Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

GNC Holdings, Inc. (NYSE:GNC)

Q4 2012 Earnings Call

February 14, 2013 10:00 AM ET

Executives

Dennis Magulick – Treasurer and IR

Joe Fortunato – Chairman, President and CEO

Mike Nuzzo – SVP, Manufacturing

Analysts

Simeon Gutman – Credit Suisse

Mark Wiltamuth – Morgan Stanley

Christopher Horvers – JP Morgan

Kate Wendt – Wells Fargo

Karen Short – BMO Capital Markets

Brian Wang – Barclays

Matt Fassler – Goldman Sachs

Kurt Frederick – Wedbush Securities

Damian Witkowski – Gabelli & Company

Operator

Good morning, my name is Coren, and I will be your conference operator today. At this time, I would like to welcome everyone to the GNC’s Fourth Quarter and Year-End 2012 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instruction).

Thank you. Mr. Dennis Magulick, Senior Director, Treasurer and Investor Relations, you may begin your conference.

Dennis Magulick

Good morning, and welcome to the GNC’s fourth Quarter 2012 Earnings Call. This morning we released our fourth quarter financial results, which are available on our website. With me today are Joe Fortunato, Chairman, President and CEO; and Mike Nuzzo, Executive Vice President and Chief Financial Officer.

Today’s call will be limited to 60 minutes. Following our prepared remarks, we will be available to take your questions. After I read the disclaimer, Joe will provide a brief overview of the business. Mike will then review financials, after which Joe will wrap up with some closing remarks.

Now for the disclaimer. This conference call contains forward-looking statements, which include information concerning our future results, trends and other information that is not historical information. All forward-looking statements included on this call are based on information available to us on the date of this call, current expectations and various assumptions.

We believe there is a reasonable basis for our expectations and assumptions, but they are inherently uncertain and may not prove correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this call. For a list of important factors that could cause our actual results to differ materially from the forward-looking statements in this call, please refer to our public filings with the Securities and Exchange Commission in our earnings release this morning.

I’ll now turn the call over to Joe.

Joe Fortunato

Thanks, Dennis. 2012 was a year of tremendous execution of financial performance, delivered consistently across all business units throughout the year. There are number of highlights spanning our product categories and businesses.

Starting with the retail segment, for the full year 2012. One, adjusting for Hurricane Sandy impact in Q4, of approximately 125 basis points. In each quarter of 2012, domestic retail same-store sales exceeded 20% on a two-year basis. We even saw this two-year trend in December as we layered a 6.4% comp on top of 15% to prior year resulting in the two-year comp of 21.4% for December.

We meaningfully grew our customer base adding 1.1 million Gold Card members, and 2.2 million email addresses. We now have nearly 6 million active Gold Card members and more than 11 million email addresses.

Three, online GNC.com posted its fourth consecutive year of revenue growth greater than 25%, and once again, expanded operating margins, conversion rate increased 50 bps, and unique visitors are up nearly 20%.

Four, LuckyVitamin.com also grew revenues by more than 25% on a pro forma basis, leveraging GNC’s merchandising and marketing capabilities. EBITDA margin rate expanded as the business capitalized on a expected supply chain efficiencies. We expect continued top and bottom line growth in 2013.

And rounding out the retail segment, our Canadian operation posted a strong year on the strength of new product innovations.

Moving to the Franchise segment. In 2012, our domestic business posted a 15% same-store sales increase and expanded operating margins. Our international operation generated a 10%, franchisee reported local currency comp, grew the store base by 15%, and increased wholesale sales by over 30%. We are positioned for sustained growth in our current 54 franchise countries, and see long-term expansion opportunities in major geographies to be across the globe.

And a manufacturing/wholesale segment, we grew revenue with each brand partner expanding our relationship with Sam’s, introducing new products at PetSmart and launching MARKED which can now be found in Rite Aid and Walgreens stores nationwide. Overall, we generated gross and operating margin gains in each segment. For the year, earnings flow-through was nearly 40% in retail and 37% for the business overall. As we look at 2013, we have several important initiatives underway.

Today, I will preview three of them. Marketing new products and Member Pricing. First, our evolutionary GNC Respect Yourself brand campaign launched last month. This campaign was developed in collaboration with Peter Arnell who led the transformational GNC Live Well brand campaign.

Respect Yourself is designated to strengthen GNC’s existing customer base while simultaneously broadening market appeal to all age groups by inspiring those to seek the live a healthier lifestyle. Respect Yourself is an evolution of Live Well and fills upon the theme of GNC’s mission and purpose. It’s reflection of GNC as a partner for those who are personally investing in taking care of themselves. And through this partnership customers can gain knowledge in products that help them improve and maintain their lifestyle.

The second tier of the campaign, Me On GNC shows that using GNC products is one way our customers can accomplish their goals. Me On GNC will include a worldwide viral campaign encouraging customers to tell their personal success stories and to participate in contest to utilize GNC successful products such as Pro Performance and Total.

The 2013 campaign will be integrated in wide reaching. It will cover each media channel including TV, a store refresh, high-profile billboards and a yearlong social media showcase as well as targeted comprehensive print and direct marketing initiatives.

Next, we have an exciting array of new products planned for 2013 more than half of which have already launched. Our product development team combined with in-house manufacturing allows us to control the pipeline and timing of product launches. In fact, we are ahead of last year’s pace in the number of products introduced at this point of the year and expect an overall increase for the year.

