GNC Holdings (GNC) Michael G. Archbold on Q1 2016 Results - Earnings Call Transcript

| About: GNC Holdings, (GNC)

GNC Holdings, Inc. (NYSE:GNC)

Q1 2016 Earnings Call

April 28, 2016 8:30 am ET

Executives

John F. Mills - Partner, ICR (Integrated Corporate Relations)

Michael G. Archbold - Chief Executive Officer & Director

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Analysts

Joe Edelstein - Stephens, Inc.

Curtis S. Nagle - Bank of America Merrill Lynch

Bob Summers - Macquarie Capital (NYSE:USA), Inc.

Philip Terpolilli - Wedbush Securities, Inc.

Christopher Michael Horvers - JPMorgan Securities LLC

Stephen Tanal - Goldman Sachs & Co.

Peter S. Benedict - Robert W. Baird & Co., Inc. (Broker)

Operator

Good day, ladies and gentlemen, and welcome to the GNC Holdings First Quarter 2016 Earnings Conference Call on today, the 28th of April, 2016. Throughout today's presentation all participants will be in a listen-only mode. There will be an opportunity to ask questions at the end of the conference call.

I will now hand you over to Mr. John Mills. Please go ahead.

John F. Mills - Partner, ICR (Integrated Corporate Relations)

Good morning, and welcome to the GNC first quarter 2016 earnings call. This morning, we released our first quarter financial results, which are available on our website. Also on the website is a webcast link that includes a presentation that will be accompanying this morning's call.

With me today is Mike Archbold, CEO; and Tricia Tolivar, Executive Vice President and CFO. Today's call will be limited to approximately 60 minutes. Following our prepared remarks, we will be available to take your questions. After I read the disclaimer, Mike will provide an update on our key initiatives, Tricia will then review financials, after which Mike 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 SEC and our earnings release this morning.

I will now turn the call to Mike.

Michael G. Archbold - Chief Executive Officer & Director

Thanks, John, and welcome, everyone, to the first quarter 2016 earnings call. Let me start by saying our results for the quarter did not meet our expectations and we, as your management team, are disappointed with these results. The impact of our initiatives is taking longer than expected to produce significant results, and we're still experiencing surprises. We clearly recognize the severity of the issues, so let me get right into the details of what happened and the immediate steps we're taking to address these challenges.

So, overall, four key factors drover our results; let's talk about them. Significant markdowns, primarily in vitamins to address expiring inventory; overall under-performance in our vitamin business, specifically Vitapaks; marketing effectiveness, although improving, is not delivering our desired results; and weakness in our franchisee results related to low adoption of corporate initiatives. While we're moving quickly to address these challenges, we reduced our guidance for the year.

Our performance in the vitamin category had a negative 4% impact on same-store sales in Q1 of 2016, about one-half of which was due to the deep discounting of our product that was nearing expiration. During the quarter, we were surprised by an increase in store-level markdowns on dated product, which caused us to examine store inventories and sell-through levels.

Based on our analysis, we determined there was more dated inventory on our shelves than we had estimated. As a result, we took actions to implement more significant markdowns in order to capture revenue on the products before expiration. While our existing customers took advantage of the discounts, this had a negative impact on overall sales, we estimate in a range of 1.5% to 2.5% and a margin impact between 80 basis points and 120 basis points.

Once we had sold down those excess units, we ended the practice of deeply discounting this product. While we do monitor expiring inventory on a regular basis, due to systems limitations, we were surprised by the level and extent of aged and ageing inventory. As a result, we've implemented new tools to more precisely track inventory at the store level, but that's only part of the answer. We're also optimizing our assortment, introducing new promotions and marketing and reallocating products.

We know from our analysis that demand for specific products varies by store, and we're focused on working with our teams in the field to move product to stores with the greatest demand. Beyond the impact of discounting, our trends in vitamins are not in line with our expectations, largely due to the declining sales of Vitapaks. Due to aggressive selling behaviors of these products in 2014 and early 2015, we experienced a significant number of one-and-done Vitapak customers and, as a result, reduced the level of agenda-based selling.

Frankly, we pulled back too far in our selling approach. Our Vitapaks are high-quality, convenient and cost effective, and they're not carried by our competitors. We're now encouraging our associates to explain the benefits to our customers once again, to begin to reverse the trends that we're currently experiencing.

Additionally, to address Vitapak declining trends, we're immediately increasing our diligence as we execute the inventory planning and production process, which is something under our control, reduce lead times, challenge our item count, and change the promotion and marketing for these products.

We also have an opportunity to improve in all other vitamins. We've already begun store associate training to emphasize vitamin solutions for our customers, because more than 70% of Americans still don't get sufficient nutrition through diet alone. Our marketing will be more focused on this category with a call-to-action objective. In addition, new promotions and store incentives will roll out for May.

In order to alter this trajectory, we continue to focus on the high quality and good value of our proprietary product. Customers can't get our product anywhere else, but we need to do more to drive them to this product. As we mentioned, to that end, we are sharpening our focus on using promotions and adding incentives.

Turning to marketing, despite continued improvements and success in targeted marketing and other marketing activities, our overall marketing returns are not where we need them to be. As planned, and as previously disclosed, we invested more heavily in Q1 marketing than we did in the prior year. While the increase in spend drove some incremental sales, we did not experience the lift in traffic or sales that we were expecting. Clearly, we must do a better job investing our marketing dollars in areas that drive the greatest return.

To support that effort, we're digging deeper into our customer marketing analytics to develop more precise plans regarding the channels that will be most effective in capturing the customers we're seeking; those focused on health, wellness and performance. For example, we'll increase our marketing in the areas of direct mail and re-targeting, which is some of our more effective vehicles. Additionally, we will be increasing our call-to-action message and highlighting our quality products in future campaigns.

Finally, our sales results among our franchisees fell short of our expectations. Our franchisees did not participate in all corporate promotions, and many have not adopted our expanded assortment initiative, which drove a 4% improvement in comps in company-owned stores that received that assortment in 2015. These initiatives, particularly the expanded assortment, requires an investment by the franchisees, so we understand some hesitancy. But we're working with our franchisees to highlight the proven impact of these new initiatives and increase the pace at which they make the investment behind these projects.

