The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this quarterly report on Form 10-Q. This report contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as "may," "expect," "anticipate," "estimate," "seek," "intend," "believe" or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, research and development expenses, general and administrative expenses, capital resources, new stores, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this quarterly report on Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth in "Item 1A- Risk Factors" in our Annual Report on Form 10-K filed on March 19, 2009 with the Securities and Exchange Commission.

Company Overview

We are a leading specialty retailer and direct marketer of vitamins, minerals, herbs, supplements, sports nutrition and other health and wellness products. As of September 26, 2009, we operated 434 stores located in 37 states and the District of Columbia and sold direct to consumers through our web sites, www.vitaminshoppe.com, www.BodyTech.com, and our nationally circulated catalog. We target the dedicated, well-informed vitamin, mineral and supplement ("VMS") consumer and differentiate ourselves by providing our customers with an extensive selection of high quality products sold at competitive prices and value-added customer service. We offer our customers a selection of over 20,000 SKUs from over 700 different national brands, as well as our proprietary Vitamin Shoppe, BodyTech and MD Select brands. Our broad product offering enables us to provide our customers with a selection of products that is not readily available at other specialty retailers or at mass merchants, such as chain drug stores chains and supermarkets. We believe our extensive product offering, together with our well-known brand name and emphasis on product education and customer service, help us bond with our target customer and serve as a foundation for strong customer loyalty.

Our Company was founded as a single store in New York, New York in 1977. Our Vitamin Shoppe branded products were introduced in 1989. We were acquired in November 2002 by Irving Place Capital Partners II, L.P. (formerly Bear Stearns Merchant Banking Partners II, L.P.) and its affiliated entities and other investors.

On November 2, 2009, we completed an IPO. Prior to and in connection with the IPO, VS Parent, Inc. merged into VS Holdings, Inc., with VS Holdings being renamed, as Vitamin Shoppe, Inc. All common shares and warrants previously held by VS Parent, Inc., were converted to common shares of Vitamin Shoppe, Inc., at approximately a 1.8611-for-one split, resulting in 15,231,446 common shares issued and outstanding at October 27, 2009. Also in connection with the IPO, 36,969 preferred shares previously held by VS Parent Inc., along with accumulated dividends in arrears, were converted into 3,764,720 common shares of Vitamin Shoppe, Inc., with the remaining 41,899 preferred shares being redeemed for cash of approximately $72.5 million. In addition, 7,666,667 new shares were issued in connection with the IPO at a price of $17 per share, resulting in net proceeds from the offering of approximately $121.2 million net of underwriters commissions. Our total outstanding common equity as of November 10, 2009, is 26,676,782 common shares.

In addition, certain designated proceeds of the IPO will be used to redeem $45.1 million of our Notes along with a premium of approximately $0.5 million which will occur during the end of the fourth fiscal quarter of 2009, which will reduce the outstanding balance of the Notes from $165.0 million to approximately $119.8 million. In connection with the redemption of the Notes, approximately $0.9 million of deferred financing fees and $0.4 million of unrecognized losses related to a terminated interest rate swap will be expensed in the fourth Fiscal quarter of 2009.

In connection with the IPO, vesting on certain stock option grants was accelerated which will result in a charge to compensation expense of approximately $0.6 million in the fourth Fiscal quarter of 2009.

On November 2, 2009, in connection with the IPO, our management agreement with IPC Manager II, LLC was terminated. A one time termination fee of approximately $0.8 million was paid from the offering proceeds per the provisions of the agreement. There are no obligations remaining under the agreement at November 2, 2009.

Segment Information

We sell our products through two business segments: retail, which is our retail store format, and direct, which consists of our internet and catalog formats.

Retail. We believe we operate a unique retail store format in the VMS industry, which has been successful in diverse geographic and demographic markets, ranging from urban locations in New York City to suburban locations in Plantation, Florida and Manhattan Beach, California, as well as to resort locations in Hawaii. Our stores carry a broad selection of VMS products and are staffed with highly experienced and knowledgeable associates who are able to educate our customers about product features and assist in product selection.