We’re emphasizing this newness through our customer’s touch phones for instance all of our stores showcased new products with shelf tags and as highlighted its items on end caps. In many stores, a new arrival wall is an added feature. The 2013 new product portfolio builds on the strength and equity of our sub-brands, that has been earned in our merchants knowledge base, as well as the exclusive third-party product launches and of course, our long-standing industry leading product development capabilities.

In Sports Nutrition, our team has developed a revolutionary nutrient delivery system, which we call optimal timing technology that can be found exclusively in the GNC Pro Performance and AMP line of products. These products highlight both GNC’s exclusive Nitro-Factor, a measure of muscle building potential and the trusted buy sport label reflecting certified banned substance free.

New this year in sports includes AMP concentrated intelligent released series created for superior performance beyond of our reload VitaPak has more than 70 ingredients targeting multiple genetic pathways for improved training, strength, power and recovery. And lastly EPIQ an exclusive third party global line of specialized supplements, that has certified banned substance free.

In addition, we significantly enhanced our premier strength product, the clinically proven Amplified Wheybolic Extreme 60 to be more potent and differentiated, this product is now offered in a new platinum addition.

Moving to the vitamin category, we remain on the cutting edge of the marketplace by continually meeting consumers request for superior products more concentrated dosages in smaller pill sizes. For instance, our recently launched one a day Multivitamins feature advance formulations and ultra compensated technology. Similarly, we now offer Triple Strength Fish Oil in a 40% smaller size pill-size. Also in addition, our AMP recovery VitaPak builds upon the success of its predecessors.

And lastly, we repositioned our conditions specific preventative nutrition line. These products are designed for adjunctive therapy developed in collaboration with our medical advisory board. In each year case, we utilize GNC’s internal performance lab test to ensure our new products are the best in the marketplace, formulated to outperform the competition.

Last, but not least, I’ll provide an update on our Member Pricing program. We continue to be pleased with the test positive and consistent results. Markets in the first phase of this test continued to produce top line growth versus control driven by increased transactions in these initial Member Pricing markets. The product margin rate impact from switching to every day Member Pricing is now running approximately 50 basis points below control.

And as we have said, sales trends continue to improve wage and occupancy leverage, resulting in overall gross and operating profit margin rate and dollar expansion, compared to the rest of our chain.

More recently launched markets of Chicago, St Louis and Omaha are exhibiting similar trends to the first few months – in the first few months as previous test markets initial phases. And while our assessment of New York City was delayed due to the impact of Hurricane Sandy. Recently, we have seen similar positive trends. Overall, we are encouraged by these results.

Across the board, Gold Card penetration in all markets is up significantly. We now have customer purchasing habits on approximately 90% of our sales in these markets, which should add value to our direct marketing segmentation as we move forward.

In Kansas City, where we have multi-year experience, we are also seeing much higher Gold Card renewal rates. Again, we are very pleased with the consistency of results and overall level of performance. We continue to monitor these markets very closely as we plan our future program expansion. Based on initial projections, we expect future rollout of the Member Pricing program to be neutral to accretive to 2013, baseline financial performance guidance.

With this overall – overview, I will now turn the call over to Mike for additional data on our financial performance.

Mike Nuzzo

Thanks, Joe. Good morning, everyone. As we indicate in the press release in addition to presenting results in accordance with GAAP, we also provide adjusted results that exclude transaction related costs, sponsor obligations and executive severance, where appropriate, I will speak to these adjusted results.

For our consolidated results, our fourth quarter consolidated revenue increased 10.9% to $565 million. Revenue increased in both Retail and Franchise segment by 12.7% and decreased in the manufacturing wholesale segment by 2.4%. Fourth quarter revenue was negatively impacted by Hurricane Sandy, affecting company owned domestic retail same-store sales by approximately 125 basis points or $4 million, and approximately $5 million reduction in third-party contract manufacturing sales as a result of optimizing manufacturing capacity for new proprietary products. Fourth quarter gross profit margin calculated after deducting product, warehousing, distribution and occupancy costs with 37.9% compared to 36.1% in Q4 2011.

The increase was driven by retail segment leverage and improved wholesale margin. Fourth quarter consolidated SG&A expenses excluding adjustments were 22.4% of revenue, equal to last year. Within consolidated SG&A, advertising and promotion expense was 3% of revenue versus 2.5% last year. Fourth quarter spend reflects initial costs for our 2013 marketing campaign and investment in our Member Pricing initiative. For the full year 2012, advertising and promotion expense was 2.6% consistent with 2011. Q4 2012 adjusted net income was $49.8 million, of 30.1% increase from the prior year’s adjusted net income. Diluted earnings per share were $0.50, a 42.9% increase over Q4, 2011.

Now for information by segment. First our retail segment. Our retail segment includes domestic and Canadian corporate-owned locations and the Internet businesses. Q4 retail segment revenue grew 12.7% to $411.5 million, driven primarily by a 7.1% domestic same-store sales increase including 32.4% growth in GNC.com revenue.

