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GNC Holdings (NYSE:GNC)

Q4 2013 Earnings Call

February 13, 2014 5:00 pm 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

Christopher Horvers - JP Morgan Chase & Co, Research Division

Karen F. Short - Deutsche Bank AG, Research Division

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Mark Wiltamuth - Jefferies LLC, Research Division

Kate Wendt - Wells Fargo Securities, LLC, Research Division

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

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Operator

Good afternoon. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the GNC Fourth Quarter and Year-End 2013 Earnings Release Conference Call. [Operator Instructions]

Mr. Dennis Magulick, Vice President, Treasurer and Investor Relations, you may begin your conference.

Dennis Magulick

Good afternoon, and welcome to the GNC fourth quarter 2013 earnings call. This afternoon, 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 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 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-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 on this call, please refer to our public filings with the Securities and Exchange Commission and our earnings release this afternoon.

I will now turn the call over to Joe.

Joseph M. Fortunato

Thanks, Dennis, and good afternoon to everyone. GNC completed another strong year while making meaningful, long-term investments in the business. For the year, we delivered a 22% increase in adjusted earnings per share, and returned more than $350 million to shareholders in the form of share repurchases and cash dividends. This marks 3 consecutive outstanding years, whereby cumulatively, adjusted EPS increased 88%.

We are equally satisfied with our ability to drive results in an extremely challenging fourth quarter retail environment. In the quarter, GNC delivered a 5% domestic same-store sales gain and a 26% increase in adjusted earnings per share. Adjusted EBITDA growth of 12% equaled our best quarter of the year. While we usually do not discuss the cadence of sales throughout the quarter, I will provide some additional detail today, due to the widely reported challenging environment.

As you know, Q4 is our lowest revenue quarter and in recent years, has been impacted more and more by macro and seasonal shopping trends. Our start to the quarter was very strong. Results were in line with expectations through October, reflecting our successful Member Pricing launch. The business generated healthy average ticket growth and positive transaction trends in malls, strips centers, online and, obviously, in our new Member Pricing markets.

In November, a tough weather-impacted start was followed by a solid finish, punctuated by an exceptionally strong Black Friday and Cyber Monday. As we moved into December, the combined impact of a shorter, significantly less robust customer holiday shopping season, particularly in malls; and two, severe weather, resulted in still positive but decelerating comp sales.

And while we typically do not refer to weather as a major influence, it was extraordinary this quarter. Our buy market results confirmed a major divergence in performance between October and in November, December time periods in the more weather-affected Northeast and Midwest, as compared to the South and West. During these months, we countered with relatively higher levels of promotional activity, impacting our margins. Our customers clearly responding, helping to generate a solid 5% comp. In addition to effectively working through these fourth quarter challenges, we delivered on key initiatives which we expect to help the business in 2014 and beyond.

To start, we continue to see benefits from the chainwide launch of our Member Pricing program, first and foremost, in driving incremental sales and transactions. Our surveys continue to show enhanced levels of satisfaction with the new program, along with corresponding intentions to shop more often. Also in the fourth quarter, we anniversary-ed the launch of Member Pricing in some of our largest markets. Throughout the year, more than 2/3 of the new customers who received a free Gold Card in these markets returned to shop with us, and more than half have shopped 3x or more. Gold Card renewal rates on the previous year's giveaway in these test markets are meaningfully above historic levels.

Second, GNC.com had a great quarter and capitalized on the holiday shopping shift to the online space, generating a 30.1% comp. Conversion continues to expand as does the penetration of exclusive products, showcasing once again our customers' loyalty to GNC's unique proprietary assortment. Perhaps, most importantly, we not only drove great sales, we also improved year-over-year EBITDA margin in this business.

Third, our proprietary brands' unique product development capabilities continue to resonate with consumers, with the 2013 vintage of new products exceeding our expectations, and last year's revenue contribution. Included in this group are 10 different Vitapaks under multiple brands, including AMP, Mega Men, Women's Ultra and Beyond RAW. We also introduced a successful line of advanced performance protein.

Fourth, internationally, we secured a new franchise in Russia, which is a major developing market in our space; purchased DiscountSupplements.com in the U.K. and opened 2 GNC stores in China, in addition to 192 net new international franchise stores opening for the full year.

Last week, we completed the transition of our transportation network to more cost-effective third-party pooled carriers, moving away from our existing private fleet. We expect this initiative to deliver measurable savings, offsetting the additional cost of our fourth quarter distribution center.

In closing, our core customer continues to be regimented in their supplement use, loyal to GNC, our brands, a unique shopping experience. I will talk more about how this impacts 2014, along with some of our key initiatives, after Mike provides details of our financial performance.