Since the beginning of 2005, we have aggressively pursued new store growth. During this period through September 26, 2009, we opened 205 new stores, expanding our presence in our existing markets as well as entering new markets such as California, Texas, Michigan and Hawaii. Our new stores typically have reached sales more consistent with our mature store base over a three to four year time period.

Direct. Our direct segment consists of our catalog and internet operations from our web sites, www.vitaminshoppe.com and www.BodyTech.com. The direct segment enables us to service customers outside our retail markets and provides us with data that we use to assist us in the selection of future store locations.

Our catalog is mailed regularly to our catalog customers contained in our Healthy Awards Program database. Our catalog is currently designed to appeal to the dedicated, well-informed VMS consumer and includes a broad assortment of approximately 12,000 to 14,000 of our most popular SKUs. Our Web sites offer our customers online access to our full assortment of over 20,000 SKUs.

Trends and Other Factors Affecting Our Business

Our performance is affected by trends that impact the VMS industry, including demographic, health and lifestyle preferences. Changes in these trends and other factors, which we may not foresee, may also impact our business. For example, our industry is subject to potential regulatory actions, such as the ban on ephedra, and other legal matters that affect the viability of a given product. Volatile consumer trends, such as those described in the following paragraph, as well as the overall impact on consumer spending, which may be impacted heavily by the current economic conditions, can dramatically affect purchasing patterns. Our business allows us to respond to changing industry trends by introducing new products and adjusting our product mix and sales incentives. We will continue to diversify our product lines to offer items less susceptible to the effects of economic conditions and not as readily substitutable, such as teas, lotions and spring water.

Sales of weight management products are generally more sensitive to consumer trends, resulting in higher volatility than our other products. Our sales of weight management products have been significantly influenced by the rapid increase and subsequent decline of products such as those containing ephedra, low carb products, and certain thermogenic products, such as Hydroxycut. Accordingly, we launch new weight management products on an ongoing basis in response to prevailing market conditions and consumer demands. As the rate of obesity increases and as the general public becomes increasingly more health conscious, we expect the demand for weight management products, albeit volatile, to continue to be strong in the near term.

In addition to the weight management product lines, we intend to continue our focus in meeting the demands of an increasingly aging population, the effects of increasing costs of traditional healthcare and a rapidly growing fitness conscious public.

Our historical results have also been significantly influenced by our new store openings. Since the beginning of 2005, we have opened 207 stores and operate 436 stores located in 37 states and the District of Columbia as of November 6, 2009.

Our stores typically require three to four years to mature, generating lower store level sales in the initial years than our mature stores. As a result, new stores generally have a negative impact on our overall operating margin and sales per square foot. As our recently opened stores mature, we expect them to contribute meaningfully to our operating results.

On October 27, 2009, in connection with an IPO discussed in Note 12- Subsequent Events, to our condensed consolidated financial statements, vesting on certain stock option grants was accelerated which resulted in a charge to compensation expense of approximately $0.6 million during the fourth fiscal quarter of 2009. In addition, our management agreement with IPC Manager II, LLC was terminated, and a termination fee of $0.8 million was paid, which resulted in a charge to expense in the fourth fiscal quarter of 2009.

Critical Accounting Policies

Our significant accounting policies are described in Note 3 of the notes to the Consolidated Financial Statements included in our financial statements for Fiscal 2008, Fiscal 2007, and Fiscal 2006, filed with the Securities and Exchange Commission on March 19, 2009, in our Annual Report on Form 10-K. A discussion of our critical accounting policies and estimates are included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. Management has discussed the development and selection of these policies with the Audit Committee of our Board of Directors, and the Audit Committee of our Board of Directors has reviewed its disclosures relating to them. Management believes there have been no material changes to the critical accounting policies or estimates reported in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.

General Definitions for Operating Results

Net Sales consist of sales, net of sales returns and deferred sales, from comparable stores and non comparable stores, as well as sales made directly to our internet and catalog customers. A store is included in comparable store sales after four hundred and ten days of operation.