LuckyVitamin.com revenue, which is not included in the same-store sales calculation, increased 33.9%. And the company operated 142 more net new GNC stores as compared to the end of Q4, 2011. Q4 retail operating income increased by 27.7% to $69.4 million and was 16.9% of segment revenue in Q4, 2012 compared with 14.9% in Q4, 2011. The increase in operating income percentage was driven primarily by expense leverage on the same-store sales increase in occupancy and payroll. We added 37 net new company-owned stores in the quarter and 142 for the year.

Next our franchise segment. Revenue with franchising is generated primarily from wholesale sales to our franchisees. The collection of royalties on franchise retail sales and fees. Q4 Franchise segment revenue grew 12.7%, $94.3 million. Domestic franchise revenue grew by 7.3% to $51.9 million with a same-store sales increase of a 11.4%. International revenue increased 20.1% to $42.4 million, on a 13.3% franchisee reported local currency same-store sales result.

Q4 franchise operating income increased 19.5% to $33.4 million and was 35.4% of segment revenue in Q4 of 2012 compared to 33.4% in Q4, 2011. The increase in operating income percentage was driven by higher gross margin. In the quarter we added 14 net new domestic franchise locations, and 119 net new international franchise locations. For the full year we added 25 net new domestic franchise locations, and 240 net new international franchise locations.

And third, to our manufacturing wholesale segment. Revenue in this segment is generated primarily by third-party sales at our manufacturing facility, and product sales to Rite Aid, drugstore.com, PetSmart and Sam’s Club. Q4 manufacturing wholesale segment revenue declined 2.4% to $59.2 million, as an increase in wholesale sales was more than offset by a reduction in third-party contract manufacturing sales.

Q4 operating income increased 5.2% to $22.3 million, and was 37.7% of segment revenue compared to 35% in Q4, 2011. The increase in operating income percentage in the quarter was driven by a higher mix of proprietary product sale. We opened 13 net new Rite Aid store within a store locations in the quarter and 56 for the year.

Next to our balance sheet and cash flow update. For the full year 2012, we generated $221.2 million net cash from operations. We spent $41.9 million on capital expenditures, primarily for new stores, store maintenance, updates and remodels, corporate IT, and other manufacturing facility expenditures. We generated a $177.4 million in free cash flow.

We entered into a $200 million incremental term loan, we repurchased $360 million in shares of common stock under share repurchase programs completing our existing authorizations. And we paid $45.2 million in debt dividends on our common stock. As of December 31, 2012, we had a cash balance of $158.5 million, and long-term debt of $1.1 billion. We have an undrawn $80 million revolving credit facility with $1.1 million pledged as collateral for outstanding letters of credit.

Now, I will provide our initial full year 2013 outlook based on current expectations. We expect total company revenue to increase approximately 9% to 10%. This is based on achieving a mid single-digit increase in domestic retail same-store sales including the impact of GNC.com. Adjusted diluted earnings per share to be approximately $2.75 to $2.80, an 18% to 20% increase.

A diluted share account of approximately $100 million and a tax rate of approximately 37%. Capital expenditures of approximately $50 million and depreciation and amortization approximately $52 million combined. Our new store expectations are as follows: Approximately 150 net new domestic retail locations, 30 net new domestic franchise locations, 175 to 200 net new international franchise locations, and 30 net new GNC-Rite Aid store-within-a-store locations.

That completes the financial update and I will now turn the call back over to Joe.

Joe Fortunato

Thanks Mike. In 2012, GNC once again demonstrated operational excellence across all business segments. Tremendous product development and innovation capabilities and the strength of our brand as evidenced by the opening of our 8,000 stores. Collectively, these traits allowed us to gain market share, maintain our industry leadership position and deliver excellent financial results.

Lastly, as a continuation of our capital allocation efforts, the company’s Board of Directors authorized a $215 million share repurchase program, while also increasing the first quarter dividend by 36% to $0.15 and anticipated to be $0.60 for the year. Now we are available to take your questions. Please limit yourself to one question, so that we can speak with as many callers as possible. After everyone has had a chance, we will be happy to take follow-up questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Simeon Gutman with Credit Suisse.

Simeon Gutman – Credit Suisse

Good morning, and thanks for taking my question, Joe, I’d like to revisit something that we discussed in the last call. We mentioned Member Pricing initially having a drag of maybe 200 basis points. Some of that was free memberships, some was the discount. But then you mentioned that you get most of the margin back over time, and I think that the numbers you mentioned today demonstrate that – I’m curious, if you get gross profit dollars up an EBITDA dollars up versus – in Member Pricing program, will you be satisfied with the program even if margin rate doesn’t get fully recoup or is to goal to get margin neutrality and that’s ultimately you won’t stop until that happens?

Joe Fortunato

Well, that goal we’d be love to be to be to get margin neutrality. But if we are where we are with some of the earlier markets now at 50 bps, I’d be very satisfied because, as we stated before, the key goal of this is to drive transactions, increase revenue stream and increase margin dollars and obviously that all results in flow through. So, to get to the point of 50 bps I’m very satisfied with. I still think there’s some more tweaking we can do, and hopefully get closer to zero, but I would live with the 50 bps at this point of time.

Simeon Gutman – Credit Suisse

Okay. And then just one follow-up is, if you look at the previous markets and the ones that have recently been rolled out, the comp lift if you – can you distinguish between existing Gold Card members, non-Gold Card members where you can track whether they were buying with you before and then just brand new people to GNC altogether?