Michael M. Nuzzo

Thanks, Joe. Good afternoon, everyone. I'll start with consolidated results. Our fourth quarter consolidated revenue increased 8.6% to $613.7 million. Retail segment revenue increased 7.8%. Franchise segment revenue increased 9.4%, and manufacturing/wholesale segment revenue increased 13.3%.

Fourth quarter gross profit, calculated after deducting product, warehousing, distribution and occupancy costs, was 37% of revenue, compared to 37.9% in Q4 2012. The decrease in gross profit rate was due primarily to planned margin investments and lower Gold Card deferral revenue recognition, related to the Member Pricing program and incremental promotions initiated to effectively react to the challenging retail environment in November and December.

Fourth quarter consolidated SG&A expenses, excluding transaction and restructuring costs, were 20.9% of revenue, compared to last years of 22.4%. Within consolidated SG&A, advertising and promotion expense was 2.2% of revenue as compared to 3% in Q4 2012.

Q4 2013 adjusted net income was $60.6 million, a 21.7% increase from the prior year. Adjusted diluted earnings per share were $0.63, a 26% increase over adjusted 2012 results.

Fourth quarter 2013 results include a total of $4.7 million in net discrete tax benefits, related primarily to the reduction of certain deferred tax liabilities and reserves.

Now for information by segment. First, to our Retail segment. Our Retail segment includes domestic and Canadian corporate-owned locations and the Internet businesses, including DiscountSupplements.com. Q4 Retail segment revenue grew 7.8% to $443.5 million, driven primarily by a 5% same store sales increase in company-owned stores, and the addition of 154 net new GNC stores as compared to the end of Q4 2012. We continue to be pleased with the success of our e-commerce strategy, and each of the businesses comprising it.

In addition to the accomplishments of GNC.com Joe mentioned previously, LuckyVitamin.com contributed solid top and bottom line growth in 2013. This business is well positioned to profitably capture market share in the price value segment, leveraging GNC's scale in the areas of procurement and supply chain.

Lastly, DiscountSupplements.com is off to a great start. It's nicely profitable, and it's set to expand its offerings in 2014, utilizing GNC's product development capabilities.

Q4 retail operating income decreased by 1% to $68.6 million and was 15.5% of segment revenue in Q4 2013, compared to 16.9% in Q4 2012, again impacted largely by lower gross profit margin. In the quarter, we added 43 net new company-owned stores.

Next, to our franchise segment. Revenue in 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 9.4% to $103.1 million. Domestic franchise revenue grew by 5.5% to $54.8 million, with a same-store sales increase of 3.3%. International revenue increased 14.1% to $48.4 million, driven by an 8.8% franchisee-reported local currency same-store sales result.

Our portfolio of International franchisees continues to perform well, with the top 15 countries collectively delivering a 10% local currency same-store sales result each of the last 2 years.

As expected, our franchise in Mexico, which was affected by regulatory changes, has returned to more typical levels of wholesale purchases, which we expect to continue. However, in South Korea, our business continues to be pressured. For the year, we estimate the challenges in these 2 markets, relative to the more normalized results, negatively impacted operating earnings by approximately $5 million.

Q4 franchise operating income increased 17.7% to $39.3 million and was 38.1% of segment revenue in Q4 2013, compared to 35.4% in Q4 2012. The increase in operating income percentage was driven by higher gross profit margin. In the quarter, we added 28 net new domestic franchise locations, 68 net new International franchise locations and 1 company-owned store in China.

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 increased 13.3% to $67.1 million, driven by an increase in shipments to our contract manufacturing and wholesale partners. Q4 operating income increased 24.8% to $27.8 million and was 41.5% of segment revenue, compared to 37.7% in Q4 2012. The increase in operating income percentage in the quarter was driven primarily by a higher mix of proprietary product sales. We opened 9 net new Rite Aid store within a store locations in the quarter.

And next, to our balance sheet and cash flow. For the full year 2013, we generated $238.1 million net cash from operating activities. Included in our operating cash flow are nonrecurring expenditures associated with our Transportation Network Transition and the term loan transaction. We spent $50.2 million on capital expenditures, primarily for new stores, store maintenance, updates and remodels, corporate IT and other manufacturing facility expenditures. We generated $186.3 million in free cash flow, which we define as cash provided by operating activities, less cash used in investing activities, excluding acquisitions.

In addition, we increased our term loan by $252.5 million, and our revolving credit facility by $50 million. We used $27.6 million for the acquisition of DiscountSupplements. We paid $57.4 million in cash dividends on our common stock, and we repurchased $310.6 million in shares of common stock. The company now has $440.7 million remaining under the existing $500 million authorization.

