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

GNC Holdings (NYSE:GNC)

Q2 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

Dennis Magulick - Vice President of Treasury & Investor Relations

Joseph M. Fortunato - Chairperson, Chief Executive Officer and President

Michael M. Nuzzo - Chief Fianacial Officer and Executive Vice President

Analysts

Brian Wang - Barclays Capital, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Gary Balter - Crédit Suisse AG, Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Justin E. Kleber - Robert W. Baird & Co. Incorporated, Research Division

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Mark Wiltamuth

Michael Weisberg

Operator

Good morning. My name is Tisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the GNC Holdings Inc. Reports Second Quarter 2013 Results Conference Call. [Operator Instructions] Thank you. Mr. Magulick, Vice President of Treasury Relations, you may begin your conference.

Dennis Magulick

Good morning, and welcome to the GNC Second Quarter 2013 Earnings Call. This morning, we released our second 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 an overview of the business and an update on our key initiatives. 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 are undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward 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 on this call, please refer to our public filings with the Securities and Exchange Commission and our earnings release this morning. I will now turn the call over to Joe.

Joseph M. Fortunato

Thanks, Dennis, and good morning, everyone. GNC continues to consistently deliver strong results, while also making meaningful investments in the business to position us for the future. I will start by highlighting some key performance metrics and by providing an update on the success of our Member Pricing rollout. First, our Retail business. We delivered a transaction driven 6.8% product-only same-store sales result in domestic company-owned stores this quarter or approximately 20% on a 2-year basis. Our domestic franchisees also posted a 2-year 20% same store sales result, and new stores continue to deliver at or above our expectations. Second, through Q2, new product launches and revenue exceeded last year and our internal plan, as we continue to build brand equity, improve product formulations and segmentation both for our domestic and international businesses. We have consistently delivered strong product launches and improved brand positioning in our key categories. This year, we introduced multiple new Vitapaks, targeting distinct customer segments. And in sports nutrition, we launched new protein powders under the AMP line, including Ripped and Power, which are also exceeding our expectations. Looking forward, our product development pipeline is on track for 2014.

Moving to e-commerce. Our strategy of addressing both the branded, content-driven space with GNC.com and the price value expanded assortment space with LuckyVitamin.com, has led to consistent top and bottom line growth. First, unique customers to GNC.com increased by more than 1 million this quarter, representing an increase of over 10%. Coupled with better conversion, we delivered a 27.5% comp, while improving our industry-leading profit margins. Our customers continue to demonstrate their loyalty to the premium GNC brand.

Second, LuckyVitamin.com delivered a 12.9% comp this quarter, with nearly double the EBITDA margin as we capitalize on the supply chain and buying synergies discussed at the time of acquisition. We will continue to make investments to improve site functionality, as our omni channel efforts evolve over the coming years, and as always, we seek to balance top and bottom line results.

Internationally, our franchisees have reported a 10.4% same-store sales increase this year on a local currency basis, and we continue to make progress on our initiative to increase the penetration of products to franchisees source -- that franchisees source from our GNC directly. On a year-to-date basis, each of the countries which cumulatively represent more than 75% of wholesale revenue has increased their purchases 10% or more, with the exception of Mexico and South Korea.

In South Korea, the political and macroeconomic environment, once again, negatively impacted our business. In Mexico, we continue to perform very well, as evidenced by consistently positive same-store sales. With regards to changes to the regulatory environment discussed previously, product reformulations we've made to date have begun to positively impact the business. We expect this progress to continue throughout the remainder of 2013, with wholesale purchases returning to more normalized levels. In conclusion, I am very pleased with the consistent earnings growth, cash flow generation and return to shareholders GNC has produced.

Next, I will provide an update on the Member Pricing rollout. During the launching period, which spanned May and June, we accomplished our primary goals as follows: one, new Gold Card member acquisition; two, increased flexibility to manage pricing; three, transaction growth spread throughout the month; four, improve price perception; and five, better program awareness among new customers. We have successfully addressed our customers #1 complaint of the previous Gold Card program, namely, their inability to use the Gold Card all month long. Also, as a result of this change, we now would have a comprehensive view of their purchasing activity. Successfully completing the transposition to Member Pricing, which was among the most significant undertaking in our company's history is a testament to the exemplary execution demonstrated by our entire management team and our associates. The national radio and targeted direct marketing campaigns effectively drove customers into our stores. Overall, the more than 3 million new names added to our Gold Card customer database was at the high end of our expectations. The multiyear potential and lifetime value, resulting from our ability to now track complete spending patterns, provides great opportunity. We can more effectively segment and engage with these customers, utilizing customized offers to drive trade-up and cross-selling. This also gives us the opportunity to utilize our store associates, demonstrated confidence to sell customers to more sophisticated products. We're only at the start of what I believe will be a meaningful improvement in presenting our value proposition to customers, in-store, online and with more effective outreach and direct marketing, e-mail and social media.

Lastly, we are encouraged by the customers response to different types of pricing approaches and promotion we used during the rollout. These metrics, combined with recent survey results confirm our expectations for the program. We will continue to listen, learn and adjust as the program enters the next phase. I will now turn the call over to Mike for additional detail on our financial performance.

