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GNC Holdings (GNC) had a memorable 2012 and is positioned to continue taking share in the market. Its competitors have been unable to keep up, like Vitamin Shoppe, which has cited both economic issues and natural disasters like Hurricane Sandy affecting the bottom line. GNC has a growth strategy unmatched in the industry and is set to report on Monday, April 29.

Quick overview

GNC, or General Nutrition Center, operates as a worldwide specialty retailer of health and wellness products. Its products include vitamins, sports supplements, herbs, dietary supplements, beauty products, and workout accessories. GNC is one of the most popular companies in America and has an estimated 82% brand recognition.

Annual results 2012

2012's full year results showed the company experienced strong growth on both the top and bottom line. The following are some of the highlights from the report:

2012 vs. 2011:

  • Revenues increased 17.3% to $2.43 billion

  • Revenues increased 17.6% in retail, 21.9% in franchising, and 8.2% in manufacturing and wholesale

  • U.S. same-store sales increased 11.5% in company-owned stores and 15% in franchised locations

  • Net income increased 81.6% to $240.2 million

The market reacted to GNC's growth by sending it up 17.14% in 2012, which is shown in the chart below. It ended the year well off of its highs, but have since surpassed them in 2013.

(click to enlarge)

Store expansion

2012:

  • Opened 142 company owned stores in the U.S.

  • Opened 25 new franchise locations in the U.S.

  • Opened 240 international franchise locations

  • Opened three company-owned stores in Canada

  • Added 56 new Rite Aid store-within-a-store locations

2013 Expectations:

  • 150 new locations in the United States

  • 30 new franchise locations in the United States

  • 175 to 200 new international franchise locations

  • 30 new Rite Aid store-within-a-store locations

Store-Within-A-Store

Rite Aid (RAD) currently operates 2,181 store-within-a-store GNC locations. This partnership allows Rite Aid to sell GNC's products within its stores. Overall, Rite Aid has over 4,700 stores in 31 states, making it one of the largest drugstore chains in the United States.

With the 2,181 stores selling GNC products, this still means that there are over 2,500 other stores that could bring the products in. Rite Aid has publicly stated: "because of the popularity of GNC products, the stores-within-a-store have consistently outperformed the overall vitamin category." I believe all Rite Aid locations will get on board within the next 10 years. This could add up to $100 million in additional revenue, not even factoring in the same-store sales growth of existing locations.

First quarter expectations

EPS Expected$0.72
EPS Growth YOY20%
Revenue Expected$674.25 million
Revenue Growth YOY8%

GNC has consistently beaten earnings expectations since going public in April of 2011. I expect nothing different this quarter, especially since the beginning of the year is when people form their New Years resolutions, which often include "getting back in shape" or "losing weight." Also, the growth of GNC's gold card membership program has been on the rise, which will provide a buffer to revenues.

Current valuation

As of April 25, GNC is trading around $43. It is just below its 52-week high of $43.99, which could be easily surpassed on an earnings beat. Compared to its top competitor, Vitamin Shoppe, and the industry, GNC is undervalued. Take a look at the current and forward price-to-earnings ratios:

CompanyP/EForward P/E
GNC18.913.1
Vitamin Shoppe25.118.1
Industry Average22.519.8

If GNC were to trade at the same multiple of 18.9 based on full year earnings expectations of $2.75, it could reach $52 by this time next year. This valuation, paired with its 1.60% dividend, makes for an incredibly cheap stock and great entry point.

Concluding thoughts

The health industry is growing rapidly and GNC will continue to benefit from it. Its products are essential for a healthy lifestyle and enhancing results from exercise. I have been a loyal customer since 2005 and do not plan on changing my shopping habits anytime soon. It has had an incredible run in 2013, up over 30%, so be careful buying at the highs. I am looking to initiate a position on any pullback following the quarterly results.

(click to enlarge)

Source: GNC: Earnings Preview And Industry Comparison