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GNC Holdings (GNC) Lags Q3 Earnings & Revenues, Margins Down

GNC Holdings, Inc. GNC reported third-quarter 2017 adjusted earnings per share (EPS) of 32 cents, reflecting a massive 45.8% year-over-year deterioration. Adjusted EPS also missed the Zacks Consensus Estimate by a penny. Per management, the hurricanes Harvey, Irma and Maria have dented the adjusted EPS figure to the tune of 2 cents.

The year-over-year decline can be attributed to a dull revenue performance in the reported quarter, primarily because of underperformance by the U.S. & Canada and manufacturing/wholesale segments.

Including one-time items, the company reported earnings of 31 cents per share, down 34% year over year.

Revenues

Revenues during the reported quarter dropped 2.9% year over year to $609.5 million. The figure also missed the Zacks Consensus Estimate of $616 million.

The lower sales at the U.S. & Canada and manufacturing/wholesale segments can be cited as the major reason for the disappointing numbers.

Same-store sales increased 1.3% in domestic company-owned stores (including GNC.com sales) in the third quarter of 2017. In domestic franchise locations, same-store sales declined 1.7%.

 

GNC Holdings, Inc. Price, Consensus and EPS Surprise

 

GNC Holdings, Inc. Price, Consensus and EPS Surprise | GNC Holdings, Inc. Quote

 

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 dropped 3.5% to $507.1 million, primarily owing to a $12-million decrease due to the discontinuation of the Gold Card program in the United States and the introduction of the company's new loyalty programs. In domestic franchise locations as well, revenues declined nearly $7.5 million, partially offset by a 1.3% increase in retail same-store sales. However, GNC.com sales were up 41.9% in the third quarter.

Revenues at the international segment increased 19.3% to $49.1 million. Revenues from international franchisees rose $2.8 million. Revenues from the China business increased $4.8 million in the reported quarter.

Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 13.1% to $53.3 million. Within this segment, third-party contract manufacturing sales fell 14.9% to $31.2 million owing to lower demand related to reduced sales for some customers. Sales to wholesale partners decreased 10.5% year over year from $24.7 million to $22.1 million in the quarter. However, Intersegment sales increased to $58 million in the quarterfrom the year-ago $53 million on the company's increased focus on proprietary products.  

Margin

Gross profit deteriorated 8.6% in the reported quarter to $196.8 million. Consequently, gross margin contracted 200 basis points (bps) to 32.3%.

Selling, general and administrative expenses rose 1.7% to $150.9 million. Accordingly, adjusted operating margin deteriorated 320 bps to 7.5%.

Financial Position

GNC Holdings exited the third quarter with cash and cash equivalents of $40.1 million, down from $51.9 million at the end of second-quarter 2017. Long-term debt was $1.38 billion at the end of the quarter, compared with $1.51 billion at the end of second-quarter 2017. Year to date, the net cash flow from operating activities was $149.6 million, compared with $169.7 million a year ago.

Further, the company generated year-to-date free cash flow of $124.8 million as compared with $162.8 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'. The company has been seeing transformational changes during the third quarter of 2017 as well. Transaction growth was up 12.4% in the third quarter. As of Oct 25, 9.6 million consumers had joined the company's loyalty programs, including approximately 585,000 customers enrolled in the PRO Access membership.

Our Take

GNC Holdings exited the third quarter of 2017 on a disappointing note with revenues and earnings missing the Zacks Consensus Estimate. The underperformance can be attributed to lower sales in the company’s U.S. & Canada and manufacturing/wholesale segments. Also, the decline in gross and adjusted operating margin is a matter of concern.

On a positive note, during the third quarter, management witnessed positive response for its New GNC Plan. New consumer enrollment under the myGNC Rewards Program. The company has also been witnessing improvement in transactions and e-commerce business, which buoys optimism.

Zacks Rank & Key Picks

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

A few better-ranked stocks in the broader medical sector are PetMed Express, Inc. PETS, Abbott ABT and Intuitive Surgical, Inc. ISRG. Notably, PetMed sports a Zacks Rank #1 (Strong Buy), while Abbott and Intuitive Surgical carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported EPS of 43 cents in the second quarter of fiscal 2018, up 79.2% from the year-ago quarter’s 24 cents. Also, gross margin expanded 548 bps year over year to 35.2% in the reported quarter.

Abbott reported third-quarter 2017 adjusted earnings from continuing operations of 66 cents per share, up 11.9% year over year. Also, third-quarter worldwide sales came in at $6.83 billion, up 28.8% year over year. 

Intuitive Surgical posted adjusted earnings of $2.77 per share in the third quarter of 2017, up 34.5% on a year-over-year basis. Also, revenues increased 18% year over year to $806.1 million.

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