Michael M. Nuzzo

Thanks, Joe. Good morning, everyone. As Joe said, GNC once again delivered strong earnings growth against tough compares, while simultaneously making meaningful investments in the business. First to the consolidated results. Our second quarter consolidated revenue increased 9.2% to $676.3 million. Retail segment revenue increased 9.6%. Franchise segment revenue increased 6.8% and manufacturing/wholesale segment revenue increased 11.1%. Second quarter gross profit, calculated after deducting product, warehousing, distribution and occupancy costs, was 37.8% of revenue compared to 38.7% in Q2 2012. The decrease in gross profit rate was driven by planned investments in the Member Pricing rollout. Second quarter consolidated SG&A expenses were 19.6% of revenue compared to last year's of 19.8%. Within consolidated SG&A, advertising and promotion was 2.4% of revenue which includes the nationwide launch campaign supporting our Member Pricing rollout. Q2 2013 net income was $71.7 million, a 7.5% increase from the prior year's net income. Diluted earnings per share were $0.73, a 17.7% increase over Q2 2012.

Now for information by segment. First to the Retail segment. Our retail segment includes domestic and Canadian corporate-owned locations and the Internet businesses. Q2 Retail segment revenue grew 9.6% to $502.5 million, driven primarily by same-store sales increase, excluding the Gold Card giveaway impact of approximately 6.8% and the addition of 151 net new GNC stores as compared to the end of Q2 2012. Q2 Retail operating income increased by 2.8% to $100.3 million and was 20% of segment revenue in Q2 2013 compared with 21.3% in Q2 2012. Operating income was negatively impacted by planned investments related to the Member Pricing rollout. In the quarter, we added 47 net new company-owned stores.

Next to the franchise segment. Revenue in franchising is generated primarily from wholesale sales to our franchisees, the collection of royalties on franchise retail sales and fees. Q2 Franchise segment revenue grew 6.8% to $110.6 million. Domestic franchise revenue grew by 5.2% to $66.1 million, with a same-store sales increase of approximately 5.2%, excluding the negative impact of Gold Card giveaways. International revenue increased 9.2% to $44.5 million, driven by an 11.7% franchisee reported local currency same store sales results. Q2 franchise operating income increased 13.5% to $36.7 million, and was 33.1% of segment revenue in Q2 2013 compared to 31.2% in Q2 2012. The increase in operating income percentage was driven by higher gross profit margin. In the quarter, we added 11 net new domestic franchise locations and 65 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. Q2 manufacturing/wholesale segment revenue increased 11.1% to $63.2 million, driven primarily by an increase in shipments to our wholesale partners. Q2 operating income increased 6.9% to $25.5 million and was 40.3% of segment revenue compared to 41.9% in Q2 2012. The decrease in operating income percentage in the quarter was driven primarily by a lower mix of proprietary product sales. We opened 4 and closed 5 Rite Aid store-within-a-store locations in the quarter.

Next to our balance sheet and cash flow. Through the first 6 months of 2013, we generated $126.8 million net cash from operating activities. We spent $21.5 million on capital expenditures, primarily for new stores, store maintenance, updates and remodels, corporate IT and other manufacturing facility expenditures. We generated $104.2 million in free cash flow. We repurchased 181.3 million in shares of common stock under a share repurchase program, resulting in 68.7 million remaining under our current authorization, and we paid $29.1 million in cash dividends on our common stock. As of June 30, 2013, we had a cash balance of $64 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 an update to our 2013 outlook based on current expectations. We expect diluted earnings per share to be approximately $2.83 to $2.88, a 21% to 24% increase over 2012 adjusted EPS. This is an increase of $0.08 from our previous outlook and includes approximately $0.06 from a reduction in the full year diluted share count based on share repurchase activity through Q2 of this year to achieve a high-single-digit increase in domestic retail same-store sales in the third and fourth quarters of 2013. That completes the financial update, and I will now turn the call back over to Joe.

Joseph M. Fortunato

Thanks, Mike. This quarter's performance reinforces GNC's global leadership position. We continue to execute effectively, delivering consistent top and bottom line growth against difficult compares, while also successfully transitioning to Member Pricing. The result is strong cash flow that allows us to both invest in the business and return capital to shareholders. Since the start of our capital initiative in 2011, we have returned more than $677 million to shareholders in the form of share buybacks and common stock dividends, representing a payout ratio of over 100%. As we look to the future, I am encouraged by the runway ahead of us. In addition to the opportunity and potential benefits of our Member Pricing program, new product pipeline and omni channel initiatives, I am excited about our ability to sustain and grow the market share internationally. This week, we opened our first stand-alone retail store in China as part of our multichannel distribution strategy as we seek new ways to address the increasing base of consumers in China's growing health and wellness market.

Now we are available to take your questions. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Brian Wang.

[Technical Difficulty]

Brian Wang - Barclays Capital, Research Division

Congrats on another strong quarter and a successful rollout of the national Member Pricing format. Can you guys please discuss the methodology used to calculate the impact on comps from the Gold Card rollout, basically, the 280 basis points that you cited on the company operated stores?