Joe Fortunato

It’s very – we don’t have it broken out that way. But, the traffic increases would make you assumed that we are getting new – and the increase in new memberships in those markets would make you assume that we are getting new customers into the stores.

Simeon Gutman – Credit Suisse

Okay, thanks. Nice results.

Joe Fortunato

Thank you.

Operator

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth – Morgan Stanley

Hi, good morning. And great quarter. Wanted to ask about how things are looking here in the first quarter to date. You are lapping a 15.8 year ago comparison. So, just want to get a thought on how things are going on the current quarter. I see you did have commented that the December comp did successfully lap a 15-year ago comparison, but how you looking quarter-to-date on the first quarter?

Joe Fortunato

As you know we don’t ever respond on what’s going on in the current quarter because it’s always too early to tell. March is our biggest month of the year. We can say right now that we are very satisfied with the trends we saw throughout the year last year on a 22%, two-year trends quarter after quarter after quarter, and December demonstrated to me then on top of a very strong of 15.1% comparable with store sales from last year.

They were able to generate significant numbers to increase – to once again arrive at a 22% plus comparable store sales growth in December. So, I’m very confident as we – we have the momentum, over a very extended period of time now. I think one of the key criteria to call out with this company is, whether it’s our franchise company, which has performed at 22% comparable store sales growth quarter after quarter after quarter after quarter.

Our company stores, which have compare – have grown at 22% comparable store sales growth quarter after quarter after quarter, and our international businesses which have grown at 25% comparable store sales growth quarter after quarter-after quarter that I get a much better comfort level that as we go into these stronger quarters not downplaying the fact of there’s strong quarters that we have the momentum to continue to positive numbers effectively.

Mark Wiltamuth – Morgan Stanley

Okay, again the December comp was a 6.4 on top of 15.1, is that right?

Joe Fortunato

6.5, I think on top of 15.1, correct.

Mark Wiltamuth – Morgan Stanley

Okay. And given your current thoughts on the go-cart roll out timing and then give us the pros and cons for all in roll out versus a more faced progression.

Joe Fortunato

I can tell you this, we don’t have the time determined yet completely because there’s a lot of preparation to be able to roll out the chain. We will not roll out in phases after this we’re roll out to chain, because you cannot have pay roll out another 25% of your chain. You can have 50% of the chain across the country in various markets on one program versus the other when we – to the point we are right now and seeing the results, we see in every market consistently quarter after quarter after quarter and even market like Kansas City that are over two years old.

We are first of all extremely elated that we’ve been able to figure out how to transition from the Gold Card because it’s been a great program for us, but we are addressing our consumers’ biggest concerns over that program and that is that they can only shop one week of the month and this solves a lot of problems, obviously it makes the program eminently stronger and also gives us much more flexibility of pricing as you see, we’ve been able to move the Kansas City market from 250 bps down in margin from the kick off to 50 bps down now. So we don’t know the exact timing of roll out, I can tell you that with the results we’ve seen that extremely consistent New York now proving that we are seeing similar results after we kicked the Hurricane Sandy out of the way.

We’re going to roll it out as soon as possible. And to answer the second part of your question, the facts are pretty similar to what we said before. We sees a downturn of 200, 250 bps out of the range. Some of that’s made up of Gold Cards, we give Gold Cards all as beginning of the program to accelerate the program in the various markets.

And then it – within three to four months, we see across the margin dollar neutral line and then it accelerates fairly quickly from there where we as you can see from the other markets we are generating significant increase in revenue, significant increase in traffic and transactions and insignificant increase in margin dollars and obviously that all ends up in tremendous flow through, as we’ve seen from the other years where we’ve generated 10% comparable store sales growth and the flow-throughs incredible at 40% this year.

That, we – that steps the economics of the program, I mean, they haven’t changed from market to market its extremely consistent. So, within three to four months after launch, we would expect to cross the hurdle on margin dollar neutral and then, we would expect acceleration not only into the – the quarters past the timeframe we launch after three or four months but into the following year, we would expect strong, strong acceleration from the results, as we’ve seen in the past.

Mark Wiltamuth – Morgan Stanley

Okay. Well, thank you very much.

Joe Fortunato

Thank you.

Operator

Your next question comes from the line of Christopher Horvers with JP Morgan.

Christopher Horvers – JP Morgan

Thanks and good morning. So – so just, I understand, it just sounds like you’re going to do sort of a amassment on your roll out – on the Gold Card. And as you think about the guidance for mid-single digits for the year, how much is, what’s embedded in that guidance for the Gold Card roll-out?

Joe Fortunato

I’m not sure what the embedded means, but I’ll try to – I think I understand it. Mike you want to take it away.

Mike Nuzzo

Sure. So, Chris, what we did on guidance is really to provide a baseline guidance structure that is consistent with the long-term framework that we talked about most recently at the Morgan Stanley Conference. So, if we have the complete roll-out as Joe is talking about, that upside, plus upside from everything else that we’re doing and getting momentum from the marketing program, new products, would provide upside to that basic guidance framework.

And as you have seen the ability to flow through on that upside is pretty substantial. But, I would note that, that long-term framework that we provide and we said this back when we, we were at a conference is a very compelling long-term growth framework for our business. And so, it’s a good place to start, we started in a similar place in 2011, and we outperformed substantially. And so that’s been our approach and focus.