Through our work with the franchise advisory council, we've identified opportunities to improve our relationships with franchisees, to increase trust and, ultimately, create more consistency of experience in our stores that our customers expect and deserve. Such opportunities include improved marketing, our pricing to our franchisees, and loyalty programs. Specifically, we've offered discounts and extended dating for orders of expanded assortment products, and we're so confident in the results that we're providing return privileges to our franchisees for those products that don't move within a year. We are moving with a sense of urgency to address these challenges and change the trajectory of our results.

While these are our critical areas of focus, I do want to spend a few minutes highlighting the progress we have made as we continue to implement our strategic evolution, including the execution of two successful all-store promotions and the introduction of new innovations during the quarter, which added 55 basis points to domestic retail same-store sales. We also announced the refranchising of 84 company-owned locations, marking significant progress against our refranchising initiative. And finally, we continued to make progress with our pricing, loyalty and Gold Card initiatives, as well as in leading the industry coalition to change the narrative around the industry.

First: promotions. We executed two successful all-store BOGO promotions in the quarter. For each event, we saw an improvement in top line sales of nearly 20% and incremental margin dollars during the promotion period, with consistent performance across all company-owned stores. More franchisees participated in the events and many experienced similar results, critical to supporting our strategic refranchise initiative.

Less than 40% of those sales were for the same product, meaning customers were using the BOGO to try new products, which is important to our evolution to expand our wellness business. And the rate of same product purchases continues to decline during each successive all-store BOGO promotion. We've also seen these customers come back in subsequent months at a rate similar to the prior year when the promo did not occur, and we've incurred a similar average ticket. Said more simply, there was simply less pantry loading.

Bottom line, the promotion continues to improve and, as a result, we remain committed to strategically placing all-store BOGO events in 2016. Our continued success here reflects our commitment to a best-in-class customer experience based on customer-focused decision making, while ensuring we provide profitable promotions that result in incremental gross profit dollars.

Next: innovation. As we continue to focus on fewer, bigger and bolder, and an integrated launch process for new products, we continue to see successes in many areas of our innovative offerings. We are leveraging our strengths to bring new leading products to market faster and more efficiently, particularly by engaging with internal partners and national brand vendors.

For example, we've brought industry-leading brands to our stores, like Nordic Naturals and Carlson's in the omegas category, SmartyPants in the kids' vitamin section, and channel exclusives, like performance expansions and weight management, with Performix SSTi and GLOW, and in men's health with Performix Super Ti IRIDIUM.

Key launches and proprietary products include the introduction of several new expansions in the Total Lean brand, including Lean Shake Burn ready-to-drink shakes, Total Lean vegan shakes, and Total Lean CLA powders and Total Lean Advanced Diet Cleanse.

Through our accelerated efforts in this first quarter, before the effect of cannibalization, we doubled the revenue from new products from $3 million in January to $6 million in March. The combination of all new proprietary products alone contributed 55 basis points to total domestic retail same-store sales in the first quarter of 2016, net of the effective cannibalization.

In the second quarter, we expect the pace of new item introductions to continue as we stay diligent in meeting our customers' needs with our proprietary products, while tapping into the innovation pipelines of our key national brand partners. This includes the launch this week of Olly gummy vitamins and the long-anticipated expansion of performance into the protein powders category, whose products leverage the TERRA Intelligent Dosing technology.

These new products, combined with our expanded assortment activities, are driving significant positive increases in categories that make up 40% of our sales; performance supplements, health and beauty, herbs and greens, and wellness supplements. The sales increases in the majority of these categories are actually above industry trends. Equally important is that we are supporting this innovation with targeted marketing to support product growth and expansion.

Next: refranchising. As I noted earlier, in March, we executed an agreement for the sale and refranchise of 84 company-owned stores to Sun Holdings across Texas, primarily in the Dallas and Austin markets. Additionally, Sun Holdings plans to open 30 new franchise locations over the next three years. We're pleased to announce the completion of this refranchising agreement, which puts us well on our way to transition approximately 200 company-owned store locations to franchise this year, and 1,000 company-owned store locations over the next three years to four years.

We believe Sun Holdings' proven track record as a highly successful franchisee makes them an exceptional partner. Guillermo Perales is the Founder, President and CEO of Sun Holdings, and is currently ranked in the Top 10 franchisees in the United States. With over 600 franchise locations under the names like Burger King, Popeyes, Golden Corral, CiCi's Pizza, Krispy Kreme and T-Mobile. He was awarded the 2015 Entrepreneur of the Year by the International Franchise Association.

In addition to that deal, we obtained an LOI for another 10 locations from another new franchisee expected to close in the second quarter. This is a significant milestone for our organization and strong evidence of our ability to successfully execute on our refranchising strategy.

Our leading brand and strong return on cash model is a very attractive investment opportunity for the leading franchisees in the U.S., and we look forward to continuing to execute our strategy. We are seeing very strong interest from leading franchisees such as Sun Holdings, and are confident we will achieve our short and long-term goals of converting our company-owned stores into franchisees.

Next: pricing and customer loyalty. During Q1 we partnered with an outside resource to refine pricing and enhance perceived value by targeting certain KVIs or known value items, and establish a role and intent by category. During this process, we conducted extensive price shops in (16:10) brick and mortar and online health and wellness supplement providers. These efforts allowed us to identify KVIs and highlighted opportunities for price investment as well as price harvesting.

During the second and third quarters we will test outcomes of this work and implement changes to the chain when appropriate later in 2016. Our objective is to simplify pricing and enhance perceived value, while driving incremental sales and margin dollars, and we believe there's an opportunity to do exactly that.

In terms of the loyalty and the Gold Card, our focus is to transition the program away from being a discount card and return the Gold Card to its roots as a Loyalty Card that provides value and further strengthens our relationship with our customers, ultimately, creating meaningful long-term connections. In 2016, we're testing loyalty components and rolling out an enhanced program in 2017.

Remember that our customers come to our store on average once every three months. As such, it's critical we read these results over an appropriate time period as we create these enhancements. As we learn, we will share more details in subsequent calls.