Cost of goods sold, which excludes depreciation and amortization which is included within Selling, general and administrative expenses, includes the cost of inventory sold, costs of warehousing and distribution and store occupancy costs. Warehousing and distribution costs include freight on internally transferred merchandise, rent for the distribution center and costs associated with our buying department and distribution facility, including payroll, which are capitalized into inventory and then expensed as merchandise is sold. Store occupancy costs include rent, common area maintenance, real estate taxes and utilities.

Gross profit is net sales minus cost of goods sold.

Selling, general and administrative expenses consist of depreciation and amortization of fixed assets, operating payroll and related benefits, advertising and promotion expense, and other selling, general and administrative expenses.

Related party expenses consist of management fees incurred and paid to IPC Manager II, LLC (formerly Bear Stearns Merchant Manager II, LLC).

Income from operations consists of gross profit minus selling, general and administrative expenses, and related party expenses.

Loss on extinguishment of debt consists of the write-off of unamortized deferred financing fees related to the termination of our revolving credit line.

Interest income represents income earned from highly liquid investments purchased with an original maturity of three months or less.

Interest expense includes interest on our second priority senior secured floating rate notes (the "Notes") along with interest on our swap, interest on the revolving credit facility, letters of credit fees, interest on our capital leases, as well as amortization of financing costs.

Key Performance Indicators and Statistics

We use a number of key indicators of financial condition and operating results
to evaluate the performance of our business, including the following (in
thousands):



                                           Three Months Ended                           Nine Months Ended
                                   September 26,         September 27,         September 26,         September 27,
                                       2009                  2008                  2009                  2008
Net sales                         $       168,400       $       151,318       $       512,098       $       458,409
Increase in comparable store
net sales                                     4.4 %                 6.4 %                 4.6 %                 7.0 %
Gross profit as a percent of
net sales                                    31.1 %                32.8 %                32.3 %                32.7 %
Income from operations            $         8,506       $         8,900       $        33,351       $        28,872

The following table shows the growth in our network of stores during the three and nine months ended September 26, 2009 and September 27, 2008:

                                               Three Months Ended                         Nine Months Ended
                                        September 26,      September 27,         September 26,         September 27,
                                            2009               2008                  2009                  2008
Store Data:
Stores open at beginning of period                425                361                   401                   341
Stores opened                                       9                 14                    34                    34
Stores closed                                      -                  (1 )                  (1 )                  (1 )

Stores open at end of period                      434                374                   434                   374

Results of Operations

The information presented below is for the three and nine months ended September 26, 2009 and September 27, 2008 and was derived from our condensed consolidated financial statements, which, in the opinion of management, includes all adjustments necessary for a fair presentation of our financial position and operating results for such periods and as of such dates. The following table summarizes our results of operations for the three and nine months ended September 26, 2009 and September 27, 2008 as a percentage of net sales:

                                            Three Months Ended                            Nine Months Ended
                                   September 26,          September 27,          September 26,          September 27,
                                       2009                   2008                   2009                   2008
Net sales                                  100.0 %                100.0 %                100.0 %                100.0 %
Cost of goods sold                          68.9 %                 67.2 %                 67.7 %                 67.3 %

Gross profit                                31.1 %                 32.8 %                 32.3 %                 32.7 %
Selling, general and
administrative expenses                     25.8 %                 26.7 %                 25.5 %                 26.2 %
Related party expenses                       0.2 %                  0.2 %                  0.3 %                  0.2 %

Income from operations                       5.1 %                  5.9 %                  6.5 %                  6.3 %
Interest income                             (0.0 %)                (0.0 %)                (0.0 %)                (0.0 %)
Interest expense                             3.0 %                  3.5 %                  2.9 %                  3.4 %

Income before provision for
income taxes                                 2.1 %                  2.4 %                  3.6 %                  2.9 %
Provision for income taxes                   0.9 %                  1.1 %                  1.5 %                  1.2 %

Net income                                   1.2 %                  1.3 %                  2.1 %                  1.7 %

Three Months Ended September 26, 2009 Compared To Three Months Ended September 27, 2008

Net Sales

Net sales increased $17.1 million, or 11.3%, to $168.4 million for the three months ended September 26, 2009 compared to $151.3 million for the three months ended September 27, 2008. The increase was primarily the result of an increase in our comparable store sales, and new sales from our non-comparable stores, offset in part, by a decrease in our direct sales.

