There are a number to be pessimistic about the long-term prospects of GNC Holdings (NYSE: GNC), and plenty of articles spell out those reasons in sufficient enough detail that it isn't necessary to expound upon them here. Most center on the idea that the company's business model is no longer valid (who needs to go to a physical store to buy easy-to-ship vitamins?) and that Amazon has taken over the world. That may be true. In fact, it probably is true at some point in the future. But for today and the foreseeable several quarters, GNC appears to be a company that generates sufficient cash flow to exist - and given the excessively pessimistic calls for this company's imminent demise, that should be enough.
Last year, GNC generated $2.540 billion in revenue, on which it earned $190.3 million in income (backing out a meaningless noncash asset impairment of $476.6 million, but including the write-off's tax benefit) and $208.2 million in net cash from operating activities. The asset impairment is meaningless; for our conservative calculations we should already assume the intangible assets of this company are zero (98.8% of the impairment was a goodwill reduction). What matters is the company's cash flow, which we'll get to in more detail in a moment.
GNC does not have a lot of actual cash ($34.5 million), but that should quickly change: the company previously repurchased its own shares at an alarming rate and imprudent rate, while also issuing a high-yielding dividend. In 2016, the company spent $229.2 million on share repurchases and $55.3 million in dividends, which have since been suspended. That's $284.5 million of cash giveaways in 2016 that we won't see this year and which should serve to improve the company's liquidity in 2017.
In fact, in just the last three years GNC has spent $1.165 billion on share repurchases ($992.2 million) and dividends ($172.5) - an incredible amount considering the company's current $462 market capitalization. Obviously these financial decisions are regrettable, but fortunately for current and prospective stakeholders the company's newfound cash discipline may immediately translate to a more stable company. Unlike many other companies in distressed situations, GNC can immediately improve its liquidity by holding on to the large sums of cash it produces.
So you have a company that last year generated $148.6 million in free cash flow (when you subtract the $59.6 million in capital expenditures) trading at 3.1 times that cash flow, with a new cash discipline and occasional rumors of buyout interest. Shorting a company that generates one-third its current market capitalization in cash flow every year, after an 80% decline in share price over the last twelve months, may be the definition of excessive risk, particularly given the number of potential positive catalysts which could jolt GNC's share price - a buyout offer, successful debt refinancing, a major store refranchising, as just some examples - none of which have to materialize for shares to rebound.
GNC has until 2019 when its $1.156 billion term loan facility is due to improve its operating performance and financial condition ($130.4 million is due in 2018). That's a significant period of time for a company that has historically generated GNC's level of cash earnings; the company does not need to erase its debt by 2019 - it simply has to secure new financing, which the company would likely be able to do if it's able to reduce its leverage, or stabilize cash flows, over the next several quarters.
In the meantime, between now and 2019, there are 7 quarters of earnings announcements and the potential for a buyout offer - or new debt issuance - which can serve as positive catalysts for the company. Yes, those earnings announcements could bring further negative news, but market expectations are solidly negative, with many pointing to the company's demise - yet even in the bear case it seems unlikely that anything approaching a default would actually occur until 2019. That's a long time of being right in order to justify a short position at these prices.
A quick point about the recently disclosed insider transactions at the company - these are large purchases when considered in relation to GNC's market capitalization.The Interim CEO spent $5 million on stock purchases (at an average of $8.44 per share) about 6 weeks ago; taken together with other insiders there was roughly $6.7 million in cash purchases of stock at GNC since the earnings release (equal to 1.44% of the current market cap), with no reported insider sales. That is a massive sum when you consider the total capitalization of the company - it would be the equivalent of McDonald's insiders buying $1.5 billion of stock, or Apple's top brass buying nearly $11 billion worth of shares.
Can we measure any sales improvement, or better yet, predict it?
GNC's valuation is meaningless if the company can't stabilize revenues - so, is there any way to predict its revenue? What follows is a tenuous examination of GNC's online traffic and its relationship to quarterly revenue. I'll redouble the obvious cautionary note: any correlation found may be totally coincidental and this approach should be taken with a large grain of salt.