Michael M. Nuzzo

Yes, sure, Brian. This is Mike. I'll go through it, and then I'm sure we'll take additional questions off-line on it, if you guys have other question. Since we gave away the Gold Cards, we have a drop in our POS register and comp revenue. And so the impact of that is 280 basis points and so what we did was we essentially stripped out Gold Card sales from last year's quarter and this year's quarter, and that's how you get to the 6.8%. You can think about that as a product-only comp, and really a true measure of how we performed in the quarter, excluding this giveaway that we did, and we're very successful at. And so on the total revenue side, you still recognize the revenue from the Gold Cards that we sold over the previous year and you don't have an offsetting deferral from the current sale of Gold Cards. So from a revenue and margin standpoint, for the quarter, you're pretty much in the same place as you would be normally. So it's really an impact on comp more so than anything.

Operator

And our next question comes from Chris Horvers.

Christopher Horvers - JP Morgan Chase & Co, Research Division

First, a quick follow-up on that one. So understand -- so the comp includes the Gold Card sales, total revenue and the margin you recognized on a monthly basis over the life of the membership. Thinking about 2Q next year, when you anniversary this giveaway, you would think that there will be some sort of margin impact from not having the Gold Card flowing through the P&L. So can you maybe quantify or talk about how we can think about that for 2Q next year?

Michael M. Nuzzo

Yes, Chris, the way it will work is that there will be a little bit of pressure on the revenue line, as you spread over the year because you would defer the sales in the current time period over a 12-month period. And so there's a little bit of pressure there. The one thing though, I would say -- and again, we're not going to give guidance or talk a lot about this because, really, the focus of the program, as you guys know, is to increase, obviously, sales of the Gold Card, which we've seen in the test markets over time, you get an increased sale of Gold Cards, which over the long term, even if you're amortizing, is going to give you a significant benefit. And the increase in sales is really driven by the increased value perceived by the customer in the Gold Card. So yes, I mean, we knew this going into it. Extremely comfortable with how they play out, and obviously, it's a key part of the program and the success of implementing it.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Understood. And then can you -- I was just curious, Joe, if you could talk about how Kansas City has performed, and then you also anniversaried some markets that you rolled out in the first quarter of last year or so. How is Kansas City looking in year 3 and how are the ones that you're anniversarying now looking in year 2 from a lift perspective?

Joseph M. Fortunato

Yes, we've kind of meshed everything together at this point, Chris, but the fact is that they continue to perform well, the markets that we started from Kansas City all the way through New York, Chicago. So pretty much at expectation levels, and obviously, there's a little variability between the markets, but we are seeing positive results across the markets as we move forward. So we're very satisfied with the first year. Second year performance in Kansas City was good, and we're starting to see as that progresses through the third year that it's up to the standards we expect.

Operator

And our next question comes from Gary Balter.

Gary Balter - Crédit Suisse AG, Research Division

And Gary is here too. Just one more clarifying on that, and hopefully, it will put it to bed. Mike, the 28 again, that is just the existing membership giveaway loss, has nothing to do with the new numbers, meaning, so next year, when renewal comes, you'll -- you should see that 28 or the month -- the quarterly impact, plus whatever incremental Gold Card renewals happen from, let's say, the 3 million that -- of new customers that cycle through the system.

Michael M. Nuzzo

Yes, it should be beneficial to us as we hurdle this number next year. And if that all happens as anticipated, and that's what we've seen so far in the test markets.

Gary Balter - Crédit Suisse AG, Research Division

Understood, okay. And then just one more clarifying on the math, the mid- to high-single-digit comps, going forward, that's also excluding the loss from membership revenues?

Michael M. Nuzzo

Here's what I'd say about that. The high single digit comp guidance, this high-single-digit comp with our comp calculation that we would normally do, if there is a component to it, Gold Card or whatever, that we feel we need to call out to make it clear to you guys and to explain the operating performance, we'll do that.

Joseph M. Fortunato

And we'll explain it to you, and it should be -- it won't be the 28. I mean, it's going to be lesser as we move forward, but there'll be some drag on it, a little bit.

Gary Balter - Crédit Suisse AG, Research Division

Okay, and then just a business question, I was hoping to ask. New products and relationships with suppliers, we noticed in the quarter on hot items like this Garcinia or even some of the Quest Bars and some of the flavors, GNC seems to be getting a strong selection early on, nice selection of products, pretty good messaging, and so we just -- I guess on the idea of products and relationships with suppliers, how are you able to move things to the market that quick? Is it -- are you very close with suppliers, I guess, early on, et cetera? You seem to be doing a good job in that area.

Joseph M. Fortunato

Well, we still win from that side because if you go back to history, significantly, when you go back in history, we've always had the advantage of suppliers coming to us because we're the largest. And obviously, if they want to get a boost in sales and get their products marketed across 4,000, 5,000 stores, the place to come is to us. So we also -- I mean, we are in close connection with them. They literally -- almost every vendor comes in here once a month. So we are tied, joined at the hip with them on everything they're doing, and we plan various things with them, whether it's exclusive, separate flavors, certain sizes, various things, they come to GNC before they go to other places. So that relationship continues, and I think it's stronger than it's ever been because their reliance on us gives us the leverage to go out and be able to cut deals and do things with them. And we insist on getting the supplies fast as we can get it and first when they -- when these products hit the market.

