GNC Holdings (GNC) Q3 Earnings Miss On Soft U.S. Retail

GNC Holdings, Inc. (NYSE:GNC) reported third-quarter 2018 adjusted earnings per share (EPS) of 2 cents, reflecting a 93.8% year-over-year plunge. Adjusted EPS also missed the Zacks Consensus Estimate of 4 cents. A significant year-over-year decline in revenues along with escalating costs impedes the bottom-line growth in the reported quarter.

Revenues

Revenues in the quarter under review declined 5.4% year over year to $580.2 million. Excluding the contribution from Lucky Vitamin (sold in September 2017), which is reflected in the year-ago quarter’s tally, revenues slipped 2% year over year due to lower sales associated with certain store closures at the end of the respective lease term. Notably, this is a component of the company’s store portfolio optimization strategy.

However, the quarterly revenues exceeded the Zacks Consensus Estimate of $575 million.

Same-store sales slid 2.1% in domestic company-owned stores (including GNC.com sales) in the quarter under discussion. In domestic franchise locations, same-store sales dipped 4.1%.

Segmental 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 (inclusive of 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 fell 3.2% to $476.5 million. E-commerce sales accounted for 7.2% of U.S. and Canada revenues, mirroring a 1% increase year over year.

In domestic franchise locations, revenues dropped $3.6 million due to soft retail same-store sales, partially offset by a $7.5-million rise relating to the company’s loyalty programs, PRO Access paid membership fees and the myGNC Rewards change in deferred points liability.

Revenues at the International segment grew 6.1% to $51.4 million, driven by solid sales at the company’s international franchisees.

Revenues at the Manufacturing/Wholesale segment (excluding intersegment revenues) were up 1.9% to $52.3 million owing to higher third-party contract manufacturing sales. However, Intersegment sales rose $5.7 million, courtesy of the company's raised focus on proprietary products.

Margin

Gross profit declined 8.2% in the third quarter to $184.7 million. Gross margin contracted 100 basis points (bps) to 31.8%.

Selling, general and administrative expenses slid 3.9% to $149.9 million. Accordingly, adjusted operating margin declined 138 bps to 5.9%.

Financial Position

GNC Holdings exited third-quarter 2018 with cash and cash equivalents of $33.3 million, down from $43.4 million at the end of the second quarter. Long-term debt was $1.04 billion in the quarter under consideration compared with $1.05 billion at second quarter-end. Year to date, net cash flow from operating activities totaled $55.7 million compared with $149.6 million a year ago.

Further, the company generated free cash flow of $60.6 million compared with $124.8 million in the prior-year period.

Our Take

GNC Holdings exited the third quarter of 2018 on a mixed note with earnings lagging the Zacks Consensus Estimate and revenues exceeding the mark. The year-over-year lower-than-expected adjusted earnings and revenues are dampening. While domestic retail comps were soft, GNC registered a strong performance in e-commerce business as well as at International segment.

In fact, GNC Holdings is pulling out all the stops to strengthen its international presence. In this regard, the company’s plan is well in place to expand its footprint in China and India and also to enter the Australian market with strategies to leverage its alternative channels of distribution.

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 Intuitive Surgical (NASDAQ:ISRG) , Stryker Corporation (NYSE:SYK) and Merit Medical Systems, Inc. (NASDAQ:MMSI) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical reported third-quarter 2018 adjusted EPS of $2.83, which beat the Zacks Consensus Estimate of $2.65. Revenues totaled $920.9 million, also surpassing the consensus estimate of $918.6 million.

Stryker posted third-quarter 2018 adjusted EPS of $1.69, outpacing the Zacks Consensus Estimate of $1.68. Operating margin was 17.8%, up 30 bps.

Merit Medical reported third-quarter 2018 adjusted EPS of 47 cents, which trumped the Zacks Consensus Estimate of 42 cents. Revenues of $221.6 million edged past the consensus estimate of $218 million.

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