And if you’re see in the guidance, which I know you have at this point as part of the script, our goal and objective is to be able to implement this program, go through the three-four month of period of some negative implications to the business and be comfortable that seeing the results we’re seeing and anticipating and doing the full pro forma where we think things would be in the future that we hit our guidance for the year or exceeded and for the long-term built this business, so it is well positioned for a home-run year in 2014.

Christopher Horvers – JP Morgan

It’s basically then – and you also mentioned that it’s accretive to or not dilutive to accretive in terms of the roll out. So you could roll it out on a faster pace and still have it be net neutral to earnings in that quarter?

Joe Fortunato

Not in that quarter. Absolutely we will tell you this. When we get closer to the roll out, which will be probably some timeframe after the next call, we will give you more information as to what’s going to be affected on a quarter-by-quarter basis and how we’ll hit the annual numbers or exceed the annual numbers based on the roll out. And once again, there’s always periods of time in a company where you need to invest in the business to drive that business and long-term value to shareholders for the long term. And this is as ideal as I can imagine if we can transition this program, hit our objectives for the year or BP objectives for the year, and set up for a tremendous 2014, we would be late.

Christopher Horvers – JP Morgan

Fair enough. And then just, I wanted to talk to, you don’t guide specifically quarters but the mid-single digits for the year, do you expect much variation on a quarterly basis off that baseline. And then finally you mentioned renewal rates being up in KC. Can you – can you provide some maybe qualitative detail on what you’re seeing there? Thanks.

Joe Fortunato

That renewal rates in KC are extremely strong in year one and in year two, and we have seen that trend started – we were hurdling like a couple of these test markets during the 13th and 14th months. So we’re starting to see the same trends there. In regards to the comps throughout the year, certainly as I just explained, we have mid single-digit comps in the forecast. We are comfortable with that and what you’ll see though is during the quarter that we implement the changeover that you may see some decline in those comparable store-sales growths, and then acceleration in the following quarter and it could cross over quarters.

So we’ll explain all that to you as we get closer rolling it out. I can tell you that, at that time is more ideal for us as well because as you know from the quarters last year, the quarter’s comps decelerate as the year goes on. So we’re in a better position as we get into quarter three and quarter four to execute that plan and again softer numbers from last year, although not, not very soft but softer from this – from 2012.

Christopher Horvers – JP Morgan

Thank you.

Operator

Your next question comes from the line of Kate Wendt with Wells Fargo Securities.

Kate Wendt – Wells Fargo

Yeah, hi, thanks for taking my question. Can you tell us about the marketing campaign, we noticed that targeting seniors in a more active way, can you talk about how you’re altering maybe your placement strategy to try to track this demographic, which is obviously a big piece of the healthy leading trend. And one where you maybe haven’t seen best penetration previously?

Joe Fortunato

Yeah, I mean, look, we obviously understand our – what I love as our demographics and that is that we are geared towards a younger consumer base. But, we do have 20% of our demographics are the baby boomers, but they are the more sophisticated, intense lifestyle driven baby boomers they come in by multiple products again want more sophisticated formulations, they’re still running races, they’re still working out on a regular regimen, they are the lifestyle consumers.

So, our goal is to not only continue to go after the young consumer who can be a consumer for life, which we did very well in the Live Well campaign, and you are seeing some of that still in this campaign, you’ll see four commercials at this point in time to geared more towards every consumer– every age group consumer, one toward the younger consumer and one definitely geared towards the 91-year-old lady either geared towards trying to tell everybody in the young world that you need to take care of yourself.

So, we really love the campaign so far, it is in the early stages. We’re going to evolve it into further TV commercials for – coverage commercials for the third quarter, and we are going into what we think will be a huge campaign for us because its viral, it will reach millions of consumers and it’s ME ON GNC, and it is very sophisticated program that will run all the way from videos of people in our stores, videos of people on the street, we’re going to hit every component of social media from Facebook to Twitter to YouTube, obviously utilization of our own site. So this social campaign is what we’ll obviously still played to the younger demographic as well.

And ME ON GNC will be geared more towards the younger demographic. So, we’re hoping in the end of the day that we are trying to expand our demographic base and make sure that we continue to cater to this unique consumer base that we have, that I think is the most ideal consumer base of any company that I’ve seen in this space, just because of how they buy product, consumer products, and are intensely focused on getting the best products in the market and buy multiple products very intense. They are very lifestyle driven. So that’s our goal and objective, but we’re always have to expand our consumer base, and this is part of this campaign for sure.

Kate Wendt – Wells Fargo

Okay. And then just a quick follow on GNC.com revenue really accelerated in the quarter, and as you placed you can talk about maybe what changes their investments you’ve made to the business, that might be driving this. And then also a fast update on your search for a new VP?

Joe Fortunato

Yes, I mean there was actually, the quarters have been very strong, you get accelerate from Q3, Q4. But for the year, it’s been very strong all the way across, but that business is just a very brand driven, as you know it’s a high margin business for a web e-Commerce business, and they chose the strength of our brand again, because that business is very focused on our brand, and LuckyVitamin is very focused on the off brand consumer, and more of a discount line type consumer. So we’re obviously very pleased with the performance of that of GNC.com.