Gary Balter - Crédit Suisse AG, Research Division

But it seems like just -- we appreciate that, and we view it as a huge strength of the company, but what we notice is when there is a hot product, you guys seem to be ahead of some of the competitors. So there must -- it's probably more than just suppliers internally. How do you identify like this is really moving, like what's your process? Is it something that...

Joseph M. Fortunato

And this goes back to a little bit to what I've talked about before with our consumer package goods capabilities. First of all, I think nobody has product development capabilities like we do. And I think that our merchants -- you can talk about Total Lean, it seem that the business was moved from the pill business to the RTD business. And when we identify that the market was moving away from just bodybuilders and people, muscle mass and things like that to fitness and health and wellness and being trim and lean and fit, we got ahead of the curve in all that. That's why AMP does what it does today. And that's why Total Lean is doing what it's doing today, and we were first in the market with all the. And we've been very successful with that over the years, and I think -- I attribute that to our merchants being very seasoned, and knowing where the consumers are heading with these trends and we get out there ahead of everybody for the most part.

Operator

And our next question comes from Mark Miller.

Mark R. Miller - William Blair & Company L.L.C., Research Division

To help us understand the underlying growth trends, excluding member price program rollout, can you help us understand the product sales lift that were attributable to new members that joined with Member Price program rollout in the second quarter?

Joseph M. Fortunato

From a dollar perspective?

Gary Balter - Crédit Suisse AG, Research Division

Well, just -- I mean, you can see the new members you got, how much incremental sales, product sales did those members bring in? And I'm just trying to understand the ramp. I know you get something like a higher single-digit comp sales lift when the program gets rolled out. How much of a lift were you getting from that in the second quarter?

Joseph M. Fortunato

Well, you can see the comp and that product, as it's equated up to 6.8%, it's product-only comp. If you look at what we've clearly defined as transaction driven, what happens at first when these new consumers come aboard, I mean, we have 3 million, so hugely successful, I mean, more than we anticipated, which was all positive, positive outlook for the future because, as we get these customers back in and nurture these consumers, what we do extremely well, and you guys have all seen over the years, that we up-sell consumers to our premium goods, and cross sell consumers end up buying more UPT or units per transaction. So that's the opportunity from those customers as we move forward. From a buying perspective, initially, when these customers come in the door, and this shows the strength of the comp number again. They are spending less than our obviously more seasoned consumers. So our -- we look at it as, okay, they came in, we got them in, we've got names, we got the ability to reach them, target them with specific offers, get them back in the store, all those kind of great things that go with the ability to market to them, understand their buying patterns and everything on every transaction they now make in the store, and then increased their spend as they continue to get them back to the store, which is what we do, I think, better than anybody in the world. I mean we can't -- as you know, in the past, I mean, we upsell consumers and our UPTs grow every year, every quarter and that is the opportunity. What they specifically spent when they came into the store this time, I don't have those details. I mean, we haven't gone down to that depth to see -- and remember, the data's pretty early yet. It takes it quite a while to accumulate some of this data and understand it, which we're in the midst of doing now, but I don't have the specific details as to did they spent half as much as our more seasoned consumers, did they spend 3 quarters, I don't know. I will tell you this, though. That I will be very clear to say that they spent less than the standard normal consumers that comes to GNC does because over the years, we've nurtured those consumers to spend and buy the high-priced goods. When people first come in, in our store, they're going to buy more of the entry-level products and various things like that, and the opportunity again exist. As we get them back in the store, we will be moving them up to the premium goods, cross selling them into various products, and targeting their spend for -- on things that we think they should be buying and pushing them in that direction. So that, to me, just spells out all opportunity, but I can clearly say, without a dollar identification, these people that came in spent less, so they were a little bit of a drain on the top from that perspective, but that should wash away and actually benefit us as we move into next year, which we've explained once before.

Mark R. Miller - William Blair & Company L.L.C., Research Division

So just as a follow-up, if -- what I'm trying to get at is if price program rollout had been, let's say, in July, August, would that -- is the comp benefit from the additional product sales, do you think, less than or greater than the 2.8% detriment that you highlight from the loss of Gold Card sales?

Michael M. Nuzzo

Yes, Mark, I don't think we're going to quantify it for some of the reasons Joe talk about, but also, I think that we talked about the new member price markets, there's that transition period during Q2, but obviously, a degree of the lift that we expect going into the back half of the year into 2014 will be contributed by new customers. And going forward, we obviously have the ability to track that really well now because we see all of their transactions with Gold Card. So -- but I still -- overall, I think we want to still stay focused on total comp performance, and again, that should be the measure we talk about and you guys hold us accountable to.

Joseph M. Fortunato

Yes, and I would look at the 6.8%, it's a -- still, it's relatively on an apples-to-apples basis, and that's what we tried to do, we went up to the 6.8% for the Gold Card differential, and cleared it out and made it product only because this really gives you a very good read on the business. When you really look at the details, if you said that now, as we've outlined for you at the last call, that we are discounting more regularly through the month. That also had an impact on comps. So if you look at the 6.8%, we're extremely pleased because we know there was a couple of 100 basis point range by the additional discounting that we had to do to spread the Gold Card program out throughout the month. But that also gives us the ability to manage that product, that pricing more effectively as we move through the next 3, 4, 5, 6 months, and manage our margin more effectively and everything at this point. So we're very pleased that we're at 6.8% in lieu of the fact that we -- I mean, I could argue to the fact, if you want apples-to-apples, you'd be around 9% because of the discounting that took place.

