GNC: A Vitamin Stock IPO I Just Can't Swallow

 |  Includes: GNC, RAD, VSI
by: Tim Galginaitis

"Third Time's the Charm" is apparently a phrase General Nutrition Centers (NYSE:GNC) lives by. After two failed attempts at taking the company public, the management of GNC is hoping to finally bring the company public. However, I do not believe that the stock of this vitamin and supplement company will make your portfolio stronger.


GNC [Proposed ticker (GNC)] is a chain of stores that specializes in the sale of health and specialty nutrition products. The company originally filed for an Initial Public Offering (IPO) twice while owned by Apollo Management, first in 2004 and again in 2006. Each time, GNC withdrew the IPO after weak investor demand.

The company's new owners, the Ontario Teachers' Pension Plan (OTPP), is again attempting to take the company public, this time to the tune of 22.5 million shares priced at between $15 and $17, on March 31, 2011. Could the third attempt finally mean success?


GNC has been growing earnings at an increasing rate; 2010 earnings grew by 50% over 2009, which were up 34% over 2008. Additionally, the company has managed to grow its same-store sales by 5.6% in its company-owned stores (2.9% in its franchised stores). The company is one of the largest health retailers in the country, with its only main competitor being the Vitamin Shoppe (NYSE:VSI). Specifically, GNC has its own brand of nutrition products, the expansion of which has contributed to its overall sales growth. The GNC brand offers considerable value in this regard. Additionally, GNC's discount program, "The Gold Card," provides the company an additional revenue stream through its paid annual membership, and an added incentive to the consumer to shop at GNC stores.


Online retailers are becoming more attractive. Ordinarily, GNC's prices carry a slight premium to the prices offered by various online retailers (such as However, when GNC offers a sale (often online), their prices more closely resemble those of their online competitors. However, as higher gas and commodity prices choke the budgets of the American consumer, GNC may be forced to offer more sales (at a cut to their operating margin) or risk losing sales to these online retailers.

Additionally, a large portion of GNC's sales come from its "stores-within-stores." These "mini-stores" are often located within Rite-Aid (NYSE:RAD) stores. GNC cites the relationship with RAD as a risk to GNC's overall health in its IPO prospectus for good reason. RAD’s stock price is hovering at just over $1, and the company has not reported a profit since May, 2007. The company is losing ground to CVS (NYSE:CVS) and Walgreen (WAG); the only price appreciation noted in RAD in recent history has been on speculation that it would be taken over by one of its competitors (most recently in April 2010). After WAG's acquisition of (NASDAQ:DSCM) today, RAD's prospects look even direr. GNC's dependence on RAD may prove to be a drag on the stock post-IPO.


Investors, particularly private investors, will be behind the entire rack of pool balls (not just the 8-ball) following the IPO. While 22.5 Million shares will be issued to the public as a part of the IPO, the OTPP will retain about 87.4 Million shares of the company, making the total number of its outstanding Class A common shares 109.9 Million (the underwriters may exercise an option to purchase an additional 3.375 Million shares, which would drive this total number higher). In 2009, the OTPP reported a $17.1 billion shortfall, and that overall assets were growing at a slower rate than their costs (including rising pension costs). The OTPP may be under pressure to sell many of their shares as soon as permitted, which may put pressure on the stock.

Additionally, GNC holds a large amount of debt. While the company reported $1.8 billion in revenues in 2010, they still carry $1.05 billion in long-term debt on their balance sheet, while only reporting $96.6 Million in earnings. Should the company experience a slowdown (with rising commodity costs), this debt could be another drag on the stock.


Personally, I love shopping at GNC (when they are having a sale). They stock an outstanding selection of products. However, I will be leaving their stock on the shelf. Their debt load, reliance on RAD, increasingly stiff competition, the specialty nature of their products, combined with the selling pressure that may be experienced from OTPP will prevent me from purchasing stock during its IPO.

However, I will be watching the stock of the Vitamin Shoppe if GNC does in fact price their IPO this time. VSI has an institutional ownership of over 90%. If large funds decide to re-balance their portfolios to include GNC stock it may force them to unload some shares of VSI, which would create downward pressure on the stock, which could make it an attractive short (or long put options) target.

Remember, we are fortunate enough to live in the land of the free, because we are the home of the brave; please remember to thank your local serviceman.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Although I mention VSI as an attractive short target, I have no interest in shorting the stock personally.