Next: the coalition. At GNC, we highly value consumer perception of the safety and quality of our products and the ingredients they contain. Questions regarding the quality, purity, potency, safety, or efficacy of dietary supplements can have a material adverse effect on our reputation, the demand for our products, our ability to generate revenues and the value of our stock. It is critical that we highlight our rigorous quality standards and enhance the perception of the quality players in the industry, but we cannot achieve this alone.

As a result, as previously announced, GNC is leading a coalition, a coalition that is comprised now of more than 80 companies, including retailers, raw material suppliers, manufacturers, multi-level marketing companies, practitioners and pharmaceutical companies. Our goals are to improve the narrative about the industry, increase consumer confidence and reduce the amount of distraction to our legislators as a result of such unfounded and meritless allegations.

We're excited about the potential of this coalition and proud to be leading it. We've already made significant progress in 2016. Just a few of them: GNC has already adopted new botanical raw material, good agricultural and collection practices, as well as good manufacturing practices, and we've shared these guidelines with our vendors to adopt this year. We anticipate broad industry adoption later this year.

In March of 2016, in collaboration with one of our trade groups, NPA, Natural Products Association, GNC introduced audit checklists for certification of compliance with those GACPs and GMPs. And GNC and the major trade groups are developing the industry product registry database. We at GNC will begin to include our products in that database prior to June 30 and anticipate broad industry adoption this year. While we expect to accomplish all of this in 2016, we recognize that changing perceptions will take some time.

Before I turn it over to Tricia, I want to reiterate that we've identified the issues that have impacted our performance in Q1 and we're moving aggressively to address them. At the same time, we continue to make important progress against our strategic evolution. As we execute our plans, we do so from an advantaged position, things that I've shared with you before, meaningful long-term connections with our customers built on deep expertise in health, wellness and performance.

We'll deliver a customized plan to meet customers' unique health, wellness and performance goals through individual, one-to-one associate interactions. We'll do it all through a best-in-class shopping experience based on customer-driven decision making and rigorous quality standards.

I'll now turn the call over to Tricia to provide details of our financial performance.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Thanks, Mike, and good morning, everyone. Before addressing this quarter's results, I want to briefly comment on our reporting segments. On our fourth quarter call, we discussed our operational structure is evolving through our strategic evolution plan. In order to better align our financial reporting structure with how we view our business, beginning in the second quarter, we will be changing our reportable operating segment from Retail, Franchise and Manufacturing/Wholesale to U.S. & Canada, International and Manufacturing/Wholesale.

As part of this change, we will be allocating warehouse and distribution costs as appropriate to our reportable segment. In our first quarter 2016 Form 10-Q that will be filed later today, we'll provide you the current quarter as well as the previous two years by quarter of reported amounts recapped into our new segments.

The new reportable segments better align with our new organizational structure and how we analyze our performance and allocate our resources. We believe that these segments, along with supplemental metrics, will provide better transparency into our business and progress on our refranchising initiative as we increase the proportion of our domestic stores that are franchise locations in 2016 and beyond.

Now, to our consolidated results. Our first quarter consolidated revenue decreased 1.8% to $668.9 million. Revenue excluding intersegment fails increased in our Manufacturing/Wholesale segment by 3.5%. Revenue decreased in our Retail and Franchise segment by 1.5% and 5.6% respectively. In addition, the fourth quarter sale of our Discount Supplements business resulted in a decrease of $7.2 million in Q1 of 2016.

Same-store sales decreased 2.6% in domestic company-owned stores, which includes GNC.com sales, in the first quarter of 2016. Weakness in our vitamin sales that Mike discussed a few minutes ago was more than offset by significant gains in our performance supplements, health and beauty, herbs and greens and wellness supplement categories, which, Mike mentioned earlier, had significant increases.

In domestic franchise locations, same-store sales decreased 5.6% in the first quarter of 2016. As Mike noted, our franchisees did not participate in all corporate promotions and many have not adopted our expanded assortment initiatives, which drove a 4% improvement in comps in company-owned stores that received the assortment in 2015. As a result, franchisees are reporting lower retail same-store sales as compared with our corporate stores.

To help increase franchisee participation on the expanded assortment initiative, GNC has offered discounts and dating on the incremental inventory investment, as well as full return privileges for products that does not sell within one year. Additionally, we're offering our franchisees lower pricing on key items to improve inventory availability for our customers.

Our domestic system-wide sales, as previously defined, was $601.4 million in the current quarter as compared to $605.3 million in the prior year quarter. Our first quarter gross profit decreased by 5.4% and was 35.3% of revenue as compared with 36.6% in Q1 of 2015. Gross profit is calculated after deducting product, warehousing, distribution and occupancy costs.

The Q1 2016 decrease in gross profit dollars and gross profit rate was a result of lower domestic retail product margin rate due to the impact of the previously mentioned expiring product and occupancy expense de-leverage associated with negative same-store sales. However, excluding the impact of expiring products, domestic retail product margin rate improved over the prior year. For the first quarter of 2016, we are recording sub-lease income received from franchisees as revenue as compared to the previous presentation as occupancy expense was in cost of sales.

We revised prior year periods to conform to the current period with no impact on previously reported gross profit dollars, operating income or net income. We are the primary obligor of the leases for the majority of our franchise store locations, and we make rental payments directly to the landlord, and then we separately bill our franchisees for reimbursement. This revision resulted in an increase to revenue and cost of sales of $11.4 million and $11 million in the quarters ended March 31, 2016 and 2015, respectively.

First quarter 2016 consolidated SG&A expenses increased $3.3 million to $143.1 million, or 21.4% of revenue compared to $139.8 million, or 20.5% of revenue in Q1 of 2015. Excluding certain expenses from the prior year's first quarter outlined in the earnings release, Q1 2016 SG&A expense would've been up $7.9 million, primarily reflecting the increased marketing spend as compared to the prior year.

First quarter 2016 operating income decreased 14.2% to $94.1 million, and was 14.1% of net revenue as compared to 16.1% in Q1 of 2015. First quarter 2016 operating income includes $1 million in gains from the conversion of four company-owned stores to franchise stores compared to two stores resulting in the $300,000 gain in the first quarter of 2015. Note that operating income margin is negatively impacted when domestic retail same-store sales are below 2%.

