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GNC Holdings, Inc. Reports First Quarter 2016 Results

PITTSBURGH, April 28, 2016 /PRNewswire/ -- GNC Holdings, Inc. GNC, +0.62% (the "Company"), a leading global specialty health, wellness and performance retailer, today reported its financial results for the first quarter ended March 31, 2016.

First Quarter Results

For the first quarter of 2016, the Company reported consolidated revenue of $668.9 million, a decrease of 1.8% as compared with consolidated revenue of $681.3 million for the first quarter of 2015. Revenue, excluding intersegment sales, increased in the Company's Manufacturing / Wholesale segment by 3.5%. Revenue decreased in the Company's Retail and Franchise segments by 1.5% and 5.6%, respectively.

Same store sales decreased 2.6% in domestic company-owned stores (including GNC.com sales) in the first quarter of 2016. In domestic franchise locations, same store sales decreased 5.6% in the first quarter of 2016.

For the first quarter of 2016, the Company reported net income of $50.8 million. Adjusted net income for the first quarter of 2016 was $50.8 million, a decrease of 23.0% as compared with adjusted net income of $66.0 million for the first quarter of 2015. Adjusted diluted earnings per share was $0.69 for the first quarter of 2016, as compared with adjusted diluted earnings per share of $0.75 for the first quarter of 2015.

Mike Archbold, Chief Executive Officer, said, "Although we experienced positive sales trends across parts of our business, these trends were more than offset by challenges in the vitamin business, driven by the decline in Vitapak® sales, and pricing pressure created by our clearing of expiring product which impacted both sales and margin during the quarter. While we are working to address the challenges in our vitamin business, we expect to face headwinds in the business for the balance of the year and are adjusting our guidance accordingly."

Mr. Archbold continued, "We are not pleased with the reported results for the quarter and find them unacceptable. While we are making progress on our strategic evolution which we started in 2014, the turnaround is taking longer than expected and the progress is insufficient. Our number one priority is our vitamin business and the steps we need to take to grow same store sales in this category through new promotions and a renewed marketing focus. In addition, we are reducing the significance of aged inventory, optimizing our assortment and training store associates to emphasize the vitamin solution to our customers."

Segment Operating Performance

Retail

For the first quarter of 2016, Retail segment revenue decreased $7.5 million, or 1.5%, to $496.0 million for the three months ended March 31, 2016 compared with $503.5 million in the prior year quarter in part due to the sale of Discount Supplements in the fourth quarter of 2015, which resulted in a decrease in revenue of $7.2 million year-over-year. In addition, negative domestic retail same store sales of 2.6%, which includes sales from GNC.com, resulted in a decrease to revenue of $11.5 million. Negative same store sales were primarily due to continued negative trends in the vitamin category, including the impact of deep discounts related to excess vitamin inventory nearing expiration. In addition, the timing of the Easter holiday (March in the current year and April in the prior year with sales being historically low on and around this holiday) and unfavorable January weather contributed to the decrease. Partially offsetting the decrease was the addition of 67 net new company-owned stores.

Operating income decreased $11.8 million, or 12.8%, to $80.6 million for the three months ended March 31, 2016 compared with $92.4 million for the same period in 2015. Operating income as a percentage of segment revenue was 16.2% in the current quarter compared with 18.3% in the prior year quarter. The decrease compared with the prior year quarter was primarily due to lower domestic retail product margin rate resulting from the above mentioned discounts, a planned increase of $4.5 million in advertising expense to restore spending to more normalized levels and deleverage associated with negative same store sales. Also in the prior year quarter, SG&A expense includes a $2.8 million charge relating to the correction of an immaterial error and the expenses associated with Discount Supplements which was sold in the fourth quarter of 2015.

Franchise

Revenues in our Franchise segment decreased $6.8 million, or 5.6%, to $115.5 million in the current quarter compared with $122.3 million in the prior year quarter. Domestic franchise revenue decreased $4.1 million to $81.8 million in the current quarter compared with $85.9 million in the prior year quarter due to lower wholesale sales and royalties. Our domestic franchisees did not participate in all corporate promotions and many have not adopted our expanded assortment initiative; as a result, our franchisees reported lower retail same store sales as compared with our corporate stores. International revenue decreased by $2.7 million principally due to lower wholesale sales and royalties primarily resulting from challenges we are experiencing in Turkey and Australia, partially offset by an increase associated with our China business.

Operating income decreased $3.7 million, or 9.4%, to $36.0 million for the three months ended March 31, 2016 compared with $39.7 million in the prior year quarter. Operating income was 31.1% of segment revenue in the current quarter compared with 32.5% in the prior year quarter. Adjusted operating income was 30.3% and 30.2% of segment revenue in the three months ended March 31, 2016 and 2015, respectively. This excludes the impact of the gain on the sale of company-owned stores to franchisees of $1.0 million and $0.3 million in the current quarter and the prior year quarter, respectively, and the prior year reduction in the previously established bad debt allowance associated with certain of our international franchisees.

Manufacturing / Wholesale

Revenues in our Manufacturing / Wholesale segment, excluding intersegment sales, increased by $2.0 million, or 3.5%, to $57.5 million for the three months ended March 31, 2016 compared with $55.5 million in the prior year quarter. Operating income decreased $1.8 million, or 8.6%, to $19.3 million for the three months ended March 31, 2016 compared with $21.1 million in the prior year quarter. Operating income as a percentage of segment revenue decreased from 17.3% in the prior year quarter to 16.0% in the current quarter primarily due to lower proprietary sales which generally contribute higher margins.

Franchise Store Strategy

Consistent with its previously announced refranchising strategy, the Company has agreed to sell and refranchise 84 corporate stores to one franchisee in the second quarter of 2016, which is expected to result in a pre-tax gain of approximately $17 million.

Mike Archbold, Chief Executive Officer commented, "We are very pleased to announce the completion of this refranchising agreement, which is part of our strategic plan to transition approximately 200 company-owned store locations to an asset light franchise model this year and 1,000 company-owned store locations over the next three to four years."

Sun Holdings, a new franchisee partner for GNC, is refranchising 84 locations. They are ranked in the top 10 of franchisees in the United States, with over 600 franchise locations including Burger King, Popeye's, Golden Corral, CiCi's Pizza, Krispy Kreme and T. Mobile.

Share Repurchases

In the first quarter of 2016, the Company completed $218.9 million in share repurchases (including $17.9 million which cash settled in April 2016), repurchasing 7.6 million shares of its common stock at an average price of $28.81 per share. As of March 31, 2016, $208.0 million remains available for purchase under the program.

Operating Metrics

For the first quarter 2016, the Company opened 30 new and closed 69 retail and franchise locations (including company-owned and franchise stores). Additionally, the company opened 14 and closed one Rite Aid franchise store-within-a-store locations. The Company now has 9,064 store locations worldwide.

For the first quarter 2016, the Company generated net cash from operating activities of $142.3 million representing a 21.7% increase as compared with the first quarter 2015, and invested $10.5 million in capital expenditures. The Company increased free cash flow 20% to $132.1 million (which it defines as cash provided by operating activities less cash used in...


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