As of December 31, 2013, we had a cash balance of $226.2 million and long-term debt of $1.35 billion. We have an undrawn $130 million revolving credit facility, with $1.1 million pledged as collateral for outstanding letters of credit.

Now I will provide our initial 2014 outlook. As outlined in the earnings release this afternoon, we expect diluted earnings per share to be approximately $3.18 to $3.24, a 12% to 14% increase over 2013 adjusted EPS, a high single-digit increase in consolidated revenue for the full year 2014. This is based on achieving a domestic retail same-store sales result, including GNC.com, of flat for the first quarter of 2014, reflecting a very challenging January and February retail environment, and a mid-single-digit increase for the remainder of 2014, to open approximately 200 net new domestic retail locations, including both company-owned and franchise stores. We continue to see strong interest from both existing and new franchise operators for new stores, which gives us additional growth options for the chain.

Anticipated capital expenditures in 2014 are approximately $70 million, which includes our previously announced fourth distribution center. Lastly, we continue to view share repurchases as the top capital allocation priority for use of available excess free cash flow. And while dividend growth is also an important element in our shareholder return model, we've taken a more conservative approach to raising it this year, in light of a 34% increase in 2013 and higher capital expenditures planned for 2014.

That completes the financial update. I will now turn the call back over to Joe to discuss our 2014 outlook and initiatives in more detail.

Joseph M. Fortunato

Thanks, Mike. As you have heard from other retailers and industry reports, the difficult Q4 trends continued into January, particularly in the weather-impacted regions. Also, our transaction and survey data indicate that our January was negatively impacted by a degree of product stockpiling, as GNC customers capitalized on the incremental add-on product promotions in November and December, therefore decreasing purchase intent in January.

The good news is these same surveys also confirm our customers' ongoing loyalty and intention to return to GNC when they are once again in the market for product. We are also encouraged by Gold Card members' stated increased intent to shop more often and to renew their membership.

Our expectations for flat, domestic retail same-store sales in Q1 2014 reflect negative trends in the first half of the quarter and an expected rebound to more normalized comp trends in the back half of the quarter.

Looking forward into 2014, we are excited about several key initiatives. In marketing, we are very excited about our work with dunnhumby on the direct marketing front and with Carmichael Lynch in the development of our new campaign.

Dunnhumby has completed their initial analysis in customer segmentation. Throughout this process, we identified the opportunity to get more targeted with our offers, and efficient with our spend, which we expect will result in increased transactions and share of wallet. In addition to the targeting of long-standing GNC customers, we will have a dedicated effort towards new customers acquired during the 2013 Member Pricing launch. This work with dunnhumby will begin to impact our customer outreach efforts in the second quarter of 2014, and will be integrated with our new marketing campaign also set to launch in Q2 2014.

Using our enhanced understanding of the drivers of purchasing behavior, the goal is to better engage with wellness achievers, capitalizing on their desire to live a healthier lifestyle. This ranges from existing GNC customers, regimented in their supplement use, and serious about health and wellness, to those more casual about their workouts along with individuals who are just getting started but can clearly benefit from GNC's superior customer service and exclusive assortment.

This campaign will be integrated across channels. We look forward to providing more details about it in all our initiatives on the next earnings call.

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 Chris Horvers with JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So can you talk about what -- I guess, what you're baking in for the back half of the first quarter, what sort of lift do you get out of the Easter shift? And can you share what you're seeing on a comp perspective in the non-weather affected markets?

Joseph M. Fortunato

We'll start with the non-weather affected market -- well, let me start with just the second half of the quarter. Right now, with what we've been experiencing, we really have not been able to get a real gauge on the business. We're very happy about some of the trends we're seeing from our new customer program. We're extremely pleased with what we've seen from our New York and Chicago markets and anniversary-ed 1 year in November and December and their shopping patterns, their interest in the program, their desire to shop more often. They're actually shopping more often, and they're tripling almost the rate of renewal, desire to renew with the program. So that's part of what we're trying to gauge as to what we're going to see from that consumer that we transitioned in May and June, and we haven't had a very good gauge on that since November, because of several things. One is weather impact that has deferred that customer as much as normal customers, and our misperception, and this was our fault, that we thought they would be shopping more regularly in November, December. But when you think about it, there's no reason they're going to shop any differently than our normal consumers do in November and December, because it's holiday season. So we expect them to come back to the table, unfortunately, and every indicator we see, says they will. Unfortunately, we have nothing to gauge how they'll rebound in the second half of this quarter, based on what we've seen so far, which has been just a barrage of weather after weather after weather impact. And if it slows down, obviously, we expect the quarter to be much better, potentially than we anticipate. But if it doesn't, and we don't have a crystal ball, we are not expecting much better than we've seen so far. Slightly better, but not much better.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So it's sort of like, it's slightly negative now, and slight positive and is Easter a point of comps for the quarter? I think that's what you said.

