, the Chatsworth-based company is looking to new products to restore its vim and vigor.

After a string of losses, Natrol reported its second-straight quarterly profit in late July. Though revenues fell by 15 percent, company management was able to bring costs in line. Net income was far lower than it was in better times, but investors have showed renewed interest. Natrol's stock has surged in recent weeks, adding to a trend that has continued since May. Since Natrol reported earnings on July 30, its stock has risen 36 percent, to a close of $3.17 on Aug. 14.

"They've done a good job of turning their company around," said Scott Van Winkle, an analyst with Adams Harkness & Hill.

Natrol reported net income of $920,000 (7 cents per diluted share) for the second quarter ended June 30, compared with a loss of $2.4 million (18 cents) in the like year-earlier quarter. Second-quarter revenues were $20.3 million, vs. $24.1 million in the second quarter of 2000.

In its best quarter ever, the fourth quarter of 1999, Natrol earned $2.7 million and generated $24.7 million in revenue. Returning to that form will be challenging due to the intense media scrutiny that has been directed at the dietary supplements industry.

Industry troubles

"There were some products that didn't do what they say they'd do," said Van Winkle, referring to a number of companies in the sector.

Dennis Jolicoeur, Natrol's chief financial officer, conceded that the industry has developed a bad reputation, but he noted that Natrol is one of the few manufacturers to be certified under the Food and Drug Administration's Good Manufacturing Practices guidelines. "The FDA is in here all the time," he said.

Jolicoeur regarded last year's troubles as an aberration -- the first time the company lost money since it went public in 1998. "The industry continues to be very soft, most of our competitors have continued to lose money. We were able to get ahead of the curve and control expenses," he said.

To combat a reduction in sales, Natrol has reduced its workforce by 12 percent, slashed its advertising and marketing budgets, and reduced capital expenditures. In addition, senior executives were denied bonuses for 2000.

Now that its finances are stable, it's time for the company to focus on creating new sources of income, Jolicoeur said. "Right now our expenses are in-line with our revenues. Our next challenge is seeing if we can grow our top-line," he said.

But don't expect too many changes. "The focus is not to recreate a business model that allows us to make money with static revenue," said Jolicoeur. "To make it to the next level we need to see growth from new products." (Besides dietary supplements, Natrol makes and distributes herbal teas, nutraceutical ingredients and sports-nutrition products.)

Flexing its muscle

Natrol plans to introduce several new products in the third and fourth quarters, but most of its hopes ride on FlexAnew, an all-natural dietary supplement for pain management and joint health. Jolicoeur said Natrol plans to spend more money marketing FlexAnew than any other introduced in 2001.

Van Winkle also sees potential in the product. "That category is approaching $1 billion a year," he said.

FlexAnew is set to hit stores this week.

Natrol plans to introduce several other new products this year, but the number will be lower than in years past, as the company tries to focus on its strongest products. Among the entries are REMEDIEF, a formula developed to deliver natural relief of pain associated with tension, stress and overexertion; Fiberlicious, an instant high-fiber beverage; and Complete Balance, a menopause formula.

Natrol Inc.
YEAR (Dec. 31)            2000   1999
Revenue (millions)       $87.1  $81.6
Operating Expenses        93.4   67.3
(millions)
Operating Income         (6.4)   14.3
(millions)
Net Income (millions)    (5.2)    9.2
Earnings Per Share     ($0.39)  $0.67

SUMMARY

Business: Dietary supplements

Headquarters: Chatsworth

CEO: Elliott Balbert

Market Cap: $40.4 million Dividend Yield: N/A [*]

Total Liabilities: $84.7 million P/E Ratio: N/A

Long-Term Debt: $8.3 million

(*.) Natrol Inc. does not pay dividens.

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