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Executives

Dennis Magulick - Senior Director of Treasury & Investor Relations

Joseph M. Fortunato - Chairperson of The Board, Chief Executive Officer and President

Michael M. Nuzzo - Chief Fianacial Officer and Executive Vice President

Analysts

Simeon Gutman - Crédit Suisse AG, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

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

Charles X. Grom - Deutsche Bank AG, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Karen F. Short - BMO Capital Markets U.S.

Brian Wang - Barclays Capital, Research Division

Michael Weisberg

Damian Witkowski - Gabelli & Company, Inc.

GNC Holdings (GNC) Q2 2012 Earnings Call July 26, 2012 9:00 AM ET

Operator

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the GNC's Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Mr. Dennis Magulick, new Director Treasurer and Investor Relations, you may begin your conference.

Dennis Magulick

Good morning, and welcome to the GNC Second Quarter 2012 Earnings Call. This morning, we released our second 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 a brief overview of the business and performance details. 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 that there is a reasonable basis for our expectations and assumptions, that they are inherently uncertain and may not prove correct. We undertake no obligation to publicly update or revise any forward-looking statements, 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 in this call, please refer to our public filings with the Securities and Exchange Commission and our earnings release this morning. I'll now turn the call over to Joe.

Joseph M. Fortunato

Thanks, Dennis. GNC delivered another very strong quarter. We continue to see strength across the business. In retail, each category contributed to our fifth consecutive quarter of double-digit same-store sales increase. This growth is fueled by the continued success of our leading proprietary brands and products, including AMP Vitapaks, Pro Performance, Total Lean and GenetixHD. Top line momentum is manifested across all business units. For instance, domestic franchisees posted a 17.1% same-store sales increase year-to-date, as they continue to benefit from GNC product innovation and line extensions.

They are now approaching brand penetration levels consistent with company-owned stores, and our strategy to expand GNC brand product distribution into existing international markets has been very successful. Purchases made by our international franchisees increased more than 40% this quarter. At the forefront of our success is our leadership position in each category. We've earned this through the development and evolution of proprietary flagship product brands. These brands are distinct in the marketplace. Their positioning has maintained and their reach extended via ongoing reformulations, soft-brand development and line extensions. Our merchants have a deep understanding of our unique customer base and where future product trends are heading. We thoroughly understand these categories and have become proficient at answering the question, "What next?" As a result, we have established the dynamic premium proprietary assortment that is second to none.

This quarter proprietary GNC products represented 57% of store sales. In sports nutrition, the flagship brand is Pro Performance. Our merchandising team's extensive experience in this category has built Pro from an entry-level offering to what it is now, the leading sports brand, positioned at a broad consumer base with higher-end premium formulations under the AMP and Beyond RAW franchises.

Our ability to trade consumers up to these products is evident in the continued success of AMP and Beyond RAW, which are driving our overall gross in Pro. Collectively, our proprietary product assortment has evolved to span the entire sports nutrition category with sub-brands positioned from entry-level through enthusiasts.

In vitamins, we established the leading position in the Vitapak market, building our presence from less than 10 SKUs when we launched the current program to more than 30 today. Through consumer research, we segmented the existing multivitamin demand into specialized categories that are condition-specific, targeted and unique. As a result, we truly represent the premium Vitapak space since no one else in the industry supports this depth or breadth of assortment.

And in diet, we successfully anticipated recent trends, developing the GenetixHD brand in repositioning Total Lean. As we saw the decline of the diet pill business and shift towards meal replacement, we developed products to capitalize on this customer demand. Total Lean ready-to-drink's rapid success is attributed to a premium formulation that includes high-quality protein and supplements, is low in calories and sugar and has a great taste profile. We are seeing success with both genders and are building on this by expanding Total Lean ready-to-drink flavors and by adding complimentary products like breakfast bars and a branded Total Lean Vitapak. In fact, across all categories, our development pipeline includes a foray of brand and product line extensions, leading the equity inherent in our sub-brands and product families.

Further, we are developing new innovative formulations. And as we have discussed, we are successfully accelerating our new product development process to introduce more products faster than in previous years. Collectively, our ability to cultivate brands is a meaningful contributor to our success and importantly extends beyond retail.

Another unique advantage of our business is that we have effectively applied our brands to multiple channels of distribution. First, our in-store experience is a powerful resource and influencer of purchases, creating additional separation for GNC in the marketplace. Our consumer base, which is strongly focused on the health and wellness lifestyle is a key differentiator. This consumer is conducive to both cross-selling and buying multiple products, which are selling culture encourages. Store associates are trained on new product launches and, for example, educating wellness consumers on the right protein for their needs.

Our unique and premium product assortment is augmented with exclusive opportunities such as gift with purchase. Second, GNC reflects the content and branding of our brick-and-mortar stores to drive robust profitable growth. Specifically, we have focused on adding helpful fitness content at each stage of our customer's online shopping experience. We continue to see meaningful increases in unique visitors, improved conversion, more efficient marketing and continued progress in the social, digital and mobile space. Clearly, GNC.com is at the forefront of the online marketplace from a branding and profitability perspective. And third, our products' success is magnified in the franchise channel. Franchisees are aligned with company merchandising strategies like never before as evidenced by record levels of GNC-sourced product buys and faster new product adoption. The success of this year's franchise convention, our best yet, is another indicator of the strength of the overall network and ongoing momentum in this business. The collective impact of all of these factors is that GNC is gaining market share, a sustained top line growth opportunity and an operating structure that generates meaningful leverage. I will talk more on our future opportunities later, but now I will turn the call over to Mike for additional detail on our financial performance.

Michael M. Nuzzo

Thanks, Joe. Good morning, everyone. As we indicate in the press release, in addition to presenting results in accordance with GAAP, we also provided adjusted results that exclude transaction-related costs, sponsor obligations and executive severance. Where appropriate, I will speak to these adjusted results.

For our consolidated results, our second quarter consolidated revenue increased 19.4% to $619.1 million. Retail segment revenue increased 19.3%. Franchise segment revenue increased 25%, and manufacturing wholesale segment revenue increased 10.7%. Second quarter gross profit margin, calculated after deducting product, warehousing, distribution and occupancy costs, was 38.7% compared to 36.8% in Q2 2011. The increase was primarily driven by retail gross margin gains in occupancy leverage.

Second quarter consolidated SG&A expenses were 19.8% of revenue versus 22.8% last year, which included $3.5 million of executive severance. Within consolidated SG&A, advertising and promotion expense was 2.2% of revenue versus 2.6% last year. With the overall advertising spend level in line with our expectations, we continue to see leverage on higher revenue. Q2 2012 consolidated EBITDA was $129.1 million, a 47.4% and 390 basis point increase over Q2 2011 adjusted EBITDA. Net income was $66.7 million, a 61.5% increase from the prior year's adjusted net income. Diluted earnings per share were $0.62, a 59% increase over Q1 2011 -- Q2 2011 adjusted EPS.

Now for information by segment. First, to our retail segment. Our retail segment includes domestic and Canadian corporate-owned locations and the Internet businesses. Q2 retail segment revenue grew 19.3% to $458.6 million, driven primarily by a 12.9% domestic same store sales increase, including 27.9% growth in GNC.com revenue, the addition of $14.1 million from LuckyVitamin.com and 155 net new stores from the end of Q2 2011. Q2 retail operating income increased by 53.9% to $97.6 million, and was 21.3% of segment revenue in Q2 2012 compared with 16.5% in Q2 2011. The increase in the operating income percentage was driven by higher gross margin and expense leverage on the same-store sales increase in occupancy, payroll and marketing. In the quarter, we added 35 net new company-owned stores.

Next, the franchise segment. Revenue in franchising is generated primarily from wholesale sales to our franchisees, the collection of royalties on franchise retail sales and fees. Q2 franchise segment revenue grew 25% to $103.5 million. Domestic franchise revenue grew by 16.8% to $62.8 million with a same-store sales increase of 15.8%. International revenue, including China, increased 40.3% to $40.8 million, on an 8% franchisee reported local currency same-store sales result. Q2 franchise operating income increased 24.5% to $32.3 million and was 31.2% of segment revenue in Q2 2012, compared to 31.3% in Q2 2011. In the quarter, we added 5 net new domestic franchise locations and 27 net new international franchise locations.

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. Q2 manufacturing wholesale segment revenue grew 10.7% to $56.9 million, which includes a 29.7% increase in third-party manufacturing contract sales. Q2 operating income increased 13.4% to $23.9 million and was 41.9% of segment revenue compared to 40.9% in 2011. The increase in operating income percentage in the quarter was driven by an increase in proprietary product sales. In the quarter, we opened 11 net new Rite Aid store-within-a-store locations.

So to quickly summarize our total store count data: at June 30, 2012, GNC operated 3,114 company-owned stores in the U.S. and Canada and 933 domestic franchise locations; 2,157 Rite Aid store-within-a-store locations; and 1,651 international franchise locations, for a total of 7,855 locations globally.

Next, to our balance sheet and cash flow update. Through the second quarter of 2012, we generated $92.9 million net cash from operations. We made strategic investments in our inventories to support new business initiatives, including wholesale partnerships, LuckyVitamin.com, alternative product options in regard to DMAA and international growth. By the end of 2012, we expect inventory levels to have increased at a lower rate than revenue. We spent $20.8 million on capital expenditures primarily for new stores; store maintenance, updates and remodels; corporate IT; and other manufacturing facility expenditures. We repurchased 60 million in shares of common stock under share repurchase programs and we paid $23.4 million in common stock dividends. As of June 30, 2012, we had a cash balance of $160.2 million, long-term debt of $900.9 million and an undrawn $80 million revolving credit facility with $1.4 million pledged as collateral for outstanding letters of credit. As a continuation of our capital allocation efforts, the company's Board of Directors declared an $0.11 cash dividend for the third quarter. We also extended our share repurchase program for up to $300 million over the forthcoming year.

Now I will provide an update to our 2012 outlook based on current expectations. We expect total company revenue of approximately $2.43 billion for the full-year 2012, a 17.5% increase over 2011. This is based on achieving an increase of approximately 11.5% in domestic retail same-store sales for the full-year 2012 or approximately 9% for the third through fourth quarter of 2012, including the impact of GNC.com. Full-year 2012 adjusted diluted earnings per share to be approximately $2.21, a 45% increase over 2011 adjusted EPS of $1.52. This compares to our previous outlook of approximately $2.05. A diluted share count of approximately 107 million for the full-year 2012, which includes the effect of deploying approximately 1/2 of the $300 million authorized share repurchase program ratably over the balance of 2012 and a full-year tax rate of approximately 37%.

So this completes the financial update, and I will now turn the call back over to Joe.

Joseph M. Fortunato

Thanks, Mike. We remain squarely focused on executing our business plan in delivering exceptional results. Beyond the core business, an incremental differentiator is our recent success with new ventures. These leverage our brand and resources while simultaneously broadening our customer base. They include: LuckyVitamin.com, which posted another double-digit sales gain this quarter, delivering $14.1 million in revenue. By leveraging our resources, this business is benefiting from more effective marketing, expanded assortment in sports nutrition and margin rate expansion.

At PetSmart, where we continue to increase our share of wallet, the GNC pet's line has quickly become the major pet supplement offering in PetSmart stores and a leader in the space. We are enjoying meaningful sales gains as a result. Not only is the core business growing, our expansion into new categories, including pet snacks and shampoos, is contributing to accelerated profitable growth.

We were pleased to have recently extended our relationship with Sam's Club. GNC's presence in all Sam's Club locations will now incorporate established shelf space with branded signage, adding to the existing rotational assortment program. And lastly, with MARKED, our partnership with Academy award nominated actor-producer, Mark Wahlberg. By leveraging the GNC product development and marketing teams, we designed a non-GNC-labeled brand and product assortment targeted to customers new to the category. The product lineup, which includes Vitapaks, protein and meal replacement will be well-positioned in the space. MARKED product is starting to hit GNC stores and is expected to fully launch in our stores in September. We are excited about its potential.

In conclusion, as we look at the business overall, our long-term model supports strong core earnings growth; the resources required to support our infrastructure needs; and a capital allocation program designed to deliver total shareholder return.

Now we're able to take your questions. Please limit yourself to one question so that we can speak with as many callers as possible. After everyone has had a chance, we will be happy to take follow-up questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from line of Simeon Gutman with Credit Suisse.

Simeon Gutman - Crédit Suisse AG, Research Division

First question with regard to the pre-workout category. Can you talk about its progress throughout the quarter? I know there's perhaps some product transitions happening. And then as my follow-up, can you talk about, now that it appears that there's non-DMAA variants available across the category, will GNC still carry them or will there be a transition away over time?

Joseph M. Fortunato

We'll address it this way. The pre-workout category is still strong, but it's not being driven by DMAA products. We have made a very concerted effort to move away from DMAA products in the stores. And we've done that in a number of ways that we usually can do to control movement, whether it's promotional money is backing those products or backing other products that we would prefer to sell in their place. So we've kind of stripped off PMs onto DMAA products, doubled PMs on some of the other products that were supported by vendors. So we remained margin neutral out of the situation. And we decelerated the sale of DMAA products significantly. So if we look at our exposure to DMAA products right now, we're very comfortable that the guidance we are giving you would include any kind of effect on DMAA, which is continuing to decline by the day. And even better news is the products that have replaced DMAA are selling at a faster pace than the DMAA products are going off. So that is something I think we told you at the beginning. We do have a unique ability to control our customer offerings and make sure that we are directing customers to products that we want them to buy and this customer, as I pointed out in the last call, is very prone to a very regimented lifestyle, one of GNC's great unique customer traits. And they are not going to stop buying products. If they don't buy something that for some reason is getting bad publicity, although, still certainly nothing has been pointed out as to why, then we can get -- then we could switch them to buy something else and we have proven again that, that very effectively works. These people will continue to take products. It just depends which ones they choose to take.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And can I just ask one follow-up to Mike regarding the retail gross margin gain. Did you mention was that product margin accelerate and if so, is that mix private label or what else could be driving it?

Michael M. Nuzzo

Yes, Simeon, the biggest driver to product margin, so if you look at the gross profit, about 40 basis points of that across the company was what I would call gross margin product-related, but the majority of that was driven by vendor support and by purchase price variance. And so we were about even when it came to the pure product piece. But as you know, we get such good support from our vendors and that has continued to grow along with purchase price variance, which is something we talked about as well. It's driven by the plant on our proprietary products. It's also driven by rebate opportunities that we have with our partnering vendors. So we think of that as part and parcel with our gross margin strategy and we've been able to show increases in it this year, which has been good.

Operator

And your next question comes from the line of Chris Horvers.

Christopher Horvers - JP Morgan Chase & Co, Research Division

One quick follow-up on the DMAA and then another separate question. When did you start to see products like Jack start to come down and as OxyELITE as well? And when did the uptake on the substitutions really come into play? I think a lot of people think it's happened more recently, but our sense is that's something that started at the end of last year.

Joseph M. Fortunato

Jack started to decline at the end of last year, going into the beginning of this year. Oxy did not. Oxy stayed at a pretty high level up until the time we started to diminish the sales of it by bringing in replacement products and switching customers over to those products rather than keep the controversy going on DMAA, which seemed just an easier thing to do. And the replacement products are very good, very effective and did not have the so-called tarnished effect of DMAA, which again, really to-date has not shown any reasons to have a tarnished effect to it. But that -- so the answer, shortly, is Jack had started to decline. There were other products that had come in on the pre-workout side of the business. Some of them are ours, some of them are our own brands we had to started to evolve with some of our product lines. And the Oxy, we pretty much have run down in the course of business on our own, more recently in the past 6, 8 weeks.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Understood. As you think about the guidance for the back half -- as a follow-up, as you think about the guidance for the back half, talking about 9% domestic comps, take that out from 8% previously. So I guess the glass half-full is you took it up, the glass half empty is that -- you took it up and it's prudence, and the glass half empty is that you're seeing some sort of deterioration in the business more recently. So we'd love to hear your thoughts on that.

Joseph M. Fortunato

Well I think that we -- if you look at the 2-year numbers, I mean we're against some pretty strong comparable store sales growth. Last year in both quarters, if I believe, it runs around 10 each quarter and the fourth quarter last year was an exceptionally strong quarter for us. So I think putting on 9s, you're still looking at the 2-year comp rate somewhere in the 19% to 20% rate. We've been running in that 21%, 21.5% rate for the last 2 quarters. So I don't think we are forecasting in any significant decline in the business. There are a couple of large hurdles that we have to overcome and we're planning those into the forecasting. But in general, across-the-board, we would not be forecasting in those numbers you're seeing, any softness across any of the categories.

Operator

Your next question comes from the line of Mark Miller with William Blair.

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

GNC has done a great job segmenting the markets by the product mix. And I guess looking ahead, if you think of a matrix by category and by good, better, best, where does the company have the, still, biggest opportunities to build a proprietary business?

Joseph M. Fortunato

Well, we continue to build very strong on our Vitapak business. Our Vitapak business is up close to 50% this quarter, over last quarter, last year. Our Pro Performance business continues to comp favorably, very favorably. We think there's still opportunities there as we expand these product lines in the strong sub-brands we have, which would again be Pro Performance, the Vitapak business and Total Lean, which is growing at a very, very accelerated rate. And we have some easy numbers to comp there in comparison to the actual run rates of those numbers right now. So you'll see growth there and you'll also see product plans where we have in place that have been accelerated, where you have more products to introduce at this point in time than I can remember in the history of the company early. So they'll be in place, in store by the end of the year and we are already at a pace that is 30%, 40% above the pace we were introducing products into the market last year. We introduced a more significant number of products into the market in February, March and April. So that will give us a leg up again. And most of this is coming from very well-established product lines that you know, that we continue to do a fantastic job in line-extending and maximizing the opportunity of those very favorable, well-perceived brands in the marketplace. And we have upside to continue to do that. And that's where we're staying very focused. And some of the newer lines like Genetix and Beyond RAW continue to grow with at a very extreme -- fast pace. And they're in their first -- Genetix is really in its first year. So we'll see opportunity off of those lines and continued growth in the existing lines that we have that are not near maturity yet. And as we start seeing products come to maturity, one thing we're very good at is making sure that we bring something else out to replace it, or that we change that product line to reflect newness so that our consumer is always getting the best products in the marketplace.

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

Okay, that's very helpful. And then my other question is, obviously, is sales has significantly exceeded expectations. The advertising has come down and it sounds like you're spending what you originally planned. I don't know if that's varied much, but I guess given the opportunity of a bigger franchise that you have, do you anticipate taking up advertising? Do you see ways to further drive the brand with the consumer?

Joseph M. Fortunato

As everyone knows, the world of marketing has changed. We're spending more money on digital and social media. Our reach is better than it's ever been and our impressions are the largest they've ever been. Next year will be interesting. We're getting into our whole planning for the marketing plan for next year. Over the next 3 months, we'll have that laid out. And some of the questions are, "Where do spend your money most efficient?" It's a simple question for everybody in the world today because marketing spend has just changed, become much more efficient, which is helping leverage things. And the way to reach consumers is changing daily. So we're seeing it on mobile, we're seeing it on our social media, we're seeing it on -- well the same way everybody else is and we're also seeing that -- we've been off television for 2 years. It doesn't seem to have one inkling of an impact on us, but that's not consideration that we wouldn't get back on. There's just numerous ways to spend your money and I think the combination of how you do that is going to -- what's going to help drive your business and help maintain or efficiently keep your marketing spend there, reach new consumers and grow the business. I think there is a great opportunity for us to begin or to be refocused on a branding strategy that took place back in 2010 that really helped change the customers' perception of GNC and what GNC offers to a health and wellness lifestyle. And I think you're going to see a new creative campaign that will help extend the creative campaign we began or continue to be new but continue to evolve a very strong creative branding strategy.

Operator

And your next question comes from line of Charles Grom with Deutsche Bank.

Charles X. Grom - Deutsche Bank AG, Research Division

Mike, can you just build up the comp for me between traffic ticket and then within ticket, how much is inflation versus UPT?

Michael M. Nuzzo

Sure. Yes, I think -- we don't give that kind of detail as you know, but I can tell you that the majority of the comp continues to be driven by ticket and within ticket itself, we've seen growth in UPT. We've seen growth in UPT now for the last number of quarters, which is, obviously, a good, very positive sign. And, obviously, on the trade-up effect that we talked about as people trade to new products that carry a higher averaging at retail, that benefits the ticket as well. The transaction side, we saw positive transactions. They did not accelerate from the first quarter and we did that a little bit to ourselves. We enhanced and expanded a BOGO promotion that was very successful for us last year. We added SKUs to that BOGO promotion, which probably pushed up average ticket a little bit more at the expense of transactions; but certainly, it was the right thing to do for the business, and I think it's something that we would probably carry forward into next year in our planning efforts. So that's sort of the general breakdown of the comp.

Joseph M. Fortunato

We could pretty much tell you that inflation has still kept -- been a minimal part of the comparable store sales gross. It's less than 2%. That's in the whey protein business of ours.

Charles X. Grom - Deutsche Bank AG, Research Division

Right, right. Okay. And then on the international side, I think a part of the business doesn't get a lot of credit for all the success you guys have had. What do you think longer-term the growth potential could be for that division? I think, Mike, you said roughly 1,650 stores today.

Joseph M. Fortunato

Yes, I mean we have -- the international business is getting to be a -- is getting to a very unique stage and its potential value add to the business. We have done what we've talked about and that is accelerate products into the existing markets, accelerate distribution points in those existing markets. We have business consultants visiting those markets on a regular basis. We had a franchise convention in Washington D.C. and had 38 of the 52 countries show up along with our domestic franchisees. They understand the value of continuing to develop the brand, continuing to innovate, continuing to bring new products to the market. And I think that strong, strong growth in their purchase number from us shows that they are buying the new products. They are behind the new products and we continue to have a very focused efforts on bringing new products into the market. When I looked lastly on what they have in their markets still, and I look at it every month, versus what they potentially can still bring into their market without a lot of reformulations or anything and then some more work with some reformulations, that part of the business should easily be able to double just with the availability of what's out there. Then you look into where else are we going and what else are we going to do in the international arena. And there are 4 or 5 deals that are coming to a head right now. And I would expect that there'll be some of those deals that will come to fruition in the third and fourth quarter as we have been spending a lot of time nurturing the right type of deal that we want to do, whether it be in Russia, what we want to finally end up doing now in China, and obviously, Western Europe and Eastern Europe and Brazil.

Charles X. Grom - Deutsche Bank AG, Research Division

And then my last question for Mike. Just can you give us a little bit of update on the Gold Card test and at what point do you think you could ever roll that out chain-wide?

Michael M. Nuzzo

Yes, Chuck. I could tell you that we -- as you know, we added some additional test markets to the plan and what we've seen is that the performance of the test markets is very similar to the performance of the original test market, which is now 1 year-plus old. And when I say that the performance is similar, we're obviously seeing upside in sales versus the chain. We're seeing upside in transactions. Again, the margin dips a little bit in percentage, but in dollars, it's meaningfully higher. And so we like what we're seeing so far from these test markets and I think that at this point, we're going to see those markets develop further as we get into the year and then really begin to put together a plan for rolling out additional test markets into 2013. There's a chance we would consider adding a market or 2 of some significance at the back half of this year and we're still considering that. But clearly, I think what this test is showing us is that this program is working well and the customer is responding extremely well to it. And we will have an opportunity to really expand this and change the way we see the Gold Card program, which I think for all of us is a really exciting prospect.

Operator

And your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley, Research Division

What are the plans on LuckyVitamin? Is that going to go into the GNC.com comp number when we get to the end of August and how much of a comp boost are you expecting from that in the second half?

Michael M. Nuzzo

Yes, Mark, just to keep it straight forward, we're not going to include in the comp. So when we report the comp or give guidance for the comp, we will indicate that it's GNC.com contribution, so which in this quarter, was about 110 basis points. We'll obviously continue to give you information about LuckyVitamin, the sales growth there, the sales amount, but from our perspective, it's -- because it's not branded GNC, we think about it separately and I think it's important to talk about it separately. And so that's our plan at this point. If that changes, obviously, we'll let you know but as far as modeling purposes or guidance purposes, it's excluded from the comp.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. And just if you could talk a little bit about what's going on in cost, especially in the whey protein area where we're still seeing cost increases rolling through and how successful have you been at getting those pass through to the consumer?

Joseph M. Fortunato

We've absorbed them for quite a while. The way protein market has climbed steadily over the course of the last 18 months or a little bit longer. And we are -- we had to pass some of them on, obviously, that's what I talked about being part of the -- probably slightly less than 2% of the comp coming from price increases recently in the last 2 quarters. And we think we can hold on from here. We're seeing some positive variants coming up at our plant in South Carolina. We are running at a very strong capacity level so we hope that we can continue to offset some of those costs internally and not pass them anymore onto the consumer. But we've pretty much done just what about everybody else has been forced to do when you had to do something. The good news is, at least for the time being, which you're never quite sure until it happens, is it appears the whey protein market may start to calm down as we go into the fourth quarter and into the first quarter of 2013. There are 2 new facilities opening, one in Ireland, I believe and one in Mexico. Our partner is opening a new facility in Ireland, so we expect to get some benefit from that. And early discussions with them are that whey protein prices for the time being, hopefully, will level off and start to come down a little bit.

Operator

And your next question comes from the line of Matthew Fassler with Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

First question is a very basic one on sources of category strength. Obviously, with a 12.9% retail comp they all have to be pretty good, but any standouts as leaders? And in particular, I know that meal replacement and the diet category in general were pretty helpful in the first quarter. Any sense as to how that held up into 2Q?

Joseph M. Fortunato

Yes, it's -- as you said when you have this kind of comp growth, everybody -- everything's doing pretty well. We had very strong growth in our vitamin categories and we did have strong growth in the meal replacement business. And even sports on a very strong year last year has almost reached double-digit growth as well. So as you said, it's coming across from everywhere. We're very pleased that we're seeing such strong gross in our core vitamin business because that was an area that was a little softer last year and all of the new product offerings that we've put into that category has certainly paid off threefold. I mean we are really doing well.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

And guys, I just want to follow up on a comment you made about the franchise business. Obviously, this has been a standout area over the past several quarters even relative to retail, and you talked about the GNC brand penetration essentially coming close to parity. What does that mean for the trajectory of franchise going forward relative to the rest of the business? It sounds like they play catch-up a bit to the business model and that drove some of the particularly outsized growth. Do you expect us to essentially comp with the domestic chain from here or are there other factors that we should think about as we forecast that line item?

Joseph M. Fortunato

Yes, you can think of it this way. They are -- at the franchise convention, I gave a presentation and I showed at the end of that where, although they're doing well, there is still significant opportunity for them to get behind products faster and do better. So that's the good news. So there's still some low-hanging fruit out there. The other news is that they are benefiting from almost 100% of their stores being in strip centers, so as you see traffic flows with customers going to strip centers, they are getting the full benefit of that where we are absorbing some of the negative traffic flows in the margin -- I'm sorry, in the malls and combining them with very favorable transaction counts in the strip centers. So they are getting all the transaction comps in the strip centers so they're doing very well from that perspective.

Michael M. Nuzzo

I think our expectation would be that they would perform at or maybe even slightly better than the corporate.

Joseph M. Fortunato

Ongoing.

Michael M. Nuzzo

Ongoing.

Operator

Your next question comes from the line of Karen Short with BMO Capital Markets.

Karen F. Short - BMO Capital Markets U.S.

A couple of questions just on the Gold Card test. Can you maybe just elaborate a little bit, how many markets was it in the second quarter, and I guess what kind of percent of the store base? And was there any impact on the comp in the second quarter?

Michael M. Nuzzo

Right now, well we started with 1 market then we added 2 new, brand new test markets and then we took 3 markets that were already in a test mode. They were doing Gold Card everyday, but under the old pricing structure and converted those as well. These are relatively small mid-size markets so they -- in terms of their impact on comp, it's relatively minimal at this point. But again, as you extrapolate out and we look to add more markets and bigger markets, I think that the impact -- we would expect it to have some positive impact on comps going forward.

Karen F. Short - BMO Capital Markets U.S.

Okay, that's helpful. And then I'm just curious when you gave some color on the composition of your comp, in the last -- well, 2011, you've definitely had a pretty decent contribution from traffic and obviously, this quarter you indicated it was only like a slightly positive. You gave a little bit of color on why, but can you elaborate a little bit more on why you think the traffic kind of took a step down?

Michael M. Nuzzo

Well, I mentioned that one of the issues was what we did with this particular promotion that we think drove ticket at the expense to some extent of traffic. We still see and we've seen this for a while, we still see this difference between strips and malls that Joe talked about. Strips continuing to perform better than malls with traffic count. Probably an element of the overall migration of where spend is going, probably a little bit on the macro side, but nothing dramatically new, I think, in that space for us. The great thing is because we've got this diversified real estate base and you've got these strips that do extremely well, you've got malls that are extremely productive and we've been able to get great lease deals really across the board. But a lot of malls situations so that, if you look out to the chain in terms of store-based EBITDA contribution, it is consistently growing throughout all of the channels. And I think at this point, we've got, I think, 25 stores that are negative EBITDA and that's only slightly negative. In a chain of 3,000 stores, that's a significant achievement. So I think we really like -- we like where our real estate positioning is and understand that on a comp side, you're going to get these variances.

Joseph M. Fortunato

Karen, you have to understand this promotion that Mike's talking about. This is a promotion that was more of a BOGO promotion this year than it was last year. Several categories were included in the sports section last year. This year all categories were included in the sports section. So, obviously, drive average ticket, it has a lower effect on transactions because people are buying multiple units, not 1 unit. So that -- a lot of traffic for us versus average ticket is driven by how we decide to run our promotional cadence in regards to what we're out to accomplish in any 1 month or quarter. And we try to keep very balanced with that, but there are opportunities at times that exist that we feel may far outweigh an average ticket upside versus a slight change in transaction and we go that direction. It's just how we choose to manage and promote our business. And Mike's right. The key for the multi-channel retail business we have is that it's a tremendous asset. I look at it as a tremendous asset. Strip centers, the more we look at strip centers, they are continuing to leverage up and very effectively. And not just the top strip centers, for the majority of strip centers are all growing at a very significant pace. With the malls -- I'm sorry. The malls, if we look at the malls, the key to managing the malls is, if we're seeing any deterioration anywhere, we want to make sure that we're managing our occupancy levels correctly so that we're paying where we should be paying and we're not paying where we shouldn't, and that we don't deleverage the EBITDA value of our malls. And so far, we've done an extremely, extremely good job about it.

Karen F. Short - BMO Capital Markets U.S.

Okay. And then just last on the ticket. You keep commenting on the fact that it's growing. Can you give us a sense of where your average ticket is now?

Joseph M. Fortunato

Dollar-wise?

Karen F. Short - BMO Capital Markets U.S.

Yes.

Michael M. Nuzzo

Probably high 40s at this point.

Operator

And your next question comes from the line of Meredith Adler with Barclays.

Brian Wang - Barclays Capital, Research Division

This is actually Brian Wang on for Meredith. Actually, our question is, I guess, the first question is around the franchisees. Obviously, you've had very strong results over there. Can you just talk a little bit about how I guess you convinced or what convinced the franchisees to add the additional private label products?

Joseph M. Fortunato

Well we made a very forceful effort to talk to them in using our regional people and our domestic franchise field offices how to point out to them where we didn't think they were taking product at a fast-enough pace. And we regularly showed them what those new product introductions have meant to GNC company stores and where they were losing opportunities both on the branded side and on the margin front. They're very attuned to margins so anytime they see an opportunity to improve margins, they are very wide open to that opportunity, and I think we just did a better job of communicating with them. And obviously, we think it will even be as good or better as we move forward because we spent a lot of time at the franchise convention showing them still where they've done much better. And we have a sales force in-house here, too, that talks to them every time they place an order and tries to get them to -- or upsell them on certain categories where we feel they're not bringing in enough inventory as they should. So that's all been working and I think it will continue to work because the franchisees see the value of that, and they still see that they're not doing it as well as the company stores, but they're still having considerably good results from what they are doing so far.