Michael M. Nuzzo

Yes, hey Chris. Typically -- yes, typically Easter is around the point, so a potential -- obviously potential benefit in this quarter. So -- but yes, I mean, clearly, I think we're just saying that first half, as we discussed, and then second half rebound. And to get a gauge for that is difficult at this point because, again, we haven't had consistency in trend. I mean, I think 250 of our stores were closed yesterday, and that was just yesterday. And so we're struggling like a lot of other retailers to really get a feel for what the trend truly looks like, given the circumstances, primarily with weather.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Can you maybe share what your closed store days have been so far this year versus a year ago? I guess the concern is, we just want to make sure that there's not this big back -- back half of the quarter hope baked in, so that we could come along and come in with another same-store sales disappointment in the first quarter.

Joseph M. Fortunato

Well, Chris, I think there's a couple of things you got to take into account. When you look at the weather states, and I heard some statistic this morning, 77% of the states in the country have been affected negatively towards weather at some point in time in the last couple of months. If you look at the high-volume stores for us, they're going to be across the Midwest, through the Midwest, Dallas, up into Chicago, across New York, New Jersey. So when you start seeing -- store closings are kind of irrelevant to me, I can go back to even when they're open. I mean, we're seeing significant transaction declines and people going into the store to shop. And when you're looking at 6 inches of snow, 8 inches of snow, 0 degree weather, people kept on coming out to go into the store to shop. So that's more important to me because I've had days when I've seen 50% decline comp, and sometimes 250 stores are closed, sometimes 350, sometimes 150. But the problem is, the ones that are open even, and 20 states have been affected by weather, that means you're doing 50% of the business you should be doing in those stores. So it's really hard to get a gauge. I mean, when you start getting Alabama and San Antonio and all through Texas at 20-degree weather patterns, and we have plants now that have been closed in South Carolina for 2 days, nobody can get through Georgia, and we can't get orders to -- I mean, the whole thing just has a compounding effect that has somewhat made us be more conservative with our outlook for the first quarter.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay, fair enough, and let me just sneak one in. Mike, could you maybe [indiscernible] the retail promotional points between the planned promotions, the Gold Card impact and the incremental promotions you used to drive traffic?

Michael M. Nuzzo

I won't break that down for you guys. I think that if you look at the difference in the margin, the net margin of 90 basis points, it really includes all of those. And also, we have in there, obviously, occupancy leverage, which we got less of, because of the lower comp that we had from what we expected.

Operator

And our next question comes from the line of Karen Short with Deutsche Bank.

Karen F. Short - Deutsche Bank AG, Research Division

Just kind of looking at your lower EPS growth that you're guiding to for '14. I mean, I guess, can you just go into anything that might have changed as it relates to your outlook on the industry? Because there's been a lot of industry data that shows growing trends and the correlation seems to be very low with you guys. But are you feeling -- give us some color on why you feel confident this is strictly weather-related.

Joseph M. Fortunato

Well, we got SPINS' data last week that we then looked at, we always do. And we're very satisfied that one, we're certainly not losing market share. It looks like the mass-market is being affected much more across numerous categories than we are, and we are outperforming the mass-market in most of the major categories in the industry. So that's all positive for us. Again, I think the momentum what we will see from the promotions and from the Member Pricing program will benefit us. So the major indicators for us, based on what we're looking at in general, in our outline, the Member Pricing program following the same trends as New York and Chicago, which have been excellent. A survey that we conducted, telling us that 78% of the members like the program better than the old one. 2/3 of them perceive the program that they will renew more like 2x or 3x the effective rate of renewals before, and 51% of them are shopping more often than they were shopping in the past. That pattern continues into the times when this kind of streak snaps from the weather, we should see an acceleration of several things. One is pent-up demand and we also conducted a survey that says customers came back and said we have some -- they did some stockpiling during the promotional periods in November, so they weren't in need of products quite yet. That's going to come going in, too. So the timetable of when that all breaks, our optimism is that the programs are working, we're very satisfied with the Member Pricing program, our surveys indicate that our consumer is still as strong as it ever was, and that we expect all those kind of stars to align as we enter a better period of time for people who start shopping again. And I think one more thing everybody's got to understand is, it even affects me, when it's not reasonable out, and people don't start exercising as quickly as they usually do, they don't get into fitness and health and regimentation as fast as they usually do, and we have had a soft start to January in general, recently, because customers don't come right out of the holiday season and decide they're going to get alternate fit for the upcoming season in the summer. So the pattern then starts January and February outside of what we perceive and truly believe to be weather and seems to be kind of normal to us.