Retail

Net sales from our retail stores increased $17.8 million, or 13.5%, to $149.6 million for the three months ended September 26, 2009 compared to $131.8 million for the three months ended September 27, 2008. We operated 434 stores as of September 26, 2009 compared to 374 stores as of September 27, 2008. Our overall store sales for the three months ended September 26, 2009 increased due to non-comparable store sales increases of $12.0 million and an increase in comparable store sales of $5.8 million, or 4.4%. Our overall sales increased primarily in the categories of supplements, which increased $5.8 million; vitamins and multivitamins, which increased $2.5 million; and sports nutrition, which increased $5.4 million. These increases were offset in part by a decrease in our weight management category of $0.8 million, which was largely due to a recall of a non-core product which began in the second Fiscal quarter and continued in the third Fiscal quarter.

Product sales in the supplements category was among our fastest growing categories as we continue to experience significant growth in sales of essential fatty acids, or EFAs, as well as experiencing growth in other products during the quarter, such as CoQ10 and probiotics for digestive health. Sales in our vitamin and multivitamin category increased at a rate greater than the overall increase in net sales due to the introduction of new special formulations for men and women as well as an increase in sales of Vitamin D. Product sales in the sports nutrition category continues to be among our fastest growing categories and has been so for twelve consecutive quarters. We expect this trend to continue based on the growth of the fitness-conscious market.

Direct

Net sales to our direct customers decreased $0.7 million, or 3.8%, to $18.8 million for the three months ended September 26, 2009 compared to $19.6 million for the three months ended September 27, 2008. The overall decrease in our direct sales was due to an increase in our internet sales of approximately $0.2 million which was offset by a decrease in our catalog sales. The increase in web-based sales was largely due to a greater influx of customers, as a result of our prior web-based marketing initiatives. We have reduced our catalog circulation and customer prospecting as we believe catalog purchasing in general is declining in popularity as a purchasing medium, especially in the wake of the growth of online shopping. In addition, as we continue to open more stores in new markets, some catalog customers choose to shop at our retail locations.

Cost of Goods Sold

Cost of goods sold, which includes product, warehouse and distribution and occupancy costs, increased $14.4 million, or 14.1%, to $116.0 million for the three months ended September 26, 2009 compared to $101.6 million for the three months ended September 27, 2008. The increase was primarily due to an increase in product costs and occupancy costs for the quarter ended September 26, 2009, as compared to the quarter ended September 27, 2008. Cost of goods sold as a percentage of net sales increased to 68.9% for the three months ended September 26, 2009, compared to 67.2% for the three months ended September 27, 2008. The increase of cost of goods sold as a percentage of net sales was due primarily to increases in product costs as a percentage of sales of 1.3%, due to the impact of promotional coupons, and occupancy costs of 0.7%, which were offset by a decrease in distribution costs of 0.3% as a percentage of sales. The increase of occupancy costs as a percentage of sales is primarily attributable to new (non-comparable) stores in operations during the third quarter of Fiscal 2009, as compared to the third quarter of Fiscal 2008.

Gross Profit

As a result of the foregoing, gross profit increased $2.7 million, or 5.4%, to $52.4 million for the three months ended September 26, 2009 compared to $49.7 million for the three months ended September 27, 2008. Gross profit as a percentage of sales decreased to 31.1% for the quarter ended September 26, 2009, compared to 32.8% for the quarter ended September 27, 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including operating payroll and related benefits, advertising and promotion expense, depreciation and amortization, and other selling, general and administrative expenses, increased $3.1 million, or 7.6%, to $43.4 million for the three months ended September 26, 2009, compared to $40.4 million for the three months ended September 27, 2008. The components of selling, general and administrative expenses are explained below. Selling, general and administrative expenses as a percentage of net sales decreased to 25.8% for the three months ended September 26, 2009, compared to 26.7% for the three months ended September 27, 2008.