Operator

Our next question comes from Peter Benedict.

Justin E. Kleber - Robert W. Baird & Co. Incorporated, Research Division

It's actually Justin Kleber, on for Pete. Just aside from the national advertising, just curious as to any different in terms of marketing support for this phase of the rollout versus maybe the tactics deployed in the prior test markets, and then just any type of competitive response that you're seeing in newly converted markets.

Joseph M. Fortunato

We've seen a little bit signage from one of our specialty competitors about giving away their card, that kind of thing. So nothing that we think has been very significant as far as trying to push back against what we're doing. First of all, I don't think there's a lot people can do. What I'm pleased about is now that we're clearly seeing surveys that we've done with our consumers that understand our pricing much more effectively. Love the results of the program, the ability to come in. The #1 complaint that I outlined before, couldn't use their card all month long, and we are getting credit for our out-the-door pricing, which was always the #1 problem with the company. Price perception was high -- our prices were high when they really weren't. When you looked at our out-the-door pricing, we were as competitive. We're more competitive than anybody. Now that's very clear, and I just looked it a lot through yesterday, and the stores were -- we will only have on the shelves 2 prices, MSRP and member price. And it's very clear. It lays out, and so again, that price perception issue is vastly improved. And in the surveys we've done, we've see that -- the feedback from consumers that are understanding the program much more effectively and giving us much more credit than we have gotten in the past from that. So the competition trial, they want to push back. I mean, as long as we're price competitive and we've got these names and we've got these consumers to market to -- and we're aggressive and continue to be aggressive in what we're doing and our marketing is working, I'm not quite sure what they can do. Yes.

Michael M. Nuzzo

And Justin, you also market mentioned marketing, clearly, the Gold Card giveaway numbers really show us that the radio and the DM and the signage in the store really work. The other piece is that we even at the start of the transitions, we're seeing that migration of sales out of the first week and now spread throughout the month, which is really a huge positive impact for the program as we go into the future, and that started happening pretty early on. So that also indicates that the marketing that we did worked pretty well.

Joseph M. Fortunato

It worked as much very effectively. I mean, the month is smoothing out much more rapidly than we thought, which is all good news from a supply chain perspective, inventory management perspective, workforce perspective. All that is going to be benefited from. And I'll tell you, the other thing that we are seeing big benefit from is, as visitors are now visiting our website, the web performance has been extremely strong because our take on it so far is that the consumers are seeing better pricing than at least from a price perception perspective because they're seeing the member price. Before, they were not getting there easily because they didn't understand BOGO, they didn't understand Gold Card. They had to calculate. As I've said before, what's the end result out-the-door price going to be. Now they're seeing it, and we are getting more people that are visiting in the site and better conversion because I believe they're seeing our prices are better disciplined now. It's being much more competitive.

Operator

Our next question comes from Kate Wendt.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Was wondering if you could talk a little bit to trends throughout the quarter, how it progressed, and perhaps, here in July. And I think trying to get at what Mark was asking about, whether there typically is a lag in terms of when you start to see an uplift in comps after you roll out Member Pricing, and whether in that case you perhaps didn't see the full benefit from the uplift in comps this quarter.

Joseph M. Fortunato

Well, we did not obviously see the full benefit from comps this quarter because they're too new -- the customers aren't back revisiting the stores yet. So what we saw in the benefit in comps this quarter was from the people being drawn into the stores and by our marketing and the Gold Card giveaway, which got them to spend at some level. And clearly, again, once I get that data, I'll absorb it much more effectively, but right now, we are clear that it was not at the same spend level that our average ticket would be with most consumers. So the opportunity, as we move forward and why we have given guidance to ramp up comps through the third and fourth quarter, is that we expect those consumers from our mail programs, which we are now segmenting very purposefully and we are targeting very purposefully, those 3 million names and customers to get back in the store, giving them offers, giving welcome mailers and things like that. We expect that to start benefiting us as we move into -- further into this quarter, a little bit August, July, but August, September, and that's why we pushed the comp number up to the high single-digits as a forecast and fourth quarter even more so, as we continue to get those customers back in the store and benefit from their spend and again, hopefully, upsell them and increase their spend patterns with us as time goes on, and that will keep going on all the way into 2014. That doesn't happen overnight. This is a nurturing process with consumers that, as you've seen over the years, how we've grown our average ticket and our UPTs, is by introducing these premier products into the marketplace, doing an extremely, extremely great job of it, and then having our workforce, sales force sell those products to consumers and up-sell those products to consumers to those premium products over time. But that does not happen right away. I mean, you might start selling them our multivitamins. It may take 2, 3 visits to the stores to get them to a Vitapak, but we get them there. The conversion rate ratio to get to these premiums goods is extremely good. So that's what I look at as all these opportunity as we move forward. So to answer your question maybe more simply, we've guided upward for comps in the third quarter and fourth quarter, and I would expect to see benefit from these customers return to the stores and buying, and hopefully, buying more as time goes on all the way into 2014

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Got it. And I'm assuming that's what you've seen in some of the test markets as well. And then can you tell from your data and surveys where you think you're getting these new customers from, whether it's attracting new people to the category, that haven't used supplements before? Or whether they are existing supplement users that are switching where they buy supplements?