I have just initiated a search for a new head of e-Commerce, and for the time being we have promoted somebody internally to the head of marketing. And I’m going to stay deeply involved in marketing, as you know I was very involved in the Live Well campaign in 2010. And I’m very involved in this campaign, and I think it’s critically important to the company from our marketing perspective, in driving new people, and various age groups to our store and it’s something I enjoy immensely anyway. So that is kind to be the game plan over the next 6 months and then I’ll determine what I want to do with bringing in a chief branding officer at that point of time.

Kate Wendt – Wells Fargo

Okay, great. That’s about this year.

Joe Fortunato

Thank you.

Operator

Your next question comes from the line of Karen Short with BMO Capital Markets.

Karen Short – BMO Capital Markets

Hi, there. Just a clarification on in terms of your guidance. So obviously, before your guidance incorporate the fact they are going to roll out in new member program to the entire chain sometime after the second quarter call that what you’re saying is on the second quarter call, you’ll give us some more granularity on how the third and fourth quarter will shake out, is that everything accurately?

Joe Fortunato

Karen, maybe to just be very specific, the guidance we’ve given is the baseline guidance. And we have said that – and it doesn’t explicitly represent the roll out of – the future roll out of the member price program. However, what we’ve also said is in our planning for the roll out of the member price book program all our forecasting and projections come in with a result that would be equal to accretive to that baseline guidance. And so on the first quarter call, we’ll give you more information and if the timing is the roll out at that point, we’ll give you more detailed information about how we see that roll out the financial impact at time finding as best we can tell, but what we’re committing to is this baseline guidance and either with the Member Pricing.

Karen Short – BMO Capital Markets

Okay, that’s helpful. And then, I know, you’ve indicated the traffic is stronger at the minor market that have a new program, but can you maybe get a little more granular way and what kind of traffic trends you’re seeing in some of those markets?

Joe Fortunato

In those markets, high single-digits.

Karen Short – BMO Capital Markets

Okay, great. And then I’m just turning to inventory. I’m just wondering if you could comment a little bit, inventory growth was high, higher than sales growth. Anything to point to there?

Joe Fortunato

Well, I completely got to give you the makeup of it. I mean 60%, you say half of that growth has been due to acceleration in comparable store sales and that’s across everywhere. I mean the international markets have been double digit again. Our franchise businesses were extremely strong all through the year, 50% for the year. Our Canadian businesses were 50% for the year. And our main business remains fairly strong.

So what we’ve to do as usual is keep up half of that due to turn, increased turn due to higher faster comparable store sales growth. The rest of it is due to raw material supplies and various things that we’ve had to build up for – continues strong performance in the fall, in this year. And the fact that there is a little bit of price decrease in there as well. So that kind is the makeup and it’s really kind of simple. Most of it turned a little bit of cost increase built in there and then there has been increases across supply chain for raw materials and a lot of things that need additional lead times we’ve had to accelerate ordering raw materials way ahead of times because the international markets with a lot of these specialized formulas require ingredients that require much longer lead times. So we have to have them available so we can continue to supply the international markets.

Mike Nuzzo

Yeah Karen, one more point to make to. We’ve over the last couple of years have made a lot of positive change to our supply chain. And so in 2012 our charges for obsolescence, we’re at an all-time low, and so I think where we’ve been able to really manage that piece of the inventory component pretty well.

Joe Fortunato

Yeah. And Mike, Thanks Mike. That’s a great point because the summary of that is we have the inventory in a right place, and it’s turning very effectively. So, like Mike said obsolescence an all-time low, we’re very pleased.

Karen Short – BMO Capital Markets

Thanks. That was very helpful. And I guess just the last question is, can you maybe just give a little bit of color on specifically what the reduction was in manufacturing and then what the new proprietary products are, if you want to give any color?

Joe Fortunato

There’s a lot on the, I’ll start with the manufacturing piece. There were several changes in the regulatory environment in some significant countries for us like Mexico, and Korea, and we had to get product into the marketplace before the regulatory changes took place. So, we had to do a lot more production for the international markets to beat the regulatory guideline changes and then going to the reformulations and new products after that, and that forced us to consume production time for that international market product regulatory environment issues. And we had to push out some contractor business or some business, and that the easiest one to push off was the contract business because of the very low margin business, it has very little impact on these.

Karen Short – BMO Capital Markets

Thanks. That’s very helpful.

Operator

Your question comes the line of Brian Wang with Barclays.

Brian Wang – Barclays

Questions and congratulations on a great year, guys.

Mike Nuzzo

Thanks, Brian.

Brian Wang – Barclays

The first question, I have is just a clarification probably from Mike. Does the guidance include the benefit of the $250 million share repurchase authorization that you announced?

Mike Nuzzo

No. As you see in the guidance, we have – we’ve indicated that it’s based on a share count of roughly where we’ve ended the year around 100 million shares.

Brian Wang – Barclays

Yeah.

Mike Nuzzo

And, so – we were very successful last year with putting together a total shareholder return package that not only included, obviously growth and EPS, But also a dividend, which as you see we raised pretty meaningfully and a share repurchase program. And so, so we wanted to reload so to speak to be able to do that opportunistically as we get out through the year. It’s always difficult to tell when exactly we’ll make those purchases and the effect on share count. So just again for baseline guidance, we want to stick with where we are currently with share count.

Brian Wang – Barclays

Okay. Great, thanks. And then my other question is on the new market product line. I think you said that it’s introduced now into some of the drugstore chains. Is that, I think the original plan was to introduce it potentially into the mass market. So is it drug channel in lieu of the mass channel. And, I guess if you could just talk about that decision and what do you think that’ll be a significant growth opportunity?