Adjusted earnings per share for the first quarter of 2016 was $0.69, as compared with $0.75 of adjusted EPS from the prior year, which excludes the conversion gains and prior year SG&A charges. First quarter EPS was impacted favorably by the repurchase of $219 million of our common stock.

Now for information by segment. First, to our Retail segment. Retail segment revenue decreased $7.5 million, or 1.5%, to $496 million for the three months ended March 31, 2016 compared with $503.5 million in the prior year quarter, primarily due to negative domestic retail same-store sales of 2.6%. Negative same-store sales were primarily due to continued negative trends in the vitamin category, including the impact of deep discounts related to excess vitamin inventory nearing expiration.

In addition, the timing of the Easter holiday and unfavorable January weather contributed to the decrease. The impact of unfavorable foreign exchange rate changes of the Canadian dollar also contributed a $2.8 million decrease in revenue. Partially offsetting the decrease was the addition of 67 net new company-owned stores since March 31 of 2015. Our strip center location comps continued to perform well, and were up 1% for the quarter.

Operating income decreased $11.8 million, or 12.8%, to $80.6 million for three months ended March 31, 2016 compared with $92.4 million for the same period in 2015. Operating income as a percentage of segment revenue was 16.2% in the current quarter, compared with 18.3% in the prior year quarter.

The decrease compared with the prior year quarter was primarily due to lower domestic retail product margin rate resulting from the previously mentioned discounts, occupancy expense de-leverage associated with negative same-store sales, and higher advertising expense, partially offset for the prior year $2.8 million correction of an immaterial error, and the sale of Discount Supplements in the fourth quarter of 2015. The impact of the lower domestic retail product margin rate, resulting from deep discounting of products nearing expiration, drove an $8 million to $11 million reduction in margin over Q1 of 2015.

Second, we'll talk about our Franchise segment. Revenues in our Franchise segment decreased $6.8 million, or 5.6%, to $115.5 million in the current quarter, compared with $122.3 million in the prior year quarter. Domestic franchise revenue decreased $4.1 million to $81.8 million in the current quarter, compared with $85.9 million in the prior year quarter, due to lower wholesale sales and royalties.

International revenue decreased by $2.7 million, principally due to lower wholesale sales and royalties largely related to challenges in Turkey and Australia, partially offset by an increase associated with our business in China. Operating income decreased $3.7 million, or 9.4%, to $36 million for the three months ended March 31, 2016, compared with $39.7 million in the prior year quarter.

Operating income was 31.1% of segment revenue in the current quarter, compared with 32.5% in the prior year quarter. Excluding the impact of the gains on sale of company-owned stores to franchisees of $1 million and $0.3 million in the current quarter and the prior year quarter, and the prior year reduction in the previously established bad debt allowance associated with certain of our international franchisees, operating income was 30.3% and 30.2% of segment revenue in the three months ended March 31, 2016 and 2015, respectively.

Third: to our Manufacturing and Wholesale segment. Revenues in our Manufacturing/Wholesale segment, excluding intersegment sales, increased by $2 million, or 3.5%, to $57.5 million for the three months ended March 31, 2016 compared with the $55.5 million in the prior year quarter. Operating income decreased $1.8 million, or 8.6%, to $19.3 million for the three months ended March 31, 2016, compared with $21.1 million in the prior year quarter. Operating income as a percentage of segment revenue decreased from 17.3% in the prior year quarter to 16% in the current quarter due to lower proprietary sales, which generally contribute higher margins.

Next, to our balance sheet and cash flow. For the first quarter of 2016, we generated $142.3 million in net cash from operating activities, representing a 21.7% increase as compared with Q1 2015, primarily due to lower tax payments and improved working capital, partially offset by reduced operating performance. We invested $10.5 million on capital expenditures primarily for new stores, store maintenance, updates and remodels, including our customer-facing initiatives, corporate IT, infrastructure and manufacturing facility expenditures.

We generated $132.1 million in free cash flow, which we define as cash provided by operating activities less cash used in investing activities excluding acquisitions. We paid $14.3 million in cash dividends on our common stock, and we repurchased $219 million of our shares of common stock, of which $18 million cash was settled in April 2016 at an average price of $28.81 per share. We borrowed $90 million under our revolving credit facility to support our share repurchase program.

As of March 31, 2016, we had a cash balance of $61 million and long-term debt of $1.54 billion. During the first quarter, we extended the maturity date of our revolving credit facility from March 2017 to September 2018 and increased the amount available from $130 million to $300 million, and ended the quarter with availability of $161.4 million on our revolving credit facility. While we have increased our revolver borrowings and capacity, we remain committed to managing our leverage to maintain our existing credit rating.

Turning to our 2016 outlook, we are updating our full year expectations. Assuming sales trends in the first quarter continue for the balance of the year, our consolidated earnings per diluted share would be in the range of $2.80 to $2.90 for the full year of 2016. While we will continue to execute on the actions identified to change vitamin trends, the impact of expiring products, marketing effectiveness and our franchise results, we are not reflecting those improvements in our revised guidance.

Our EPS outlook excludes the net gain from corporate to franchise store conversions and we expect to generate meaningful franchise conversion net gains throughout the year that is not included in the guidance mentioned. We expect to record a refranchising pre-tax gain of approximately $20 million in the second quarter for 94 stores, 84 of which are associated with the sale of company-owned stores across Texas to Sun Holdings.

Our number one priority is to deliver on the actions we've created to offset the headwinds we're experiencing in our business. We will be relentless in our drive to reverse the vitamin trend, eliminate ageing inventory, improve effectiveness of marketing and align our franchise results with industry trends through better program, pricing and adoption of initiatives.

That completes the financial update and I will now turn the call back over to Mike.

Michael G. Archbold - Chief Executive Officer & Director

Thanks, Tricia. So just briefly, before we open up for questions, I want to reiterate we are clear-eyed about our challenges, but we're in this for the long haul. We also recognize we need to deliver on the short-term improvements discussed throughout this call, while, at the same time, remaining focused on our strategic evolution.

So, with that, Barbara, I'd like to open it up for questions.

Question-and-Answer Session

Operator

Okay. Thank you. Okay. We'll take our first question today from Joe Edelstein from Stephens. Please go ahead.

Joe Edelstein - Stephens, Inc.

Hi. Good morning, and thanks for taking my questions.

Michael G. Archbold - Chief Executive Officer & Director

Good morning, Joe.

Joe Edelstein - Stephens, Inc.

So the new guide does assume that the first quarter sales trends will continue throughout the rest of the year. Can you at least confirm that's where we are so far in the second quarter? I'm really just trying to confirm that things aren't getting worse at this point.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

We generally don't give color on where we are in the quarter, but we are comfortable with the guidance that we're sharing that we will continue with those sales trends, and we're not building in any impact of the initiatives that we outlined on.

Michael G. Archbold - Chief Executive Officer & Director

I think, more importantly, Joe, is we're saying we're not building in any upside for those initiatives. So we've assumed that those trends would continue.

Joe Edelstein - Stephens, Inc.

Okay. Thanks for the clarification. And you didn't talk really at all about the dot com business, how did that perform in the quarter? And are there any changes just in terms of your philosophy over whether the franchisees can participate in those GNC.com sales just following some of your meetings with the franchise council.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

So, our revenues in the dot com business declined 7.5%. Traffic was our biggest challenge in Q1, it declined by 21%. But conversion was certainly our biggest upside. Regarding how we evaluate our dot com sales in the relationship and any sharing with franchisees, we're currently exploring a number of different options with the franchise advisory council on how to improve the relationship between GNC and the franchisees and financial and other measures on doing that, but nothing yet has been decided or communicated.

Michael G. Archbold - Chief Executive Officer & Director

Just to build on that, Joe, so just to reiterate the thing that really drives a lot of this business is the one-to-one engagements. So we still believe that the bricks and mortar is an important part of delivering on the GNC branded customer experience, whether that's in the corporate-owned stores or franchise stores.

So related to that, if you actually look at the penetration of GNC.com to our overall business, it's actually only about 6% penetrated to the overall business. So it is actually on the light side relative to most sectors of retail. So it isn't the big penetration that sometimes is experienced in other sectors of retail.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

And really, our GNC.com site is to create (38:40) to the store experience, so there's more use of the site for store locators than there is for anything else. So we're really leveraging that as a tool to drive customers into the store.

Joe Edelstein - Stephens, Inc.

Okay. I appreciate the comments there and if I could just ask one more, are you seeing interest from the existing franchisee base and those want to take on more stores or, at this point, are you really just focused on those larger groups, the new franchisee partners that's really the two groups that you called out with the 84 stores and the 10 stores under the LOI?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

We are seeing interest from the existing franchisee base in addition to the 84 stores that we mentioned with Sun Holdings and the LOI for 10 with a new franchisee. There are 17 other LOIs for additional locations that we expect to close in second quarter, and many of those are with existing franchisees.

Joe Edelstein - Stephens, Inc.

Okay. Thanks. And I'll turn it over to everyone else. Thanks.

Michael G. Archbold - Chief Executive Officer & Director

Great. Thanks, Joe.

Operator

Thank you. We'll now take our next question from Curtis Nagle from Bank of America. Please go ahead.

Curtis S. Nagle - Bank of America Merrill Lynch

Great. Thanks very much for taking the question. Just a question on the weakness in vitamins. I know this has been somewhat of a long-standing trend, but it looks like it accelerated this quarter and just curious kind of what's behind it. Do you think its more penetration mass or, I guess, health enthusiasts less active in the category? What do you think is specifically driving it?

Michael G. Archbold - Chief Executive Officer & Director

Okay. So, several things in there, Curt. So thank you for the question. So there are several things that have driven it. As you pointed out that some of the weakness in vitamins has existed for some time. And a couple of things that have contributed to that, not the least of which was us making sure that when we engage on Vitapaks, we were doing it for the right reason for our customers.

So, we intentionally moved away, as you know, from the so-called agenda-based selling to making sure that we're doing solutions-based selling. But, as I said on the call, frankly, we went too far. Because it's one thing to say that we're solutions-based selling, but that doesn't mean that we're not a sales oriented culture, and we need to make sure that we are providing the right product for customers. And frankly, multivitamins and vitamins in general are a big part of providing that solution for our customers.

So, we expected that we would've cycled on that in the first quarter and we did not, and that was our miss, which is why we have focused on the things that we can do to really meaningfully drive that business. So combinations of training our associates, making sure we get behind the products, promoting the products, highlighting the quality of them, those are the kinds of things that we're going to do to make sure that we can drive the vitamin business, so.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

And so when you look at it and you pull out the Vitapak business from the vitamin trends and then compare vitamins to how IRI and others look at the category, external groups look at it including a number of other items such as probiotics, omegas and other specialty vitamins like joint and heart, other vitamins like that.

When we look at it internally, excluding Vitapaks and compared to how our external industry experts look at the category, we're actually at or above the industry trend. So part of it is how we look at it, but we're certainly influenced by the Vitapak declines that we mentioned, but clearly focused on what we're going to do to change those trends going forward.

Michael G. Archbold - Chief Executive Officer & Director

So just to build on that, Curt, so to be clear, there's a number of categories that externally, in other market aggregation numbers, are included as vitamins. And a number of those categories which we look at separately, they're actually growing rather dramatically. So things like probiotics being up literally over 50% year-over-year. There's a number of places where we are actually exceeding the industry. But our big issue continues to be specifically in the Vitapak area, which is why our recovery efforts are really going to be focused on the Vitapaks.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

The other thing impacting the vitamin trends are the deep discounts on the expiring product. So those deep discounts impacted us anywhere from 1.5% to 2.5% from a comp perspective. And we believe the majority of that is behind us and we have better focus on the store-level details of that expiring inventory and we're doing everything to make sure it doesn't come up again in the future.

Curtis S. Nagle - Bank of America Merrill Lynch

Okay. Thanks for that.

Michael G. Archbold - Chief Executive Officer & Director

Thank you, Curt.

