GNC Holdings (GNC) Tops Q2 Earnings, Suspends '16 View

GNC Holdings Inc. (NYSE:GNC) reported second-quarter 2016 adjusted earnings per share (EPS) of 79 cents, reflecting a year-over-year improvement of 2.6% owing to a more than 20% drop in the company’s weighted average number of common shares outstanding.

The quarter’s adjusted EPS exceeded the Zacks Consensus Estimate by 4%.

Including one-time items, the company’s reported EPS was 94 cents, up 19% year over year.

Total Revenue

Revenues dropped 2.4% year over year to $673.2 million and missed the Zacks Consensus Estimate of $673.3 million, by a whisker. This decline in revenue growth can be attributed to lower sales in the company’s U.S. & Canada and international segments, which were partially offset by the sales improvement in the manufacturing/wholesale segment, excluding intersegment sales. Moreover, the fourth-quarter sale of GNC Holdings’ Discount Supplements business also affected total revenue growth of second-quarter 2016, by $6.6 million.

Same-store sales dropped 3.7% in domestic company-owned stores (including GNC.com sales) during the second quarter; while in domestic franchise locations, same store sales fell 6.6%.

Segment in Details

Starting from second-quarter 2016, GNC Holdings is reporting its operations in three segments: U.S. & Canada – including company-owned stores in the U.S., Puerto Rico and Canada, franchise stores in the U.S. and e-commerce; International – including franchise locations in approximately 50 countries, The Health Store and China operations and Manufacturing / Wholesale –including manufactured product sold to other segments, third-party contract manufacturing and sales to wholesale partners.

During the reported quarter, GNC Holdings’ revenues from the U.S. & Canada segment dropped 2% to $570.9 million, primarily on the back of a decline in same store sales in both company-owned and franchise stores. Domestic franchise revenues fell 2.1% to $86.5 million, primarily due to lower wholesale sales and royalties. Weakness in the food and protein categories, as well as continued softness in Vitamins and Vitapaks, coupled with softer than expected traffic trends, largely affected this segment’s growth in the second quarter.

Revenues at the international segment declined 2.5% to $43.1 million primarily on account of a decline of 1.6% in international franchisees same store sales, at constant exchange rate. However a revenue increase of $1.5 million contributed by GNC Holdings’ China business partially neutralized this decline.

Revenues from the manufacturing/wholesale segment (excluding intersegment revenues) improved 5.3% to $59.2 million. Within this segment, third-party contract manufacturing sales increased 18.3% to $33.7 million, which was partially offset by an 8.1% decline in wholesale sales of $2.2 million and a 22.4% plunge in intersegment sales of $56.6 million.

Margin

Gross profit deteriorated 6.9% in the reported quarter to $238.7 million. Consequently, gross margin contracted 170 basis points (bps) to 35.5%, owing to lower sales, lower product margins in the company’s GNC.com business and deleverage of occupancy costs as a result of the negative same-store sales.

Selling, general and administrative expenses dropped 0.8% to $139 million. However, adjusted operating margin deteriorated 210 bps to 14.8% during the quarter, due to higher decline in gross profit.

Financial Position

GNC Holdings exited the reported quarter with cash and cash equivalents of $48.2 million, compared with $61 million at the end of first-quarter 2016. As of Jun 30, 2016, the company generated cash of $130.9 million from operating activities, compared with $184.2 million a year ago.

During the second quarter, management bought back shares worth roughly $28 million and had a remaining cash balance of $48 million available in hand. The company also paid $28 million in cash dividends on its common stock as of Jun 30, 2016. Further, the company generated free cash flow of $110.6 million, reflecting a year-over-year decline of 32.7%.

Moreover, during the second-quarter earnings release, GNC Holdings declared a cash dividend of 20 cents per share of its common stock for the third-quarter 2016; payable on or about Sep 30, 2016 to its stockholders of record at the close of business as on Sep 16, 2016.

2016 Outlook

Assuming the weakening performance of the company to continue in the remaining quarters of 2016, management has temporarily suspended its previously announced earnings guidance for 2016. However, management remains committed to deliver improved performance in the near future.

Our Take

GNC Holdings ended second-quarter 2016 on a disappointing note as its revenue figure failed to meet the Zacks Consensus Estimate. Although earnings surpassed the same, it was on account of considerably lower number of weighted average common shares outstanding and not any strong fundamental on the company’s part.

Not only did the company lags in the domestic market, its operating results in overseas was equally disappointing. Foreign currency also played spoilsport, particularly in Mexico. In Turkey, macroeconomic challenges hampered growth. That said, it is worth mentioning that management still believes that international markets hold a tremendous potential for GNC Holdings and is thus engaged in capitalizing its opportunities in there. However, the temporary suspension of 2016 outlook is quite discouraging as it points to no major improvement in GNC Holdings’ operation, at least in the near term.

Zacks Rank & Key Picks

GNC Holdings currently holds a Zacks Rank #4 (Sell). Some better-ranked medical stocks are Abiomed, Inc. (NASDAQ:ABMD) , Masimo Corp. (NASDAQ:MASI) and Natus Medical Inc. (NASDAQ:BABY) . All these stocks sport a Zacks Rank #1 (Strong Buy).