Joe Fortunato

Well, we’re pleased with it so far. It’s done pretty well in our own stores; obviously our brand dominates in our stores. So it’s not as strong as our own brand. But it got a lot of to exposure by being in our own stores, and now we’ve taken it into and it is just literally hitting the shelves of variety and Walgreen as we speak. And, our goal is to take that product line as broadly as we can, we’re still talking to Wal-Mart We’re still talking target, we’re talking a lot more, a lot of other drug chains and some food chains as well. So drug chains are strong chains. So there is no limitation on where we want to take that product line. We’ve seen excitement from the drug channels so far, so obvious you’ve gone there. We’re also willing to go into the club business separately, they’re interested in.

So we have – and they also as you know very well. I am Sure. All of the mass channel or food, drug channel players all change out at various times in a year and it’s not once-a-month like we do once every other month like we do. So you have the time your entry into those stores, and this was the right time you provided and obviously the right time of Walgreens as they’re going through some repositioning in those stores. But Wal-Mart may do it a month or two later and some of the other mass market players making that as well, so it’s going to be a role – a continued roll out throughout this year and we’re trying – we’re trying to get as broad expansion on that line as possible. I think right now it is pretty well, pretty good well accepted line, where were we’ve seen.

Mike Nuzzo

All right. Thank you very much.

Operator :Your next question comes from the line of Matt Fassler with Goldman Sachs.

Matt Fassler – Goldman Sachs

Morning. My first question relates to your New York, Chicago entry, you had spoken on your last call to some discrete cost associated with entering that market. I know it’s a rather unique situation, but any sense of how the costs ultimately came in relative to your plan?

Mike Nuzzo

The costs were fine we’ve spend whatever we have to in the way of direct marketing and most of that is direct market cost associated with that expansion and obvious some graphics change out there is things like that, but we manage – we exchange – change our graphics in our stores on a semi – on a bi-monthly basis anyway. So it’s really no not much additional cost there are any and a little bit of change in the inside of the stores on the set, but mostly, it is the direct marketing piece that accelerates and we’ve seen that come out right in line which were we anticipated.

Matt Fassler – Goldman Sachs

Got it. And another quick one, if I could, can you just give us a little more color on categories and whether there’s any meaningful deviation from trending any other major categories across the box?

Mike Nuzzo

No. We really haven’t seen. We fortunately been strong in all our categories all year long. And you know on a two-year basis, again if you look at the consistency of the comp growth in each of the categories you would see, they are very consistent, a little bit of an acceleration in the diet category which totally (inaudible) but outside of that, we’ve seen pretty consistent performance on a two-year basis across all of our businesses and a strong brand presence as a component of our sales in regards to the mix of sales.

Matt Fassler – Goldman Sachs

And real quickly for Mike. The buyback, you work through prior buybacks pretty quickly. What do you anticipate the pace of completion of this authorization to be?

Mike Nuzzo

I can’t –I can’t really tell you at this point, Matt. We’ll just have to see how it plays out. We had a great opportunity last year to buyback a significant number of shares in conjunction with a secondary offering. So that was – that was taking advantage of a really good opportunity. But we’ll step to see how things play out. I can’t – I can’t give you much color on that at this point.

Matt Fassler – Goldman Sachs

Got it. Thank you.

Mike Nuzzo

Thanks, Matt.

Operator

Your next question comes from the line of Kurt Frederick with Wedbush Securities.

Kurt Frederick – Wedbush Securities

Good morning. Had a quick follow-up on earlier question on contract manufacturing. So the – I guess the mix shift is on Q4, is that coming and going back to market historical I guess mix shift going forward in Q1 and beyond?

Joe Fortunato

Yeah, absolutely. This was a one-time issue where these regulatory environment change very quickly as there were different new governmental agencies who took over the areas of regulation, especially in Mexico, and the deadlines were very, very tight. So we had to do it immediately, and once again our preference was push off a low margin contract business. But, we’ll see consistency going forward as far as we’re planned up.

Kurt Frederick – Wedbush Securities

And a question I had was on new stores. In the release you had a comment in there about new store showing increasingly strong initial your sales productivity. Just wonder if you could expand on that and just may be talk to the sales ramp to breakeven and maturity?

Joe Fortunato

We’re still very pleased with performance, and we’re opening quite a few stores. I think we’re on to 150 net for the year domestic and obviously in the international market. So there’s a lot of growth opportunity still. But the – if the domestic markets we look at them every month and we see the performance of these stores we’re opening now versus how the stores used to perform, even in the hay days of new store openings when we’re growth – unit growth story in the ‘90s, they’re performing extremely well and very consistently as well. So, we still see a lot of opportunity for that and it kind of goes back to the – the numbers are pretty consistent.

You get to year one, you get – I mean you’re profitable after month nine or ten, you get your money back in two to two and half quarters years, and we’re very –and we’re very active in that most of the time by short year three they’re returning over 20% margins on revenue from a four-wall score basis.

Kurt Frederick – Wedbush Securities

Thank you.

Operator

Your next question comes from the line of Damian Witkowski with Gabelli & Company.

