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Summary

  • GNC is off to a bad start this year.
  • Harsh weather, bad publicity and membership program make comparables difficult.
  • Long-term growth potential remains, leaving a premium business trading at an attractive price.

GNC Holdings (NYSE:GNC) has been off to a very poor start so far this year. Harsh weather, negative publicity surrounding vitamins and tough year-on-year comparables on the back of its premium membership program are to blame.

While these issues will cast a shadow on the results for this year the long-term growth prospects remain intact, allowing investors to pick up a solid business at an interesting price.

Long Term Growth Story...

At an older investor relations presentation, given in September of last year, GNC stressed the long-term consistently profitable growth reported by the company.

Between 2005 and 2012 the company reported a 10.7% compounded annual growth rate in its revenues driven by 30 consecutive quarters of comparable store sales growth. EBITDA grew much quicker as margins expanded from 8.7% to 19.7% over this same time period.

... In A Global Growing Market

GNC has seen massive tailwinds from a growing dietary supplement market which rose from roughly $22 billion in 2005 to an expected $39 billion in 2015 within the US, according to the Nutrition Business Journal.

An increased focus on health and consumer willingness to spend on achieving this allowed GNC with its leading brands to benefit from this trend. To continue to benefit from this trend, the company sees the potential of 4,500 US stores as well as e-commerce growth on its website.

The company aims to boost overseas operations as well, currently already having more than 2,000 stores in some 55 countries. Typically vitamins and related markets are less well-developed overseas, resulting in fewer premium players to compete with.

As Short-Term Worries Arise

On its first quarter earnings report, GNC reported just 1.9% sales growth with revenues coming in at $677.3 million. Retail sales came in at $509.0 million thanks to store openings as comparable store sales were down by 0.7% compared to last year. Operating earnings plunged by 150 basis points to 18.5%.

Gross margins were under pressure, falling by 73 basis points to 37.8% of total sales and were the main driver behind a modest fall in net earnings. This of course was the result of the membership program under which members get sizable price discounts on purchases.

GAAP earnings came in at $69.9 million, down from $72.6 million as reported last year. Thanks to sizable share repurchases, net earnings were up by two pennies to $0.75 per share.

2014 Outlook

Based on the difficult quarter, GNC is being more cautious for the entire year of 2014. Adjusted earnings per share are seen up by 7-9% to $3.05-$3.10 per share, increasing largely thanks to share repurchases.

Reported revenues are expected to increase in their mid single digits, driven by flat to low single digit same store sales of domestically owned stores. Despite a challenging and competitive marketplace, gross margins are expected expand modestly as comparables become easier.

Valuation

GNC ended the quarter with $172 million in cash and roughly $1.35 billion in debt for a net debt position which approaches $1.2 billion. The net debt position rose after the company spent a sizable $150 million to repurchase shares during the first quarter. At the moment, another $291 million in the share repurchase authorization exists.

At $37.50 per share, GNC commands a market value of about $3.5 billion. Given the outlook, full year revenues of $2.7 billion should be attainable as earnings are seen around $285 million. This values equity in the business at roughly 1.3 times annual revenues and 12-13 times annual earnings.

On top of sizable share repurchases, investors currently receive a quarterly $0.16 per share dividend which provides them with a dividend yield of 1.7%.

Takeaway For Investors

GNC is an interesting case at the moment. The company holds a leading position in a long-term growing industry which is facing short to medium term headwinds at the moment. The company has been around for 80 years, having established a strong retail brand as well as propriety brands. At the moment, the company has some 8,678 stores around the world, of which about 40% are company-owned.

Shares made their public debut at $16 during the spring of 2011, rising all the way to $60 by the end of 2013. Shares sold off some 40% form those levels, currently trading at $37 per share.

The company is facing numerous short-term headwinds which include the very poor weather at the start of the year, yet trends have improved recently. FDA warnings and media reports on vitamin and fish oil-based products have had a negative impact on the public perception of its products as well.

The member pricing program took a toll on margins as it aims to boost long-term customer loyalty, and all of these factors combined drive the current short-term pessimism, causing the market to become more competitive as well.

After the recent sell-off I therefore believe that shares offer value, although I wish management was a bit more conservative in the pace of share repurchases, thereby containing the leverage employed by the firm.

That being said, I believe shares offer compelling value, and I may become a buyer on potentially renewed dips toward the mid-thirties.

Source: GNC Holdings: Short-Term Headwinds Create Long-Term Opportunity