Karen F. Short - Deutsche Bank AG, Research Division

And that's also based on data that you can see from the fact that there must be some markets that you operate in that have not been affected by weather, that's based on that data? And any color you could give on that? And then I guess, any color you could specifically give on mall-related stores versus the rest of your store base?

Joseph M. Fortunato

Yes. We are -- basically, I'll start with the non-weather impacted states and it's pretty hard to pick off any that haven't been impacted at all, but we have several, and we're pretty pleased with those -- with the performance in those states. Obviously, they vary a little bit, but overall, we would be satisfied with what we're seeing going on in those states. The second piece is malls and strip center related. Amazingly, we haven't seen a divergence from the normal divergence we see in malls and strip centers. So this kind of shows the trends everybody's talking about. Mall traffic was light during the holiday season and certainly, that was an indicator in our number. And the weather has impacted the strip centers, so the spread has not changed, which kind of is a good indicator as well because it doesn't tell me that one area of the real estate, the problem is being impacted more than the other by the weather or shopping patterns in general, they're all pretty similar across the nation.

Karen F. Short - Deutsche Bank AG, Research Division

Okay, that's helpful. And just Mike, your guidance of [indiscernible] share buybacks in the earnings, right?

Michael M. Nuzzo

Actually, it does, and I won't give -- we typically do. I don't like to give detail on the cadence of share buybacks but I think a safe assumption would be that we would work through roughly half of the 500 million authorization by the end of the year. And obviously, it could be quicker or slower, depending on how things play out. But that's the general guidance I would give you at this point.

Operator

And our next question is from the line of Stephen Tanal with Goldman Sachs.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

My question's really about the margins in 2014. Are you guys planning for sort of a rebound in gross margins, or how would you think about the year-on-year trend on the margin line as we go through the quarters here?

Michael M. Nuzzo

Yes, Stephen, that's a good question. We don't -- again, we don't get too deep into guidance on particular line items. But again, what I can give you some insight on is, as far as the product margin itself, if you think about that piece of it, we would expect it to be obviously, more in line with normalized approaches. I think we said in the prepared remarks that we were more promotional in Q4, and that did affect margin. We would expect going into 2014, that we would be more consistent there. And then if you also think about the rollout of the Member Pricing program, we invested pretty heavily in margin in Q2 for the rollout of the program and really sustained that pricing profile as we got into Q3 and Q4, less so in Q3 and Q4 from the Q2 margin investment. So we'll obviously have that as an anniversary benefit as we get into the back part of the year. So that -- but again, yes. So again, that's -- I think that's how we're thinking about the margin. The other piece of it is what we've talked about and what we have talked about is this Gold Card amortization piece, which, again, will also be a factor. Again, that's tough to give you a lot of guidance on because, as you know, it has a lot to do with the Gold Cards that are sold in the current quarter in relation to the Gold Cards that have been sold in the previous quarters. So that will also be an impact to our margin, but again, I think, at this point, it could be premature to give a lot of guidance on that.

Joseph M. Fortunato

But it's had an impact this year as well.

Michael M. Nuzzo

The impact should be less as we move forward than it's been during the current year.

Joseph M. Fortunato

And another thing of comfort is that overall, so far, we have not seen major escalations in any of the raw material cost.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Got it, understood. And just to the extent that the promotions or the incremental promotions in the fourth quarter were tied to weather, would you expect those or should we expect those to have continued to January and February where weather was obviously a bigger impact?

Joseph M. Fortunato

No, we didn't really -- we kind of had a normal promotion in January and February. And because once again, when you're planning these things, 45 to 60 to 75 days before you run them, we didn't anticipate January and February to be the weather impact it was. And we did have an opportunity to get more promotional and make a decision around mid-January, whether to do that or not. We chose not to. And certainly, I'm pretty pleased we made that decision because anything we would've invested would've been wasted because people aren't getting to the stores anyway.

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

Got it. And just the last one for me as I sort of think about the year-on-year impacts of the new Gold Card program. In 2Q '14 as you start to cycle some of those free giveaways, will you be charging for the card for the members who got it for free in the prior year, or will you be giving it for free, or will you be targeted and give it for free where you think you need to? How will you think about approaching that?

Joseph M. Fortunato

I think we're going to have a pretty multi-tiered approach to it, and it's really dependent on those customers that -- the new customers that we acquired through that program back in May, June, how they're shopping. But a lot of it is going to be built around dunnhumby and how they want to attack that customer base, because that's where the value is going to be to us. We have a lot of those people as we saw in New York, Chicago that have shopped 2x, 3x, 4x a year now, since we gave them the card. We got half of the people that were new in the giveaway May, June, that are shopping 2x, 3x, 4x already. And to get more targeted with our efforts on the marketing front to drive them to the stores, and then we'll decide. If a customer hasn't shopped in 6 months, we may give them a free card. So there's going to be all kinds of variables and relationships to how that will play out over that period of time.

Operator

And your next question is from the line of Mark Wiltamuth with Jefferies.

Mark Wiltamuth - Jefferies LLC, Research Division

Joe, can you give us some insight across the categories? Was the slowdown kind of uniform or do you think there was something going on with industry demand in any one area?

Joseph M. Fortunato

No. I mean, we've seen pretty consistent trends by category. Obviously, our sports fitness category has always grown quicker than our VMS category. So we didn't see those trends changing dramatically, we just saw some tail-off in all of them. But the mix of all of them didn't seem to dramatically change.

Mark Wiltamuth - Jefferies LLC, Research Division

So from your standpoint, you still think the long term industry growth trend is still solid, is that fair to say?

Joseph M. Fortunato

I do. I think that the long-term industry growth trend is solid. I know it was revised slightly downward recently and I believe that those numbers are solid, and I think that's how I view the business and how we perform and whether we'll continue to gain market share as we have in the past or not.

Mark Wiltamuth - Jefferies LLC, Research Division

And is there any way you can give us the comps for the unaffected weather markets? Just because I think there's so much weather in here, investors are really trying to get their arm around how much was just pure disruption and is there really solid comp in the remaining days.

Joseph M. Fortunato

In the first quarter?

Mark Wiltamuth - Jefferies LLC, Research Division

In the fourth or the first, maybe if you can give me what the total unaffected weather markets were.

Joseph M. Fortunato

It's really hard. Well, I can give it to you in the first quarter but I really can't in some ways, because -- I can tell you this, that the non-affected markets, and we have been very conservative in what we've classified as non-affected markets, because clearly, even those markets, to some extent, like Texas and areas like that, have been affected. But we've been satisfied that they are on a trend rate that we would expect for this period of the year. The problem is, there's so few of them to look at. But I can tell you that the ones we have been able to isolate, even knowing that some of them were affected by weather, have been satisfactory to us.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And before the drop-off from weather, were you getting incremental traffic pickup from Gold Card?

Joseph M. Fortunato

We were. And the other thing you guys keep on -- we have been able to identify that there's probably at least an 8% swing in weather-affected states versus non-weather-affected states.

Mark Wiltamuth - Jefferies LLC, Research Division

8%?

Joseph M. Fortunato

8%. So you can see the magnitude of it, it's significant.

Operator

And your next question is from the line of Kate Wendt with Wells Fargo.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Just wanted to -- one thing on the weather. I would have thought that some of that would be made up for by e-commerce, and you did see that GNC.com accelerated on a 2-year trend. But is it just that it's not going to be enough to make up for the lag time? If somebody does order online, they have to wait for that product to ship and maybe that, also, that shipment is being affected? And perhaps, also, an impact from people who happen to stop in retail business?

Joseph M. Fortunato

Well, we did have a strong fourth quarter on GNC.com, and a lot of that was -- Cyber Monday was extremely strong for us because we got more promotional. In fact, that creates some of the stockpiling I've talked about. But it's kind of get the customer while you can, and I think we did that and we paid a little bit of the price for it, but we delivered the quarter fairly effectively anyway. So my position is, and I'm not a big web shopper, so I'm not the expert here, but I think consumers will shop the web and there are multichannel consumers for sure, but the web is still, you got to consider, it's only about 9%, 10% of the business. So when you're looking at that, and even if it accelerates, it's not nearly enough to make up for any of the impact that's going on in the stores. So we have seen them. We saw 30% growth rates in the fourth quarter in the web. So now that's pretty strong when you got margins that are as strong as our website margins are, and they show very high-end brand loyalty. But I think consumers, for a day or two, see bad weather and they don't go to the web necessarily. And then they maybe get bad weather again and they don't go to the web, but I think if they knew they were going to get bad weather for 6 weeks or 5 weeks or 4 weeks, I think they would have made a better choice to go there.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Yes. And to your point, do you have any breakdown in terms of your customers and in terms of what percent are retail only? So they only stop in your stores versus multi-channel or maybe e-com only?

Michael M. Nuzzo

Yes. I mean, we obviously track it but we don't really talk about that or give out that sort of information. I mean, obviously, as you know, more and more of our customers, I can say more and more customers over the last couple years have become multichannel and that's effective. So yes, but Kate, we don't really get into that.