Damian Witkowski – Gabelli & Company

Good evening. Congratulations on a good year and a good quarter. If you look at Nielsen data, the December was the fourth quarter was pretty good, pretty good overall up almost 7% then you came in higher than that. But in – as first impression in particular was very strong and similar overall in track channels. So, I’m wondering if you use sort of same – same sort of results within your categories?

Joe Fortunato

Look, we have accelerate, it’s hard to match up against that data because the business is so significantly different than ours commodity versus specialty business, consumer basis all different. But we – the way and the way they categorize this is different than we categorize many of times. So what we have seen is in the majority of cases where they’re struggling with joint, we’re doing better with joint. The fish oil business is strong on our end, I think there is a slow a little bit. They’ve seen an acceleration, if I believe in vitamin D and that started to slow down a little bit. So those kind of commodity type trends, we’re very consistent with where they are at or better than that. With the Specialty business, which is again 90 – over 90% of our business there’s really no comparison. So it’s really, really hard to tell you how we stack up against them. All I can tell you is at the rate of growth we’ve seen over the last year and this year and even 2010, we’re taking market share.

Damian Witkowski – Gabelli & Company

And then, just looking at your new store openings this year. Domestically, are you looking into strip malls or a malls where is a good balance where are you looking to open these stores?

Joe Fortunato

Both, we’re pretty much in all the malls at this point. So most of the development that we’re seeing is in strip centers and power strips. And a few downtown locations in some major markets, we still see some good opportunities as well. But, the pipeline on real estate continues to be very good and the deals that we see continue to be very attractive and very consistent with what we’ve seen in the last couple of years.

Damian Witkowski – Gabelli & Company

And internationally, which markets in particular, I know it’s franchise, but...

Joe Fortunato

Well, it’s very spread out to be honest with you, I mean we’ve got still – a lot of growth, some growth in Malaysia. We are still see significant growth in Mexico just opened their 500 store, and now we had our Korean franchise group leader yesterday, and they are going for market penetration across the country in various formats of stores and it is significant.

So those are what I (inaudible) of the international market for a long time. We got an opportunity to do a land grab a little bit like we did here in the U.S. they also have the opportunity for much, much stronger expansion, how we do with markets like we do with various stores formats, their Internet businesses and obviously what we are very focused on and you can see from the results, where we would increase towards 50%.

But we have a 30% increase in wholesale sales, very, very focused on new product introductions into those markets. And I can tell you, in Canada, we did 50% comparable store sales growth that was driven by new product introductions, Pro Performance and VitaPaks drove that whole comp. So that’s all important. Our product pipeline and our consumer packaged goods material product development is to this business and how much it can accelerate our because of the differentiation we continue to have in all our new product introductions.

Damian Witkowski – Gabelli & Company

To that point. I mean last me. Just – you look at your, your innovation pipeline is obviously very robust for this year. Is this the sort of new annual kind of pace or you actually sort of pulling forward some innovation from forward years?

Joe Fortunato

We don’t really pull forward, we accelerated, and I have to apologize to Karen Short, because I didn’t get before she got off line, I didn’t get into the new products which she asked me to. But this year, we have launched over 77 new products, where in the prior year we only launched about 50 and we are on a very good pace for 2013. The pipeline is full and it’s all about how we want to time the release of these products, because you want – you put a lot of money and time and effort into either scientifically based products or formulations and making sure you’re getting the best formulations in the market, and you want to make sure that you’re are not pushing the launches too tight to each other, because then you don’t get the benefit of the launch that you spent a lot of time and effort and money on.

So, we are very good at timing on how we want to launch these products in the marketplace, and I can tell you from all you saw in my script of component of my script as I lead into this. I probably couldn’t be more pleased with how we have introduced products into the market this year and we have quite a few more introductions coming in January, or obviously in February, March and April, and then it will slow down because the importance is to get these products, and that’s why I move some into the fourth quarter of this year.

You get these products into the pipeline earlier and once you get into the pipeline earlier, it builds momentum through the year. These products to mature sometimes can take two to three years, I mean Total Lean, look at Total Lean as is on the curve, I think almost 50% growth this year, offered growth the prior year and accelerated again into 2013. So we are – that’s how we try to time these things, and it’s more of an art than a science from that perspective.

But I think we do a very good job of it. And the products we’ve released this year, just the – the concentration, the focus on what consumers want, once again, I’ve said this many times. I think our merchants know the consumer in this space, especially our demographic, better than anybody in the world. And obviously, how they react to our new product introductions continues to show that we do, and the ability to grow these sub-brands that have tremendous brand equity at this point in time.

It’s critically important to us and that’s we continue to focus on. And our consumers, again pretty unique consumers, looking for sophistication, concentration. We know women have been asking for smaller pill dosage. We are very focused on that right now as we talked – I talked about some in the script. So I think we’re really doing a very good job and ahead of the curve on a lot of the additions.

Damian Witkowski – Gabelli & Company

Thanks, congrats again.

Joe Fortunato

Thanks.

Operator

And I would now like to turn the call over to Mr. Fortunato, for closing remarks.

Joe Fortunato

I just want to thank everybody for joining us on the call, and that we are excited about the performance for 2012, and more so about that momentum that we have consistently shown across all our businesses over the course of four to six quarters at a minimum. So thank you, appreciation for joining the call. Look forward to talking to you again.

Operator

And ladies and gentlemen with this we conclude today’s presentation. We thank you for joining. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: GNC Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts