GNC Holdings (GNC) Beats On Q1 Earnings, Plans Store Shutdown

GNC Holdings, Inc. (NYSE:GNC) reported first-quarter 2018 adjusted earnings per share (EPS)of 24 cents, reflecting a 36.8% year-over-year decline. Adjusted EPS surpassed the Zacks Consensus Estimate of 20 cents by 20%.

Revenues

Revenues (which now exclude Lucky Vitamin in all periods) in the reported quarter dropped 7.2% year over year to $607.5 million.The drop was primarily because of the sale of Lucky Vitamin in September 2017 and the termination of the Gold Card program.

Same-store sales increased 0.5% in domestic company-owned stores (including GNC.com sales) in the quarter under review. Notably, this is the third straight quarter of growth. In domestic franchise locations, same-store sales dropped 1.9%.

Segments in Details

GNC Holdings reports operations under three segments: U.S. & Canada (including company-owned stores in the United States, Puerto Rico and Canada, franchise stores in the United States and e-commerce); International (including franchise locations in approximately 50 countries, The Health Store and China operations); and Manufacturing/Wholesale (comprising manufactured products 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 decreased 4.5% to $512.4 million. In domestic franchise locations, revenues declined $7.8 million due to a decrease in retail same store sales along with a reduction in the number of franchise stores.

Revenues at the International segment increased 0.8% to $40.1 million driven by higher cross-border e-commerce sales in China.

Revenues at the Manufacturing/Wholesale segment (excluding intersegment revenues) declined 1.4% to $55.1 million. Within this segment, third-party contract manufacturing sales fell by $0.9 million. However, Intersegment sales increased $3.4 million on the company's increased focus on proprietary products.

Margin

Gross profit declined 5.9% in the reported quarter to $206.9 million. However, gross margin expanded 48 basis points (bps) to 34.1% on rising penetration of the company’s private label brands.

Selling, general and administrative expenses contracted 3.2% to $160.7 million. Accordingly, adjusted operating margin dropped 62 bps to 7.6%.

Financial Position

GNC Holdings exited first-quarter 2018 with cash and cash equivalents of $53.9 million, up from $64 million at the end of 2017. Long-term debt was $1.06 billion in quarter under review, compared with $1.29 billion at 2017-end. Net cash flow from operating activities totaled $25.07 million, compared with $46.10 million a year ago.

Further, the company generated free cash flow of $37.4 million as compared with $33.4 million in the year-ago quarter.

One New GNC Plan Update

Earlier, management had announced plans to revamp its existing business model, dubbed as the ‘One New GNC'. Till now, more than 13 million consumers have joined the company's loyalty programs, including approximately 935,000 customers enrolled under the PRO Access membership.

Store Count Update

As of Mar 31, 2018, GNC Holdings had 3,385 corporate stores in the United States and Canada, 1,083 domestic franchise locations, 2,428 Rite Aid franchise store-within-a-store locations and 2,009 international locations. The company currently has 8,905 store locations globally. The company intends to shutter approximately 200 stores in 2018 as part of the ongoing optimization of the company's store portfolio. The company has also announced plans to open a limited number of new stores in 2018.

Our Take

GNC Holdings exited the first quarter of 2018 on a mixed note. The year-over-year fall in adjusted earnings and revenues is dampening.

The company has been firing on all cylinders to strengthen its international presence. In this regard, GNC Holdings recently announced that its proposal to enter into a strategic partnership and China joint venture agreement with Harbin Pharmaceutical Group Holding Co., Ltd ("Hayao") has received Hayao shareholders’ vote. Further, the company has recently entered into a master franchise agreement with Rapid Nutrition to foray in Australia. At the same time, GNC Holdings has also announced plans to expand presence in India where it operates in collaboration with the master franchise partner — Guardian Healthcare Services Pvt. Ltd. Thus, all these developments help in boosting investors faith on the stock.

Zacks Rank & Key Picks

GNC Holdings has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical space, which reported solid earnings this season, are Laboratory Corporation of America Holdings (NYSE:LH) , Chemed Corporation (NYSE:CHE) and Intuitive Surgical, Inc. (NASDAQ:ISRG) . While Intuitive Surgical sports a Zacks Rank #1 (Strong Buy), LabCorp and Chemed carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical reported first-quarter 2018 EPS of $2.44 per share, which beat the Zacks Consensus Estimate by 22.6%. Revenues totaled $848 million, also surpassing the Zacks Consensus Estimate by 10.6%.

LabCorp reported first-quarter 2018 EPS of $2.78, beating the Zacks Consensus Estimate by 5.3%. Revenues came in at $2.85 billion, steering past the Zacks Consensus Estimate of $2.78 billion.

Chemed posted first-quarter 2018 EPS of $2.72, beating the Zacks Consensus Estimate of $2.37. Revenues came in at $439.2 million, surpassing the Zacks Consensus Estimate of $420 million.

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