Nutritional Supplement Maker GNC's IPO Take Two (GNC)

For the second time in three years, nutritional supplements maker GNC is trying to go public. After filing an S-1 in 2004, GNC withdrew its IPO when the diet products market began to slow down. Here are details from the GNC IPO, take two. Proposed ticker: (GNC). All excerpts are from the full SEC filing. Take a look at the 2004 prospectus as well for comparison's sake.

Company Description

With our worldwide network of over 5,800 locations and our www.gnc.com website, we are the largest global specialty retailer of health and wellness products, including vitamins, minerals, herbal, and specialty supplements (“VMHS”), sports nutrition products, and diet products. We believe that the strength of our GNC® brand, which is distinctively associated with health and wellness, combined with our stores and website, give us unmatched reach to consumers and uniquely position us to benefit from the favorable trends driving growth in the nutritional supplements industry and the broader health and wellness sector. We derive our revenues principally from product sales through our company-owned stores, franchise activities, and sales of products manufactured in our facilities to third parties. Our broad and deep product mix, which is focused on high-margin, value-added nutritional products, is sold under our GNC proprietary brands, including Mega Men®, Ultra Mega®, Pro Performance®, and Preventive Nutrition®, and under nationally recognized third-party brands. For the 12 months ended March 31, 2006, we generated revenue of $1.4 billion and Adjusted EBITDA of $129.2 million. For the first quarter of 2006, we generated revenue of $386.9 million and Adjusted EBITDA of $42.6 million.

We have a unique business model that has enabled us to establish significant credibility and brand equity with both our vendors and our customers. Our domestic retail network, which is approximately nine times larger than the next largest U.S. specialty retailer of nutritional supplements, provides an unmatched platform for our vendors to distribute their products to their target consumer. This gives us tremendous leverage with our vendor partners and has enabled us to negotiate product exclusives or first-to-market opportunities. In addition, our in-house product development capabilities enable us to offer our customers proprietary merchandise that can only be purchased through our stores or our website. As the nutritional supplement consumer often requires knowledgeable customer service, we also differentiate ourselves from mass and drug retailers with our well-trained sales associates. With our expansive retail network, our differentiated merchandise offering, and our quality customer service, we offer our customers convenience, value, and service resulting in a unique shopping experience.

Key Financial Data

Revenues: Broken down into retail, franchise, and manufacturing revenues, retail represents the lion's share (74-75% in 2004 and 2005), franchise at around 16% and manufacturing hovering around 8.8%. This breakdown has been relatively stable since 2003 at least. Total revenues were $1.34 billion in 2004 and dropped to $1.31 billion in 2005. The decrease was explained by the company as "primarily the result of decreased comparable same store sales in our Retail and Franchise segments, a reduced domestic franchised store base and decreased revenue in our manufacturing segment due to declining demand for Vitamin E soft-gel products." First quarter revenues for 2005 were $336 million; the comparable period in 2006 showed $386.9 million.

Operating Expenses: Cost of sales are included in the OPEX line, with 2005 COS at 68.2%, up over 2004's 66.5% level. Total OPEX was 94.5% for 2005, compared with 92.5% for 2004. There was an improvement in Q1 2006 in COS from 68.5% same period last year to 66.4% this year. Total OPEX dropped from 94.7% to 92.8% in the period.

Net Income: 2004 was apparently a good year for the company with $42.7 million in comprehensive net income. This dropped to $18.5 million in 2005. The first quarter of 2006 is an improvement over 2005, however, as comprehensive net income increased from $2.5 to $10.8 million.

Cash: $44 million in cash and an additional $70 million in receivables at the end of Q1.

Debt:

Senior credit facility consisting of a $95.9 million term loan facility and a $75.0 million revolving credit facility. Also from the S-1: "On December 5, 2003, Centers completed a private offering of $215.0 million of its 81/2 % senior subordinated notes due December 1, 2010. The senior subordinated notes were issued under an indenture [...] In January 2005, Centers completed a private offering of $150 million of its 85/8 % senior notes due January 15, 2011. The senior notes were issued under an indenture among Centers, certain of our subsidiaries and U.S. Bank National Association, as trustee. We have not guaranteed Centers’ obligations under these senior notes."

Key Competitors
There are apparently too many competitors for the company to list any individual one in its S-1. Categories of competitors include:

1. Parmacies and supermarkets in the US ranging from Walmart (WMT) to Walgreen's (WAG) with a slew of players in between
2. Specialty retailers: Include NBTY (NTY), Herbalife (HLF), Leiner (private), and Tree of Life (subsidiary of Koninklijke Wessanen, the Dutch conglomerate)
3. International drugstores, supermarkets, and distributors

Notable Issues To Watch For
Take a look at Market Participant's piece this week on SeekingAlpha on Recent IPOs Crippled by Private Equity Investors. Following the IPO, GNC Investors LLC, GNC Corp.'s principal shareholder will continue to hold more than half of the company; Apollo Fund will hold more than half GNC's voting power.

In a business with no clear head-on competitor but multitudes of varied comps, the bottom line for GNC doesn't look stellar. For back-of-the-envelope's sake, net income as a percentage of sales was 1.87% in 2005; compare that to NBTY's 4.5% in the same period.

What's really changed? According the the S-1, the company has undergone a substantial strategic repositioning as outlined in the quote below. While some metrics show improvement, and Q1 2006 was a strong quarter for the company, Q2 results will have significant bearing on understanding the effect of the restructuring.

In 2005, we undertook a series of strategic initiatives to enhance our business and establish a foundation for stronger future performance. These initiatives have allowed us to capitalize on our national footprint, brand awareness, and competitive positioning to improve our overall performance. Specifically, we:

• introduced a single national pricing structure in order to simplify our pricing approach and improve our customer value perception;

• developed and executed a national, more diversified marketing program focused on competitive pricing of key items and reinforcing GNC’s well-recognized and dominant brand name among consumers;

• focused our merchandising and marketing initiatives on driving increased traffic to our store locations, particularly with promotional events outside of Gold Card week;

• improved supply chain and inventory management, resulting in better in-stock levels of products generally and “never out” levels of top products;

• reinvigorated our proprietary new product development activities;

• revitalized vendor relationships, including their new product development activities and our exclusive or first-to-market access to new products;

• realigned our franchise system with our corporate strategies and re-acquired or closed unprofitable or non-compliant franchised stores in order to improve the financial performance of the franchise system;

• reduced our overhead cost structure; and

• launched internet sales of our products on www.gnc.com.
Since implementing these strategic initiatives, we have seen a meaningful improvement in our operating results. Since the first quarter of 2005, domestic company-owned same store sales have improved with each successive quarter of the year, culminating in an 8.1% increase in the fourth quarter of 2005. In the first quarter of 2006, domestic company-owned same store sales increased 14.5%. Given the significant operating leverage in our business, Adjusted EBITDA grew by 51.1% in the first quarter of 2006 compared to the first quarter of 2005. We believe these initiatives will continue to allow us to capitalize on our brand, worldwide network, value-added products, and aided shopping experience to grow our business.

Underwriters
Merrill, Lehman, and UBS.

Offering Details
Looking to raise $400 million. Last time, net proceeds were pegged at close to $280 million. $100 million of liquidation preferences will be redeemed with the proceeds; the remainder will be used for working capital and general corporate purposes.