Operator

Thank you. Our next question today comes from Bob Summers from Macquarie. Please go ahead.

Bob Summers - Macquarie Capital (USA), Inc.

Thank you. Good morning. Just to dig into this product expiration issue a little bit more, this doesn't seem as if it's something that had materialized before. Same-store sales have been challenging here for a bit. So was there a change in your buying behavior? And then, what's the right way to think about the pipeline of expiring products that will continue to pressure margins?

Michael G. Archbold - Chief Executive Officer & Director

Okay. So, good question, Bob. So, let's go back because it's what happened in this quarter that was different. And it really goes back to even in 2013, because keep in mind that we do – we are vertically integrated and, therefore, we manufacture much of our product, including those Vitapaks. So there was – we were manufacturing a lot of product several years ago and this did create some excess and expiring product risk. But this risk then became magnified by what we did in 2015.

So, in our efforts to migrate from that agenda to a solutions-based, we dramatically reduced the sales in Vitapaks. So that exaggerated or created more risk in expiring product. But the real challenge was that our systems did not identify the risk due to a flawed logic that was based upon consolidated demand versus store-level demand. So, as we were liquidating the product, which was our expectation, the amount of product being liquidated and sold at markdown prices surprised us frankly.

So that was the big deal and that's what led us to a deep dive to understand what was going on, which was when we realized that there was a flaw in the logic that we were using to monitor the health of the inventory. So we kept it in place because, at that point, we knew that we needed to liquidate the product. We have significantly liquidated that product.

So we then, having liquidated it, went back and went back to our more normal sell-through and markdown process. And we've made sure that we now have reports and visibility to identify the exposure at that individual store level. Based upon that new analysis, we can now say that we know that the significant exposure is behind us. So it is now past us and we will revert to more normal discounting and reduction of our expiring product.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Right. So, Bob, just to be clear on the vitamins nearing expiration and what we see going forward, just to reiterate what Mike said, our store by store review of our inventory exposure shows that our expected expiring trends for the remainder of this year are consistent with historical levels.

Bob Summers - Macquarie Capital (USA), Inc.

Yeah. Okay. And then did I hear you right that it was $8 million to $11 million drag on the gross profit dollars in the quarter?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

That is correct. And the reason for the range is we have to make some assumptions on the trade down in sales, because many of those expiring products that were deeply discounted were sold to our regular customers, so therefore we traded down on sales. So we used an estimate of a range on what we believe that to be.

Bob Summers - Macquarie Capital (USA), Inc.

Okay. And then just one last question, just getting back to the targeting marketing and sort of the continued evolution there and the relationship with dunnhumby, I would've thought by now you'd be more synchronized and have better traction. Can you maybe walk through what some of the issues may or may not be?

Michael G. Archbold - Chief Executive Officer & Director

Yeah. So let me jump in there. So, the relationship with dunnhumby continues, and we have been working with them. And I think I mentioned – so targeted marketing, if you think of the more targeted marketing, the true CRM, one-to-one kind of customer engagement stuff, which is what dunnhumby really focuses on, that is working for us. So we are seeing good return on our marketing investment for the one-to-one dunnhumby-like CRM-associated direct mail pieces. So that piece is actually working.

But, keep in mind that that is really only addressing a small portion of our customers, so of the 6.5 million customers that are in our database, that kind of direct, high cost, one-to-one marketing really only works for your top customers. So, for us, depending upon the month, that would range between 1 million and 1.5 million out of the total of the 6.5 million customers, so that piece is working.

There are some other things that are working, like targeted marketing is working, so we're going to continue to focus on those things. What we didn't see work for us in the quarter is in television marketing and some other mass media types of marketing, where, obviously, they are costly, but they are not driving enough of a return. As I said, overall, it's better than what it was, but it's still not where it needs to be in order for us to be comfortable with our marketing spend.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

But using dunnhumby, we are able to expand better into our wellness segment, so we broadened our assortment and leveraged that dunnhumby marketing to result in an increase in year-over-year customers in the wellness segment. So again, going back to the industry itself and our focus on expanding outside of the sport customer, we are seeing progress there. This growth is being driven by increases in spend per trip and frequency from these customers. So we are seeing positive results from using that data.

Bob Summers - Macquarie Capital (USA), Inc.

Okay. Thank you.

Michael G. Archbold - Chief Executive Officer & Director

Thank you, Bob.

Operator

Thank you. Our next question today comes from Philip Terpolilli from Wedbush. Please go ahead.

Philip Terpolilli - Wedbush Securities, Inc.

Yes. Good morning. Thanks for taking the question.

Michael G. Archbold - Chief Executive Officer & Director

Good morning.

Philip Terpolilli - Wedbush Securities, Inc.

Just a quick one, going back to the vitamins and the impact on the quarter. I want to make sure I understand this correctly, in terms of what you have assumed now in the model. So I hear that you're sort of taking out impacts from any sort of strategic initiatives and what they could do for the balance of the year. But what are you assuming from maybe a pantry-loading standpoint from 1Q, with the deep discounts? Was there any sales potentially pulled forward?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Phil, going back to the guidance, we are assuming that the trends in the first quarter will continue for the remainder of the year. It's not our expectation or belief that there was significant pantry loading in the first quarter.

Michael G. Archbold - Chief Executive Officer & Director

Right. So, one of the nice things about having the kind of visibility that we have at the customer level is that we can actually say that on a basis of fact. So, for instance, we can track at the individual customer level and know whether in fact they've not only bought two of the same product, which would be the pantry loading, but we can also watch the consumer behavior. And what we've been able to see is, at the individual customer level, that those customers have then returned back to the GNC stores on a rate very similar to the rate that they previously had done.

So, we're seeing a similar type of customer behavior, even after the sale. So, to your point, we're not seeing – we don't believe that there's – we know (50:49), we know that there's not a dramatic pull-forward of sales for that. So therefore, we're assuming that the trend that we experienced in Q1 will just continue for the remainder of the year.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

And Mike, you're speaking to the all-store BOGOs and the results of that, but specifically on expiring product and purchases of that expiring of product, it does not look like there was pantry loading associated with those items as well.

