FitLife Brands Eyes Acquisitions, Margin Gains to Offset Organic Growth Headwinds

Key Points

• FitLife Brands is prioritizing acquisitions to expand its supplement portfolio and diversify sales, using debt-funded deals while avoiding stock issuance. The Irwin Naturals acquisition roughly doubled the company’s size, bringing last-12-month revenue above $100 million and adjusted EBITDA above $14 million, according to management.
• The company is pursuing margin improvements after Irwin lowered blended gross margins to the mid-30% to high-30% range. Longer product shelf lives, reduced inventory obsolescence, lower fulfillment costs and SG&A adjustments are expected to support profitability over time.
• FitLife faces organic-growth pressure from Amazon algorithm changes, weaker specialty-retail traffic and declining demand in categories affected by GLP-1 drugs. Management is responding with external digital marketing, new product development and selective acquisitions, although it has found few attractive targets in the current market.

FitLife Brands NASDAQ: FTLF outlined its strategy to grow a portfolio of nutritional supplement and wellness brands through acquisitions, e-commerce sales and operational improvements, while acknowledging recent organic-growth headwinds tied to Amazon changes, specialty retail traffic and weakening demand in certain product categories.

Chairman and Chief Executive Officer Dayton Judd said FitLife owns 16 brands and operates as an asset-light business, owning brand intellectual property while using third parties for manufacturing. The company sells products through e-commerce and wholesale channels, including GNC franchise stores, Walmart, CVS, Walgreens, Costco Canada, Sprouts, Fresh Thyme and Whole Foods.

About half of FitLife's revenue comes from online sales, Judd said. The company does not sell products directly to Amazon, but instead operates as the seller of its brands on the marketplace and manages its own product pages and advertising.

Growth Strategy Built on Acquisitions

Judd described FitLife's transformation since he became interim CEO in 2018, when the company was facing debt default and was “literally on the verge of bankruptcy.” He said the company had been heavily dependent on GNC, with about 99% of revenue coming from wholesale sales before FitLife expanded its online operations, particularly on Amazon.

FitLife subsequently used cash flow from its existing businesses to acquire additional brands, seeking both growth and a more diversified customer base. Its recent transactions included Nutrology in April 2021, Mimi's Rock Corp., which included the Dr. Tobias brand, in February 2023, MusclePharm assets out of bankruptcy in October 2023, and Irwin Naturals more than a year ago.

Judd said the Irwin Naturals purchase roughly doubled FitLife's size. On a last-12-month basis, he said FitLife had more than $100 million in revenue and adjusted EBITDA of more than $14 million.

The company uses debt for acquisitions and seeks to pay it down afterward rather than issuing stock, according to Judd. He said FitLife has not issued shares for acquisitions and has a simple common-stock capital structure. Judd also said he owns about 60% of the company on a fully diluted basis, which he characterized as aligning management with shareholders.

Margin Improvement Efforts

President Ryan Hansen said the Irwin Naturals acquisition lowered FitLife's blended gross-margin profile because Irwin historically operated with somewhat lower margins. He said the combined company is currently generating gross margins in the mid-30% to high-30% range, compared with low-40% margins before the acquisition.

Management is working to improve those margins by extending shelf life across Irwin products where possible. Hansen said most Irwin products historically had two-year shelf lives, while retailers often require products to have at least 12 months of dating remaining before putting them on shelves.

That requirement effectively left the company with about a year to sell products after manufacturing, he said. Irwin had been recording more than $1 million and potentially close to $2 million annually in inventory obsolescence. FitLife has worked to transition formulas it owns to three-year shelf lives, which would double the sellable period from 12 months to 24 months.

Hansen said the benefit will take time to materialize because the company must first cycle through older inventory. FitLife also has made changes to its third-party logistics, transportation and distribution arrangements that are expected to reduce fulfillment costs. In addition, management has made SG&A and headcount adjustments following the Irwin acquisition.

Organic Challenges and Portfolio Response

Hansen said FitLife operates in a fragmented supplement market with favorable long-term category trends, but said growth has not been evenly distributed among competitors. The company identified three recent challenges to organic sales:

• Amazon algorithm changes that have favored brands with traffic and presence outside the Amazon ecosystem.
• Lower foot traffic at specialty retailers, where consumers may be more sensitive to premium prices.
• Exposure to declining segments, including weight-loss and cleanse products affected by GLP-1 drugs, as well as certain men's health and testosterone-focused products.

Hansen said FitLife is responding by building external traffic through TikTok, Google and Meta advertising, while also pursuing generative-engine optimization to improve discovery through artificial-intelligence search tools. He said Irwin, which was already broadly distributed outside Amazon, has performed above the company's expectations since its acquisition.

Management also plans to introduce products outside the categories facing pressure. Hansen said the company's product-development pipeline is focused on areas where FitLife believes it has “permission to win” or an existing presence that can be expanded.

Judd emphasized that the company is not experiencing a rapid revenue decline. He said quarterly revenue over the prior three quarters had generally been in the $25 million to $26 million range, with declining brands and channels being substantially or fully offset by growth elsewhere. Still, he said FitLife needs to restore organic growth to support a higher valuation multiple.

Acquisition Market Remains Difficult

While FitLife intends to remain a consolidator in the supplement industry, Judd said the company has not found a transaction it feels compelled to pursue recently. He said FitLife has signed more than 75 nondisclosure agreements, and possibly close to 100, over roughly five years but has completed four deals.

Over the past year, Judd said the company reviewed about two dozen potential transactions and did not see a single business presented as growing. Many potential targets were direct-to-consumer businesses experiencing declines while spending heavily on advertising in an effort to stabilize sales, he said.

About FitLife Brands (NASDAQ:FTLF)

FitLife Brands, Inc is a developer, manufacturer and marketer of nutritional supplements. The company focuses on products intended to support sports performance, weight management, energy, recovery and general health, serving consumers through a portfolio of branded dietary supplements.

FitLife's product portfolio has included brands such as NDS Nutrition, PMD Sports, iSatori and Muscle Elements. Its offerings include powders, capsules, tablets and other supplement formats marketed to athletes, fitness enthusiasts and consumers seeking wellness and nutrition products.

The company sells its products through e-commerce channels, specialty retailers, gyms and other distributors.

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