Joseph M. Fortunato

And we don't have it accurate enough that I'd want to give it to you right now. But as Mike said, the trend is more and more people are going multichannel.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Got it. And then just one other quick one. How much have you factored into guidance for any incremental spend on dunnhumby or the new ad campaign this year versus last year?

Joseph M. Fortunato

It's all in there.

Michael M. Nuzzo

Yes, and how we look at the dunnhumby spend is we look at it really integrated within the marketing budget itself. And it is incremental spend but on the flip side, I think our intention and expectation is that we will be much more efficient and effective with direct marketing. So we won't have to send out as much to get a much higher return. And so that is how we see the offset.

Joseph M. Fortunato

And we have not baked in the savings potentially by being more efficient [indiscernible]. What we've done is if you -- our marketing technically on the guidance you're seeing is de-leveraging the business, because we are spending more on the launch, we're focused on dunnhumby, and then there's some expense in there on transitioning to another distribution center. So if you look at that, that's all baked into that guidance. We didn't leave anything out, but we also didn't give incremental upside to the efficiencies potentially created or the upside in selling potentially created by Dunnhumby.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay. So would you expect to -- you had a pretty big increase in the first half last year related to the Member Price rollout. Would you expect to be able to leverage that or maybe even just for the year or are you expecting more flat as a percent of sales?

Joseph M. Fortunato

No, we're actually probably going to deleverage [indiscernible], a little bit, but not much. But when we're launching the new campaign, we're going to do it right, and we want it to be effective. And when you do these kinds of things, I don't think those are the times you go out and be conservative. I think you go out and tap the consumer -- the potential consumer base, and hopefully, we drive more traffic to the stores.

Operator

And your next question is from the line of Mark Miller with William Blair.

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

Can you give us an update on your approach to the buy one get one free promotion? I know years ago, that was not a big part of the business, but it's increased over time. So how are you communicating that discount to the member relative to MPP? How do they think about that discount? And then I wasn't quite clear, was BOGO a bigger part of the promotional effort in 4Q and that's what drove the stock up? And then if you're doing normal promotion, is that possibly what's contributing to the slower sales in the first quarter?

Joseph M. Fortunato

Yes, that's part of it and it's not buy one get one free, it's buy one get one 50%. So we don't hardly ever -- I don't know, remember doing buy one get one free for the past 10 years. But we buy -- we do BOGO events and we are in the middle of a BOGO event now for sports, where you buy one, get 50% off, anything else in the same category, mix and match. So has that accelerated? It really hasn't, we dedicate so many months a year to sports and fitness BOGO, and then we dedicate so much through VMS type BOGO, and there's always some kind of BOGO going on in the store. What happened some in the fourth quarter was that we implemented some in-store promotional campaigns that gave offers to customers at the register, which comp up, which certainly produced more revenue and allowed us to deliver the numbers, but it also compounded some of the, what I'll call, stockpiling.

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

Okay, all right. On the first quarter, could you just give some perspective about what the prompter impact is on EPS? I mean, I guess with flat comps, presumably looking for down earnings, but just any color you can provide around that?

Joseph M. Fortunato

Well, I mean, I think -- are you talking about the effect on EPS for the year?

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

No, just -- since you're giving some guidance for the first quarter and color within the quarter, just -- I mean, you want -- when you report the first quarter, to have numbers presumably in the right place. So to the extent you can give more color around the bottom line EPS expected in the first quarter, that would be helpful.

Michael M. Nuzzo

Yes, Mark. We typically don't give, as you know, quarterly EPS guidance but I think that as you guys model this out, obviously, the big factor is flat comp in Q1 and then the anniversary of the tax benefit in Q4. And all that is sort of couched around more normalized performance from Q2 through Q4. So I think if you just work with that parameter, I think you'll certainly get in the range that we set the year, and I think your quarters will get probably pretty close to where we have the expectation.

Operator

And we do have a follow-up question from the line of Chris Horvers with JPMorgan.

Chris has withdrawn his question and we do have a follow-up question from the line of Mark Wiltamuth with Jefferies.

Mark Wiltamuth - Jefferies LLC, Research Division

First, would you maybe just revisit your long-term growth algorithm? And is the second half of the year kind of fitting in with that or do you have some built-in conservatism just because we're off to a slow start?