Michael G. Archbold - Chief Executive Officer & Director

Yes, right. Good point.

Philip Terpolilli - Wedbush Securities, Inc.

Okay. That's helpful. And then just one big picture question, if I could as well. On the refranchising side, I hear all your comments about franchisees maybe being slow to adopt some of the new innovation that you've done, and category changes. Just kind of curious, sort of big picture, why you think that is? I would have to imagine they're seeing certainly the same same-store sales trends you are, why they wouldn't be open to working on this more aggressively with you, and adopting these things you're doing?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Frankly, it requires an investment. So the franchisees have to invest dollars to participate in many of these, particularly expanded assortment. So it's concerning to them. So, we are working with them to create incentives, so the discounts and dating that I mentioned earlier regarding the purchase of that inventory, and as well as giving them security on the back-end if their investment in the inventory doesn't pay out and they feel like they're stuck with an item. We're giving them the right to return that item if it doesn't sell in the first year. So, it's clearly the investment, and getting them over that initial hurdle.

Michael G. Archbold - Chief Executive Officer & Director

So let me just build on that, Philip. So one of the things that is very attractive about the franchise model in GNC is, it is actually a very low cost of entry. But in that cost of entry, there is almost the same amount of investment from the franchisees in inventory as there is in the building. So, the investment in inventory is a big portion of what is their investment in this business. So, as part of this, we're asking for them to increase their investment in the business and, in some cases, in a significant way.

And, as you can imagine, in retail, we're saying, invest in a significant way in things that would normally be considered more of the long tail. So what it is now incumbent upon us is to show them enough facts to get them comfortable with that level of investment.

To Tricia's point, because we are so comfortable that it works, because we did it to hundreds and hundreds of stores last year, and could see that it really did move the needle, and understand that on a statistical basis, we're standing behind it and giving them some discounts that will give them an incentive to get there. And even give them the right to return the product if it doesn't work after a year. So we have that much conviction around the upside that we see for our franchisees in this expanded assortment.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

And additionally, when you look at the all-store BOGO, we need to work better in communicating the timing of those, making sure the franchisees have the inventory available, and providing them the proper incentives and discounts to get that product, and have it available for them to sell to customers.

Philip Terpolilli - Wedbush Securities, Inc.

Okay. Great. That's helpful. Thank you.

Michael G. Archbold - Chief Executive Officer & Director

Thank you.

Operator

Our next question today comes from Chris Horvers from JPMorgan. Please go ahead.

Michael G. Archbold - Chief Executive Officer & Director

Good morning, Chris.

Christopher Michael Horvers - JPMorgan Securities LLC

Thanks. Good morning, everybody. So want to follow up on that franchisee thread. So, does the performance or the behavior of your current franchisees not adopting some of the new initiatives make you add, I guess, certain clauses or barriers in the new franchise documents or contracts that you're signing up now? And is there a way to sort of induce the franchisees to adopt these initiatives earlier on a contractual basis? I guess that's the question.

Michael G. Archbold - Chief Executive Officer & Director

So, overall, there's not a lot. We have actually recently revisited our franchise disclosure document and put in place a number of new clauses that we think can help drive the level of consistency of the GNC-branded customer experience going forward. As far as anything in terms of mandatory on product or pricing, that is not something that is permissible, so we're not doing that. What we can do is mandate that they come as close to the branded customer experience and we work with them to make sure that we provide them the right incentive. So they do it from an economic compulsion, not a contractual compulsion.

Christopher Michael Horvers - JPMorgan Securities LLC

So doesn't this more recent experience make you change your view of the right balance between company-owned and operated versus franchisee locations?

Michael G. Archbold - Chief Executive Officer & Director

So, not at all, not at all. In fact, it really tells us what we can do to help drive the franchise business and it actually enforces the need to have both corporate, as well as franchise business, because we can continue to execute tests on a meaningful and statistical basis in our corporate stores, have all of the learnings there and then be able to roll those out to the franchisees. So, we actually believe this reinforces our strategy to have a more balanced portfolio.

Christopher Michael Horvers - JPMorgan Securities LLC

Understood. And then on the – going back to the comp guidance, it sounds like that 200 basis points from the vitamin markdowns is one-time in nature, so, I guess, why aren't we assuming that that goes away and guiding to something a bit better than what you just experienced in the first quarter?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

We believe it's the prudent thing to do to look at our current experience and assume that for the rest of the year. When we're able to deliver on our initiatives or any of the other items we discussed then we'd revise as appropriate.

Michael G. Archbold - Chief Executive Officer & Director

Right. So, Chris, we've had surprises before and what we're making sure we're doing at this point is not setting ourselves and you up for any other surprises. So we are taking our existing trend and continuing that for the rest of the year.

Christopher Michael Horvers - JPMorgan Securities LLC

Understood. And then last question is you bought a lot more shares earlier in the year, so are you targeting buying more than, I think, the stated 5% to 6% of shares annually this year?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

So we've already – in the first quarter, we've already bought 10% of the beginning of the year's shares outstanding. So, while we'll be thinking about using excess cash flow if the price is below intrinsic value, we're very committed to maintaining our existing leverage structure and not putting any of our credit ratings at risk. So I would just keep that in mind.

Michael G. Archbold - Chief Executive Officer & Director

Right. So, clearly, we've pulled forward all of those purchases into Q1.

Christopher Michael Horvers - JPMorgan Securities LLC

Right. So, I guess, taken all together, it seems like you had to – you're making some pretty, I guess, significant margin decline to get to that $2.80 to $2.90 range.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

So, similar to in the assumption for the remainder of the year in the guidance, essentially experience that we see in first quarter for the remainder of the year.

Christopher Michael Horvers - JPMorgan Securities LLC

Understood. Thanks very much.

Michael G. Archbold - Chief Executive Officer & Director

Great. Thank you, Chris. Thanks for the clarification.

Operator

Thank you. Our next question today comes from Stephen Tanal from Goldman Sachs. Please go ahead.

Michael G. Archbold - Chief Executive Officer & Director

Good morning, Stephen.

Stephen Tanal - Goldman Sachs & Co.