Operating payroll and related benefits increased $2.0 million, or 13.1%, to $16.9 million for the three months ended September 26, 2009 compared to $15.0 million for the three months ended September 27, 2008. Operating payroll and related benefits expenses as a percentage of net sales increased to 10.1% for the three months ended September 26, 2009 compared to 9.9% for the three months ended September 27, 2008. The increase as a percentage of net sales was primarily due to lower sales per hour for the quarter ended September 26, 2009, as compared to the quarter ended September 27, 2008, due to a greater number of new (non-comparable) stores.

Advertising and promotion expenses increased $0.2 million, or 5.9%, to $3.4 million for the three months ended September 26, 2009 compared to $3.2 million for the three months ended September 27, 2008. Advertising and promotion expenses as a percentage of net sales decreased to 2.0% for the three months ended September 26, 2009, compared to 2.1% for the three months ended September 27, 2008. The decrease is primarily due to a decline in our catalog circulation for the three months ended September 26, 2009, as compared to the three months ended September 27, 2008, as we are reducing our catalog advertising and prospecting efforts.

Other selling, general and administrative expenses, which includes depreciation and amortization expense, increased $0.9 million, or 4.1%, to $23.1 million for the three months ended September 26, 2009 compared to $22.2 million for the three months ended September 27, 2008. The increase was due primarily to increases in depreciation and amortization expense of approximately $0.9 million, and corporate payroll expenses of $0.4 million, offset in part by decreases in information technology costs of $0.2 million and professional fees of $0.2 million. Other selling, general and administrative expenses as a percentage of net sales decreased to 13.7% during the three months ended September 26, 2009 compared to 14.7% for the three months ended September 27, 2008. The decrease as a percentage of sales was largely the result of experiencing overall economies of scale with regards to these expenses relative to the increase in sales for the quarter ended September 26, 2009, as compared to the quarter ended September 27, 2008.

Related Party Expenses

Related party expenses remained level at $0.4 million for the three months ended September 26, 2009, and the three months ended September 27, 2008.

Income from Operations

As a result of the foregoing, income from operations decreased $0.4 million, or 4.4%, to $8.5 million for the three months ended September 26, 2009 compared to $8.9 million for the three months ended September 27, 2008. Income from operations as a percentage of net sales decreased to 5.1% for the three months ended September 26, 2009 compared to 5.9% for the three months ended September 27, 2008.

Retail

Income from operations for the retail segment increased $1.6 million, or 7.9%, to $22.1 million for the three months ended September 26, 2009 compared to $20.5 million for the three months ended September 27, 2008. Income from operations as a percentage of net sales for the retail segment decreased to 14.8% for the three months ended September 26, 2009, compared to 15.5% for the three months ended September 27, 2008. The decrease as a percentage of sales was primarily due to a 1.4% increase in product costs as a result of pricing promotions during the quarter ended September 26, 2009, as compared to the quarter ended September 27, 2008, as well as an increase in occupancy costs of 0.5% as a result of having a greater number of newer, non-mature stores during the quarter ended September 26, 2009, as compared to the quarter ended September 27, 2008. These increases were offset in part by a decrease in certain operating costs as a percentage of sales as described in "other selling, general and administrative" above.

Direct

Income from operations for the direct segment decreased $0.4 million, or 10.4%, to $3.2 million for the three months ended September 26, 2009 compared to $3.6 million for the three months ended September 27, 2008. Income from operations as a percentage of net sales for the direct segment decreased to 17.1% for the three months ended September 26, 2009 compared to 18.4% for the three months ended September 27, 2008. The 1.3% decrease in income from operations as a percent of net sales was due to an increase in product costs of 2.4%, as a percent of net sales, due primarily to an increase in promotional pricing, and an increase in distribution costs of 0.6% as a percentage of net sales during . . .