By using Amazon's premium web data service, Alexa, one can obtain the daily rank for GNC.com over time. Basically, this is Amazon's version of Nielsen ratings for internet traffic - the company tracks the behavior of users who have installed the Alexa toolbar and reports the results as a ranking, with the first slot position denoting the most popular site measured. So Amazon's results are a statistical sampling of internet behavior extrapolated to project total internet behavior - obviously, the accuracy of this information is highly dependent on the total sample size, which to my knowledge is not released, and there are certainly other limitations that we should keep in mind (for instance, relative ranking results deteriorate in quality as the rank number increases, since the sample size drops, and one can go on at length about any selection bias that exists with people who select to install the toolbar).
The goal is to test a straightforward idea - is GNC's online traffic reflective or predictive of the company's actual revenue? Because GNC has experienced a significant fluctuation in both revenue and online traffic, we can test the relationship and further use recent trends to try to extrapolate revenue figures.
To measure online traffic change, we can take the daily change in GNC.com's rank (multiplied by -1, since a lower number reflects rank improvement) and sum it over the length of a quarter. This allows us to get a sense of the accumulation of change that is taking place in the site's relative internet popularity over time. Because each rank is calculated in relation to other sites on the internet and not measured as an independent value, we're controlling for total internet traffic growth and instead looking at the relative strength of GNC.com as compared to all web properties.
Here are the results for the sum of daily changes in the Alexa rank in each quarter, going back 3 years (the maximum timeframe) and yielding 1,090 rank observations, with higher values denoting popularity improvement and lower numbers denoting a relative traffic drop:
*Author created table using 3-year historical Alexa traffic rank data, available for .csv download with a premium Alexa account (or trial).
Clearly, GNC suffered a significant drop in web traffic at around the same time that it experienced a significant revenue decline. When you examine the change in traffic ranking alongside the company's change in revenues by quarter, you see a chart where one variable leads the other by one quarter.
*Author-created chart using 3-year historical Alexa traffic rank data.
Why? First, it could be because there is no meaningful relationship to be detected and this is all noise (completely plausible). These traffic results are based on a rolling average - that is, a particular rank today is dependent on 90 days of previous traffic. But this should actually move any predictive relationship in the opposite direction, where traffic improvement lags actual revenue change. Perhaps people are engaging with the company online in anticipation of future spending, or perhaps the quarterly cutoffs are not capturing meaningful changes in actual trends.
The figures appear highly correlated when you adjust traffic results up one quarter, so that, for example Q1 traffic changes are tied to Q2 revenue changes. Further, the correlation appears to be statistically significant. Again, the sample size for a regression is small and there is a good chance these results may be completely meaningless.
*Author-created chart using 3-year historical Alexa traffic rank data.
*Regression analysis performed via GraphPad, using the summed data from Alexa traffic ranks in the tables above.
If this were predictive, we would essentially look at last quarter's change in online traffic rank to predict this quarter's change in revenue. Perhaps this relationship is capturing some of the impact of online traffic on GNC sales, or perhaps it is a "statistically significant," but coincidental phenomenon. Or again, perhaps this is totally meaningless.
One could also examine data for the company's bounce rate, daily page views per visitor, and average daily time on site to further explore any possible relationships or to detect any significant changes over time.
Either way, what is clear is that GNC's traffic for Q1 2017 has shown the second-best improvement in the company's three-year history (after Q4 2014). This would support the idea that sales are in the process of stabilizing or improving, assuming again that any relationship exists at all. Further, the data show material drop-offs in traffic that coincide with the company's previous sales declines. Interestingly, the data actually supports the idea that revenues will sequentially drop this quarter, but that the decline has reversed and improvement in revenue will be reflected in future results (for instance, in this scenario we could see management indicating that comps notably improved as the quarter progressed). Of course, real internet traffic trends are not necessarily driven by fiscal quarter cutoffs, but the traffic changes do highlight dark days for GNC that have begun to show a significant rebound, at least where relative traffic rank is concerned.
All that can be said for certain is that GNC's online Alexa traffic rank has improved this quarter, and that this recent improvement is the second-highest improvement recorded for the company over a three-year period when examined as an aggregate sum of daily changes. What that means for actual changes in revenue is to be determined.
Disclosure: I am/we are long GNC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author is long GNC shares and may freely dispose of part or all of the position at any time in the future.