Michael M. Nuzzo

Well, Mark, as you know, we always talk about going into a year with the algorithm that we've established, which is mid-single-digit comp, high single-digit revenue growth and EPS in the mid to high teens. And obviously, we've outperformed that. And so our approach has been to get into the year with that framework and then modify accordingly. In this case, we have a situation with the first quarter, which, as we've talked about, will impact that guidance structure for 2014. Having said that, obviously, all the initiatives that we're doing, dunnhumby, the marketing, the Member Pricing program itself, really focused on driving as much of an outperformance in the Q2 through Q4 time periods as we possibly can, and in the balance of Q1 for that matter. So that's sort of how we think about it. It's very consistent with how we've talked about it the last couple of years. And as you know, that's been our approach.

Joseph M. Fortunato

Yes, and Mark, it's pretty -- if you kind of do the math, you'll get pretty close to the standard model Mike's talking about with x Q1. I mean Q1 is an unknown, so we've been conservative.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay. And for your adjusted EPS on the quarter itself, did that take out the tax gain there in that quarter?

Michael M. Nuzzo

I'm sorry, are you talking about the guidance for the year?

Mark Wiltamuth - Jefferies LLC, Research Division

No, no. For the quarter that was announced, you had an unusual tax rate. So was that already adjusted out in your adjusted EPS?

Michael M. Nuzzo

No. That EPS includes the tax benefit.

Joseph M. Fortunato

So if you kind of bridged it, you would look at, you miss comp by 3%. We understand, somehow, the reason why. If you drop that to the bottom line, you'll never be able to pin it down, and the margin implications by being more promotional and the Gold Card deferral impact, you probably would have negated the $0.04 and still ended up in the second position.

Operator

And your next question is from the line of Charles Grom with Sterne Agee.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Just a lot of retailers are obviously calling out weather, a lot of companies have positive comps in November and December and down mid-teens in January. But some are also calling out that the fourth quarter was more promotional and more severe with customers acting differently than they even did in 2008. And I'm just wondering, it's probably hard to decipher just given the volatility, but is there anything in customer behavior that has you guys thinking that it's potentially more than just the fact that we've got 16 inches of snow in Manhattan today and just overall weather over the past couple of months?

Joseph M. Fortunato

Well, better you than us, but we had our impact as well. But not the -- I don't really see a change in the shopping patterns. It's really hard to get a read on November, December, because December really started kind of the weather impact on us a little bit. And obviously, January, February is the same for everybody. I can tell you that I'm happy we're not seeing the same effect to some of your other retailers that I've told you about January and February. But as far as customer shopping patterns, I mean, we're still seeing an average ticket up. We're still seeing when we can gauge transactions, they look [indiscernible]. We're seeing what they're buying, we're seeing basket sales, we're seeing UPTs. They all look good, so it's not -- I don't see a major change in our core consumer in regards to their shopping patterns.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay, great. And I guess on the one positive, all the softness in sales is -- the theory is pent-up demand which makes a lot of sense. And I'm just wondering if you guys have gone back to look at previous winters where we've had this severe weather conditions. I'll bet the winter of 2000, 2001 comes to mind. I'm just wondering if you did in fact see that release come, the March, April, May time when the weather got more normal?

Joseph M. Fortunato

I could tell you, I've probably been here the longest, so I'll gauge it, but I think there was some kind of indication, and I really hate this weather game, but that 1977 was the last time we've seen the winter close to what we have this winter. The reality is, when I can remember having a significant weather months, we usually do get a recuperation of a fair piece of that from a pent-up demand position. We've always kind of estimated that 50-plus percent comes back in, but it's kind of hard to put your finger around it, really is. But we do see the bounce-back, though.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. And then just one for Mike on the '14 guide. Any color you could provide by segment, either revenue or operating margin performance would be helpful.

Michael M. Nuzzo

Yes. No, I mean, we typically -- and Chuck, you've known this for a little while, we don't give that kind of color. But again, our business, I can tell you, especially in some of the other segments like the franchise and the manufacturing/wholesale, I think if you understand the dynamics of how those components work with the domestic retail and domestic franchise operate in a very similar way, International franchise is a business that has had very strong growth over the years. And obviously, we've got growth in stores there, growth in new products and then the manufacturing/wholesale piece. Again, we've added components like Sam's Club and PetSmart, and so there's a good consistent growth rate expectation there as well. But yes, so that's as much as I can comment on that.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay, fair enough. And then just one more for Joe. You said the 8% swing in weather versus non-weather, was that in the fourth quarter as well or is that just over the past 6, 7 weeks here in 1Q?

Joseph M. Fortunato

Q1.

Operator

And we have reached our allotted time for questions, and I would like to turn the call back over to Mr. Fortunato.

Joseph M. Fortunato

I'd just like to say thank you, to everybody, for joining us, and we know the call is scheduled a little later today, so we appreciate that, your time, and talk to you again next quarter.

Operator

Thank you. This does conclude today's conference call, and you may now disconnect.

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