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This analysis of GNC Holdings, Inc. (NYSE:GNC) was provided to TradingIPOs subscribers in advance of its IPO. On March 31, the company priced its IPO within expected range at $16 per share.

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GNC plans on offering 25.875 million shares at a range of $15-$17. Insiders will be selling 9.875 million shares in the deal. Goldman, JP Morgan, Deutsche, and Morgan Stanley are leading the deal, Barclays Credit Suisse, Blair and BMO are co-managing. Post-IPO GNC will have 103.55 million shares outstanding for a market cap of $1.657 billion on a pricing of $16.

A big chunk of the IPO monies will be used to pay a dividend to insiders. Note that insiders also paid themselves a nice dividend as well on a recent debt restructuring. Remainder of the IPO proceeds will be used to repay debt.

Due to a couple leveraged buyouts over the past decade, debt here is substantial. Post-IPO GNC will have $903 million in debt on the balance sheet.

Ares will own 28% of GNC post-IPO. Ares and other entities purchased GNC from Apoll in a 2007 leveraged buyout. Total consideration was $1.65 billion, much of it funded via debt. Apollo attempted unsuccessfully to take GNC public twice in the 2004-2006 timeframe.

From the prospectus:

Based on our worldwide network of more than 7,200 locations and our GNC.com website, we believe we are the leading global specialty retailer of health and wellness products, including vitamins, minerals and herbal supplements ("VMHS" products, sports nutrition products and diet products).

Large, successful brand and retailer here. Our one question is to discover if the pricing range here works, factoring in the hefty debtload.

Much like competitor The Vitamin Shoppe (NYSE:VSI), GNC enjoys higher margins on their own branded 'GNC' product line. GNC branded products accounted for approximately 47% of GNC's total 2010 sales. Branded products are sold at company owned stores, GNC franchise stores and Rite-Aid 'GNC store within a store' locations.

Sector - The US nutritional supplement industry generated $28.7 billion in sales in 2010. Growth projections are for 5%+ annually through 2015. GNC is the largest participant in a fragmented sector, with an estimated 5% US market share.

***GNC has had an impressive 22 straight quarters in company owned same store sales growth. Again, not a question here of a strong brand name or a successful operation. GNC is both. The question is the valuation with debt factored in.

As of 12/31/10, there were 2,917 company owned stores, 2,340 franchise stores and 2,003 franchised Rite-Aid stores within a store locations.

GNC plans on growing US company owned retail space by 3%-4% in 2011.

2010: 5.6% company owned same store sales growth, 2.9% franchise same store sales growth. $438,000 average revenue per company owned store. 101 company owned store openings, 40 closings.

2009: 2.8% company owned same store sales growth, 0.9% franchise same store sales growth.

GNC manufactures approximately 35% of products sold over the past five years.

Franchise revenues account for 16% of total revenues. Revenues from Rite Aid accounted for 3.5% of 2010 revenues.

11% of revenues come from international operations, mostly in Canada.

Financials

$903 million in debt post-IPO.

2010 - $1.822 billion in revenues, an increase of 6.7% from 2009. Gross margins of 35%. Operating margins of 11 1/2%. Interest expense ate up 19% of operating margins. For the size of the debt load, a nice positive here that interest expense is only cutting into 19% of operating margins. The debtload is large here, but not killing GNC operationally. Net after tax margins of 6.1%. EPS of $1.08. Note that cash flows here pretty much match EPS. If GNC continues to bring in 100+ million in cash flows annually, they can substantially pay down their debt load over the next five years.

2011 - Based on planned square footage growth and plugging in positive same store sales puts 2011 revenue growth at 5%-6%. Operating margins should improve slightly as debt servicing % will dip a bit. A run rate of $1.922 billion with net margins of 6.5% puts 2011 EPS at $1.20. On a pricing of $16, GNC would trade 13 1/2 X's 2011 estimates.

Quick look at GNC and recent IPO VSI:

  • VSI - $955 million market cap, trades 24 X's 2011 estimates. Much less debt, $75 million. 33% gross margins, but just 3% net margins.
  • GNC - $1.66 billion market cap, at $16 would trade 13 1/2 X's 2011 estimates. 35% gross margins 6%+ net margins. Debt is the issue at $903 million.

Conclusion - IBs and private equity entities have finally been valuing these indebted IPOs reasonably. The debt is an issue here, however debt servicing eats up just 19% of operating profits. Not ideal of course, but not enough to impede cash flows. GNC is a market leader, the worldwide supplement/vitamin leader in terms of revenues and store locations. Coming just 13 1/2 X's 2011 estimates is cheap. Definite recommend here in range, solid deal coming reasonably valued.

Source: GNC's IPO: A Solid Deal at Reasonable Valuation