Brian Wang - Barclays Capital, Research Division

No, that's very helpful. And I guess just switching gears a little bit on the expansion of the Sam's Club assortment. I guess if you could just talk a little bit more about that. Was it always part of the original plan? Approximately how many permanent SKUs do you expect to have there? Have you done a test on that to see if you expect that to have any cannibalization on your existing stores?

Joseph M. Fortunato

We have. We've checked stores around those stores and there has been 0 cannibalization. What we have seen is what we expected. People would get introduced to the brand and then come to the store and we would then have our sales force try to upsell them or sell more units, combinations of units as selling culture is great in the stores right now. And turn that customer more into a loyal everyday consumer. We are still very rotational with Sam's Club, but there are some items that we are putting in there on a more permanent basis. They may even change out a little bit over time as we move through the year. But there are items that are not going to have -- if they would cannibalize significantly, which we know they don't, they would not have any great material effect on GNC stores. They are not the same type of products that we push very hard on the, especially, retail front. They're more of a commoditized goods that those customers are more prone to buy than our consumers.

Operator

And your next question comes from line of Michael Weisberg with Crestwood Capital.

Michael Weisberg

A couple of quick things. The new Gold Card, what percentage of the country in revs do you think it covers now?

Joseph M. Fortunato

Oh, not that much because it's not in big major markets. So we may see some of that roll out into big major markets starting early this year. But for now, I would say, and this is a wild guess, but I would say 5%.

Michael Weisberg

Okay, great. When you mentioned -- Mike, when you mentioned sports in the second quarter and you said it was almost double-digit, was that sales or was that comps?

Michael M. Nuzzo

Comps.

Operator

And our final question comes from the line of Damian Witkowski with Gabelli & Company.

Damian Witkowski - Gabelli & Company, Inc.

Just want to go back to the pre-workout category. Any sense of -- you said you're de-emphasizing products that contain DMAA and any sense of -- is it magnitude of sales of these products? Is it half of what it was a year ago in the quarter? And also, do you have a sense for the new products that people are buying instead? What are the -- is it too early to tell what the repeat rates on those products would be?

Joseph M. Fortunato

It was so interesting. I'll answer both those questions. We did a consumer survey on what DMAA products were. 2% of the consumers that take -- that were taking them knew what DMAA was, so that's #1. So that kind of led, obviously, to what we always thought that consumers are going to buy products that they need, perceive to be beneficial to their workout regimens, pre- going post. And the DMAA was not what was driving that. It just happened to be that they became popular brands with consumers, but were pretty readily replaced. And you asked against last year, they're probably about 40% of sales levels they were at last year, maybe a little less. And the replacement products are selling at a faster pace than they are coming off. So I guess, does that answer your question?

Damian Witkowski - Gabelli & Company, Inc.

Well, I mean, I think it's probably too early to tell, but I'm just curious if people are -- I asked for repeat rates on those. And I'm not sure there's a way of tracking it and, obviously, it would imply, if it's high, that people are finding that it works just as well.

Joseph M. Fortunato

Yes, it works just as well. We've had consumer research again on those kinds of things. And again, those consumers will repeat-buy. As long as they like the product, it works well and we're seeing since it has been going on for a couple of months now, we are seeing consumers continuing to buy and, again, at a very accelerated pace. So we do not feel that anybody is buying once, don't like the product and not buying again. That consumer -- there's enough of an assortment for them to pick from ultimate products that they're going to find something that they think meets their regimen for workout goals.

Damian Witkowski - Gabelli & Company, Inc.

And who makes the replacement products? Is it the same companies under a different brand name or is it completely someone different?

Joseph M. Fortunato

There's 4 or 5 companies that have stepped up to the table and brought products in. And the good news for us is we had already started bringing in products because we like to keep a very competitive product assortment in our stores. We don't like any of the products moving up towards 6%, 7%, 8% of sales. So we had already been in the midst with certain companies of bringing in pre-workout products, so it was not a difficult transition. It wasn't like we were starting from square one. We were able to execute and execute against that very quickly, very efficiently and do what we said what we were going to do and accomplish the same thing from our financial protection downside and with our consumers.

Operator

We will now turn the conference back over to Mr. Fortunato for closing remarks.

Joseph M. Fortunato

I basically have none, Miss. I think we've had the script, and I think all the questions have been answered. If anybody has any more questions, we'd be glad to answer them.

Michael M. Nuzzo

Thanks a lot.

Joseph M. Fortunato

Thank you, everybody, we appreciate you joining us today.

Operator

And thank you. This concludes today's conference. You may now disconnect.

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