Joseph M. Fortunato

It's very hard to tell because, remember, we weren't collecting data on people that were coming to our stores before. So we're -- we know there's some kind of split between customers that potentially were coming in a couple of times a year in off Gold Card weeks, just didn't have a Gold Card and now they do. And then also new consumers that are coming in as part of our marketing strategy and driving those consumers. Where they come from, it's impossible at this point to track.

Operator

Our next question comes from Matthew Fassler.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

I have a couple of questions on the mechanics of the giveaway this quarter and going forward. I know you excluded the 2.8 percentage points of comp impact based on the exclusive sale of Gold Cards from both periods. Were you giving Gold Cards away for all of the second quarter or only from the May 1 launch? And it was only from the May 1 launch. Presumably, there were some Gold Card sales that went into revenue even if you kept them out of the comp.

Joseph M. Fortunato

It was from May, so it was the last 2 months of the quarter. So there was a small number of cards that were sold, but very, very small.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Got it. And just to clarify, it sounds like you'll be giving away some cards, but to a lesser degree, I mean, is that still part of the promotional cadence to build the program? Or are we back to selling these cards for $15 a piece at this point in time?

Joseph M. Fortunato

We're back to selling them. What we are trying to do a little bit of is if we see any bleed-off of the consumers, as everybody does on a month-to-month basis, we're trying to reinvigorate those consumers that haven't come to our store for a while with different offers and one of those offers is free Gold Card to get them back into the store, but that's a promotional-type vehicle. We are selling the cards in the stores now on an ongoing basis.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Yes, got it. And just one last question. So I know that dollars are not huge, but there will be, I guess, some lag as a consequence of the giveaway that was not felt fully in Q2. So to think of what that looks like, should we just basically take that 2.8% percent of sales, which I believe is something in the $10 million, $12 million, $13 million range and just sort of look for a quarter of that, each quarter understanding that that's certainly implying your guidance? Is that the magnitude of delta that we should see from this giveaway?

Michael M. Nuzzo

If you wanted to model that you could, the deferral mechanism is a complicated thing during normal times because you always have the months previous where you sold the card and then you have the current month deferral, and so the net is always going to be the net of that. So yes, that makes sense mathematically, but as it plays out, there will be other factors that will influence it, especially the run rate, the new run rate of Gold Card [indiscernible] that we have because, again, we might be selling fewer because we had such a huge success in the giveaway in the first couple of months, and we might be selling a lot more in 3 or 4 months. The timing is even difficult to predict. So you guys are good modeling folks, but this will be a challenge for you, I'm sure.

Joseph M. Fortunato

We would clear to tell you that it will be -- I mean, go from 0 to 2.8%, and we can tell you it will be less than 2.8% and more than 0. So it would be somewhere. I think you can target it for some reasonable amount by just -- by looking at it that way.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

And just kind of a final clarifying question. Let's just say we went back to absolute normal on July 1, and you gave no more away, and went back to selling them at the typical cadence. The impact of having done these giveaways on the P&L, going forward, will not be something that builds over time. It's sort of a fixed number, you amortize it over the course of the year, and relatively, equally through the quarters and it goes away, I understand then that that's kind of a theoretical look at it. Is that -- will that be the right way to think about it?

Joseph M. Fortunato

Yes, Matt. It should -- it will impact you for a few months and it should stay over time. So as the cards you gave away, if you get more back into a regular rhythm of selling cards like we did in July already, and we'll continue to do for the rest of the year, we'll save the drag, future drag, on what you gave away over the next 4, 5, 6 months.

Operator

Our next question comes from Shane Higgins.

Shane Higgins - Deutsche Bank AG, Research Division

You guys, I believe you rolled out the new Members Pricing Program on GNC.com and I think it was around mid-May. How's the online customer respond to that program and how does that compare to what you've seen in the bricks and mortar stores?

Joseph M. Fortunato

No, better. Well, I mean, right now, I don't know on a compare to compare basis, but our web business is performing extremely well. It's higher than anticipated, and has been escalating since we rolled out the Member Pricing and I noted a little bit earlier that I believe it's because you get a lot of visitors to that site that are not necessarily GNC shoppers to start with. And what they're doing is now seeing a much more competitive price on the web and buying, where before, they were looking and they couldn't figure out kind of the pricing scheme and figure out the real out-the-door price. So we weren't getting -- as I said before, we weren't getting credit for our good competitive out-the-door pricing. Now the price hits them right in the face so they know exactly what it is that they're buying, and that's why you're getting an uptick in conversion in that -- the unique visitors.

Shane Higgins - Deutsche Bank AG, Research Division

So you guys were seeing a pretty immediate response? I mean, not the 2 to 3 month lag? You're kind of seeing the response almost immediately after you guys rolled it out?

Joseph M. Fortunato

I mean, very immediately, and we're getting all month long again, where people were getting on before and they were trying to see the value to doing the Gold Card in the first week. Online, that's a tough proposition because in the store, you can sell that program to a consumer. Online, it's really -- you can't -- you don't have somebody to talk with you face-to-face. Now all month long, they're seeing good pricing consistently throughout the month, and we're seeing the buying patterns, where they're consistently buying at a strong level throughout the month and it started almost immediately.