Good morning. Thanks for taking the question. So I just wanted to quickly follow-up on the discount stuff. Now, I had a similar question on the trend rate. But the other thing I noticed, it doesn't seem like inventory benefited much from these actions. Can you just elaborate on what may have happened there?

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Inventory benefited from what? I'm sorry.

Stephen Tanal - Goldman Sachs & Co.

From the deep discounts of the expiring product.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Well, we're continuing – as we talked about, we're also investing in new products and new innovation and making sure that we have the appropriate levels of inventory in the store to serve the customer. So, while it did have an impact, we're certainly investing in initiatives in our product to drive returns going forward.

Stephen Tanal - Goldman Sachs & Co.

Okay.

Michael G. Archbold - Chief Executive Officer & Director

Was there somewhere else you were going with that, Stephen?

Stephen Tanal - Goldman Sachs & Co.

No. Just the last one I had on kind of discounting thing. And so moving on to the refranchising, like this deal with Sun Holdings, it wasn't perfectly clear in the release. Is this a signed and done deal like kind of regardless of what happens in the interim, i.e. the comps in the stores at this point?

Michael G. Archbold - Chief Executive Officer & Director

Yes. We have a signed deal. And in fact, we expect that we're going to begin actually transferring stores over in the next couple of weeks.

Stephen Tanal - Goldman Sachs & Co.

Got it. Okay. Good to hear. And then, lastly, if you could just update us on where private label penetration at retail is these days. I know we haven't heard that number in a little while.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Private label penetration is a little bit below 50%.

Michael G. Archbold - Chief Executive Officer & Director

Yeah. And that's consistent with what we've been experiencing, because as we've gone into expanded assortment, we've actually been driving our third-party comps which have actually well exceeded our average. So the vitamins trend that we've been talking about, our proprietary penetration within vitamins is very high. So, therefore, the penetration of overall private label would naturally be down based upon that.

Stephen Tanal - Goldman Sachs & Co.

That makes sense. Okay. Thank you, guys.

Michael G. Archbold - Chief Executive Officer & Director

Thank you.

Operator

Our next question today comes from Peter Benedict from Robert Baird. Please go ahead.

Michael G. Archbold - Chief Executive Officer & Director

Hey, Pete.

Peter S. Benedict - Robert W. Baird & Co., Inc. (Broker)

Hi, Mike. Hey, guys. Just a question around the pricing strategy that you're going to be testing, I'm curious, the KVIs, is that really focused on third-party branded items or do you guys also have a plan or are going to be testing pricing around the GNC product? That's kind of my first question.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

So when we looked at pricing, we looked at everything and focused KVIs on third-party and proprietary products. I will be honest, the majority of the KVIs identified are third-party just by their nature, because you can go out and evaluate pricing on a complete apples-to-apples basis. But proprietary is certainly not excluded and there are a number of proprietary products that we'll be testing from a KVI perspective.

Michael G. Archbold - Chief Executive Officer & Director

Which is also different than what one might have expected going into this, which is our customers still value a number of our proprietary products that they actually do rise to the level of known value items.

Peter S. Benedict - Robert W. Baird & Co., Inc. (Broker)

Okay. Perfect. Yeah. That makes sense and it's helpful. Just to circle back to the gross margins kind of questions been asked, but in the guidance going forward, it said you assume the current trends continue. I guess specific to gross margin, given that the aged inventory, I guess, has somewhat been – that issue's been addressed in the first quarter, why wouldn't the gross margin declines get better or I guess less negative over the balance of the year?

Do you have other, I guess, initiatives or pricing initiatives that will kind of replace that impact? Or just trying to understand that, I understand the comp guidance, but we're just trying to figure out the gross margin view over the balance of the year. Thank you.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Similar to comps, we just assume the results in the first quarter would continue throughout the year and not reflect any of the impacts of any of the things, the actions that we do that might have upside to that. So it assumes current activity in first quarter extends through the remainder of the year. And regarding pricing and looking at the pricing and the work that we've done, we don't believe the pricing changes that we intend to test and implement will have a negative impact. There's opportunities to harvest as well as invest in pricing so that we can be more competitive in the future.

Michael G. Archbold - Chief Executive Officer & Director

Right. So, just to build on that, we are not here today saying that we foresee other things that will adversely impact gross margin, but we are not building any of those kinds of improvements in trends into the guidance.

Peter S. Benedict - Robert W. Baird & Co., Inc. (Broker)

Got it. That makes sense. And then just last question on – back on the leverage. In the past, you'd spoken to, I think, 3.2 to 3.4 adjusted debt to EBITDAR. Is that still kind of a level where you want to get the business back to? I know you're running above that right now, but anything you can help us with in terms of target leverage ratios would be great. Thank you.

Tricia K. Tolivar - Chief Financial Officer & Executive Vice President

Sure. What we've been communicating is that we're going to maintain our current credit rating. So that is a fairly broad range when you look at leverage. I don't – where we are right now is 3.9 and I would believe that's certainly at the top-end of our range and that we'll come down from that going forward.

Peter S. Benedict - Robert W. Baird & Co., Inc. (Broker)

All right. Terrific. Thanks so much, guys.

Michael G. Archbold - Chief Executive Officer & Director

Thank you.

Operator

Okay. Thank you. As that will conclude today's question-and-answer session, I'll now hand you back over to Mike Archbold for any additional or closing remarks.

Michael G. Archbold - Chief Executive Officer & Director

Okay. So, thank you, Barbara. So with no more questions on the queue, glad we could get through those. I just want to end where we began, which is to state that we are disappointed in our Q1 results. We are very intent on addressing them very quickly. We shared with you full transparency on the impact of those as well as our plans to improve the performance going forward.

Those things are not reflected in our guidance as we mentioned. But, at the same time, we are making a number of improvements and we're making progress in a number of areas. So things like the promotions, the innovation, and driving new product on our refranchising and coalition stuff. The refranchising that we heard a lot about in the Q&A and, most importantly, with the strong cash flow that we've gotten from the business.

But that doesn't take away from our focus on the need to improve short-term results as well as focusing on the long term. So with that, I look forward to continuing to update you on our progress throughout the year and thank you all for participating in the call.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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