Shane Higgins - Deutsche Bank AG, Research Division

Have you guys seen any response from competitors online with more promotions, anything like that?

Joseph M. Fortunato

No, we really haven't. I think the news from the competitors side is they were already discounting to a certain effect level. And if they want to continue to go deeper on discounting, obviously, we can play in that game. We've chosen in the past to be competitive where we need to be, and get a premium for our brand, and you could tell by the margins. First of all, on our GNC.com site, when you've got 27% margins in dot-com business, there is an extreme loyalty to our brand and those consumers are now looking and seeing a value proposition to our brand by Member Pricing, where they were not seeing the value proposition before because of the complexity of the pricing.

Shane Higgins - Deutsche Bank AG, Research Division

And do you guys, Joe, have a higher percentage of proprietary brands that you sell to GNC.com versus what you guys sell in your stores?

Joseph M. Fortunato

Yes, it's pretty consistent . I mean, there's pretty good consistency between this. It's amazingly consistent, what sells, the sports mix, the vitamin mix. There's a little bit of a flip there, but not much so -- and the mix of third-party and GNC brand, and I mean, it's very, very consistent, which is kind of interesting, actually, so...

Operator

And our next question comes from Mark Wiltamuth.

Mark Wiltamuth

I'm at my new firm at Jefferies. Just wanted to ask, I know the Rite Aid store-within-a-store agreements are expiring in 2014. Just curious if you have any update on the renegotiations there.

Joseph M. Fortunato

We're in the midst of discussions, and we'll obviously continue to do so, and we have many alternatives to look ahead towards that. Feedback so far is they're very pleased with the business. We're very pleased with the business, and we'll move through those negotiations as we go into 2014.

Mark Wiltamuth

Okay. And as you look at how the things have ramped here on the Gold Card rollout, is it all consistent with what you saw in the test market so far?

Joseph M. Fortunato

It's pretty consistent. As you can see, the guidance we gave you back last quarter were pretty much on target, and we're very satisfied. The execution has been impeccable truthfully, which is, as I've stated in the script, this is the most difficult program and complex program we've all, ever, ever attempted to change in regards to the company, and I think we've done it better than expectations -- better than I could have ever expected. So I think we've executed very well, and it's consistently performing close or online with what we were seeing before -- in line with what we're seeing before.

Mark Wiltamuth

So is the active Gold Card membership now up to $9 million, somewhere in that range? And maybe talk to us a little bit about the infrastructure you're putting in place to capture data and mine that data from all of the purchase activity.

Joseph M. Fortunato

Yes, it's about $8.5 million, and we are targeting now, and we're in the midst of talking to various companies as well to get -- since the base is getting so big, and you have to manage and target those consumers, and we want to get much more into targeted offers, cross-selling opportunities, segmentations, various things like that. We're managing that right now in-house, and we have a very kind of methodical game plan as to how we're going to hit these consumers, what the offers are going to be. If they don't come back for a month, what we're going to send them, if they don't come back for 2 months, what we're going to send them, if they don't come back for 3 months, what we're going to send them based on what they bought. Those offers could get deeper as time goes on because we don't want to lose them now that we've got those extra 3 million names to target, and we'll nurture those consumers very closely. I mean, that's a major weekly discussion in this room we're sitting in, and we are very methodical about how we're going to go about targeting that consumer.

Operator

Our next question comes from Michael Weisberg.

Michael Weisberg

A couple of quickies. What kind of negative impact did you have from currency on the international franchise revs? Can you give us any sense of what the revenues would have been x currency losses?

Joseph M. Fortunato

If was very little as I recall, and I don't have it right in front of me. Do you have -- go ahead.

Michael M. Nuzzo

It's less than 1%

Joseph M. Fortunato

It was less than 1% flip between the currency.

Michael Weisberg

Really? Okay. But you said the international comp was, what, it was 11?

Joseph M. Fortunato

11, yes. That's right.

Michael M. Nuzzo

And Michael, just keep in mind, when we give you that, that is local x currency. That's a local comp so it's an apples-to-apples comp measure that we like. Yes, so okay, yes.

Michael Weisberg

Yes, Mike, but the revenue growth was a couple of points below that, and you're opening a lot of stores. That's why I was confused.

Michael M. Nuzzo

Yes, well, the revenue growth is really driven -- and we talked about it a little bit in script by South Korea and Mexico. If...

Michael Weisberg

That's right. So that would be offset because that offset better buying from the other places.

Joseph M. Fortunato

Absolutely.

Michael M. Nuzzo

That's correct.

Joseph M. Fortunato

That's what it was.

Michael Weisberg

Yes, when do you anniversary Korea, going to 6 days? That stop serving you in the third quarter?

Joseph M. Fortunato

Yes, Korea's got -- the Korean market, we have somebody parked over there right now. We're trying to get everything we can to get that back on track. We anniversary it, I believe, starting around November, December...

Michael Weisberg

Oh, not till then? Okay. Maybe could you talk a little bit about your plans in terms of buybacks? Because you've been relatively aggressive beginning in the fall. You only have roughly $70 million left on the existing buyback. Should we assume that once that's satisfied, there'll be another buyback and this would be a sort of a consistent strategy of the firm going forward?

Joseph M. Fortunato

We just had this discussion at our board meeting last week, and we are of the belief that we should have a very consistent program from year-to-year to buy back stocks. So I think you'll see that continue. We obviously generate the cash to do so, and leverage is extremely good even on additional debt right now. Our debt ratios are extremely low. So the accretion from the buyback is one of our best investments we see right now with the stocks. So we'll continue to do that.

Michael Weisberg

Great. So it's possible that not only you use your cash flow, but could increase your debt levels to continue the buy backs?

Joseph M. Fortunato

Yes, absolutely. We've looked at it, and we're looking at it closely and we could -- we did it last time with our $250 million, I believe, Mike, and I wouldn't be surprised to see us do that again.

Michael Weisberg

Good. Two other quickies, if I could. How much of a boost in comp did you get in the quarter from GNC? How much did that contribute to the comp?

Michael M. Nuzzo

140.

Joseph M. Fortunato

140.

Michael Weisberg

140 bps?

Joseph M. Fortunato

[indiscernible] 140.

Michael Weisberg

And then another, and that is what's your internal thoughts about the gross margin degradation as we move through the year in order to get to the guidance you are using?

Joseph M. Fortunato

What I like about the program, one other thing beside all the benefits it did to transition this program for the company and for our consumer is that it will give us the ability to manage pricing more effectively, and therefore, manage margin more effectively. If you recall, I mean, one of the things I disliked, extremely disliked about the Gold Card was 20% off everything in the store, the first week, clearly, the consumers disliked certain things about not being able to come in only 1 week and all that, but I dislike the fact that we had to discount everything 20%, so the peripheral products, everything. So you were giving away margin unnecessarily. Now you'll see, as we move forward some things, 15, some things 18, some things 25, we can rotate, we can change. We don't have to give off on some of the peripheral products nearly as much. So I view the fact that what we've seen in the degradation of margin from the additional discounting that we've had to do to make sure we maintain the pricing structure for our existing Gold Card base, as we move forward, we're going to have a lot more flexibility, and I think I explained this last time on the call. The Kansas City market has moved much back towards almost normalized, about 100 bps decline from the margin impact from where it started, which I believe was around 250 or so. So if you start thinking about the ability to do that over time, that's not against something that you can do fast tomorrow because you can't shock the system with your consumer. You've got to nurture them. But over time, as we see the ability to alter various products, very, call it, kind of going at it with a scalpel, that we can probably get a piece of that margin back over the next 6, 9, 12 months.

Michael Weisberg

Okay. So at Kansas City, if they're running 100 negative now merchandise margin, they probably can offset a good piece of that just by their stronger comps...

Joseph M. Fortunato

The stronger comps offset all of it. You start generating incremental margin dollars 4, 5 months into the program...

Michael M. Nuzzo

Yes. The dollar is right. The dollars should be positive. The percentage you may drag, and then get to about even by, let's say, at the end of the year under our rollout, but yes, dollar positive, definitely.

Michael Weisberg

Okay. So actually, by the end -- a year from the rollout, you will be gross profit margin neutral on the whole program?

Joseph M. Fortunato

I wouldn't call it neutral, but close. I think we could be within 50 points, 50 points...

Michael Weisberg

The first-year?

Joseph M. Fortunato

Yes, the first year after the first year, and I mean, that is -- too hard to predict how fast is that, but we know we've been able to get within 50 bps on the test markets as we've moved through a year.

Operator

And our final question comes from Jason Rogers [ph].

Unknown Analyst

Would you mind repeating what the GNC.com performance in the quarter was?

Michael M. Nuzzo

27.5%.

Joseph M. Fortunato

27.5%

Unknown Analyst

Okay. And then what's the percent of sales now if you add in GNC.com and LuckyVitamin as a percent of the total?

Michael M. Nuzzo

It's close to 10% of retail.

Joseph M. Fortunato

Yes.

Unknown Analyst

Okay. And then, finally, there's been some articles lately on fish oil and the possible impact on prostates health. Have you seen any change in your fish oil sales recently?

Joseph M. Fortunato

It's hard to tell. It was just recent, those articles came out. They didn't get a lot of press. In the past, we've never seen anything have any substantial impact. The only thing, I think, going back 7, 8, 9 years, was Vitamin E, which have more of a permanent effect on sales. So I mean, we're seeing some ups and down with fish oil. Overall, the category is performing very well, and we're going to get aggressive with a marketing campaign to go out to all consumers in our magazines and our catalogs and everything, making sure our doctors' opinions. It's one of the craziest articles I've ever read because if you look at the science-based facts behind fish oil, and the authors, they recommend fish oil, that is the most clinically tested, scientifically-based product we sell, as I'd approach this probably. So I think it's not -- I don't think it's going to be affected. People who take fish oil know the benefits of it, and we are going to make sure that we hit it off just in case anybody's getting any negative perception of anything in all of our marketing materials.

Operator

And I would now like to turn the conference over to Mr. Fortunato for any final remarks.

Joseph M. Fortunato

I just want to thank everybody for joining us. Appreciate your time, as always, and look forward to talking to you again.

Operator

And this does conclude today's conference call. Thanks for your participation. 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 Inc (GNC) Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts