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GNC Holdings (GNC) Q1 Earnings Lag, Cash Position Strong

GNC Holdings Inc. GNC reported first-quarter 2016 adjusted earnings per share (EPS) of 69 cents, reflecting a year-over-year deterioration of 8% on account of declining revenue growth. The quarter’s adjusted EPS also missed the Zacks Consensus Estimate by 8%. However, as per management, GNC Holdings’ first-quarter EPS was favorably impacted by the repurchase of $219 million of the company’s common stock.

Including one-time items, the company’s reported EPS was also 69 cents, down 4.2% year over year.

Total Revenue

Revenues dropped 1.8% year over year to $668.9 million and also missed the Zacks Consensus Estimate of $671 million. This impacted revenue growth, primarily because of lower sales in the company’s retail and franchise segments, which was partially offset by the sales improvement in the manufacturing/wholesale segment, excluding intersegment sales.

Same-store sales dropped 2.6% in domestic company-owned stores (including GNC.com sales) during the first quarter; while in domestic franchise locations, same store sales fell 5.6%.

Segment in Details

GNC Holdings reports its operations in three segments: franchise, retail and manufacturing/wholesale segments.

During the reported quarter, GNC Holdings’ revenues from the franchise segment dropped 5.6% to $115.5 million, primarily on account of a decline in domestic franchise sales. Domestic franchise revenues declined 4.8% to $81.8 million, primarily due to lower wholesale sales and royalties. International revenues also reduced by $2.7 million, primarily due to reduced wholesale sales and royalties largely related to challenges in Turkey and Australia, partially offset by an improvement in GNC Holdings’ business in China.

Revenues at the retail segment declined 1.5% to $496 million, partly due to the sale of Discount Supplements in the fourth quarter of 2015, which resulted in a $7.2 million year-over-year decrease in revenues. Negative domestic retail same-store sales also played spoilsport on account of continued negative trends in the vitamin category, the timing of the Easter holiday and unfavorable weather conditions in January. However, the addition of 67 new company-owned stores partially offset the revenue decline at the segment.

Revenues from the manufacturing/wholesale segment (excluding intersegment revenues) improved 3.5% to $57.5 million.

Margin

Gross profit deteriorated 5.4% in the reported quarter to $235.8 million. Consequently, gross margin contracted 130 basis points (bps) to 36.9%, owing to lower domestic retail product margin rate – a result of the expiring product and occupancy expense de-leverage associated with negative same-store sales.

Selling and administrative expenses grew 2.4% to $143.1 million. Consequently, adjusted operating margin deteriorated 220 bps to 13.9% during the quarter, owing to higher adjusted operating expenses.

Financial Position

GNC Holdings exited the reported quarter with cash and cash equivalents of $61 million, compared with $56.5 million at the end of 2015. As of Mar 31, 2016, the company generated cash of $142.3 million from operating activities, compared with $116.9 million a year ago.

During the first quarter, management bought back 7.6 million shares worth roughly $218.9 million (of this $17.9 million was settled in Apr 2016). Meanwhile, as of Mar 31, 2016, $208.0 million worth of shares are available for repurchase. The company also paid $14.3 million in cash dividends on its common stock in the quarter. Also, the company generated free cash flow of $132.1 million, reflecting a year-over-year improvement of 20%.

Moreover, during the first-quarter earnings release, GNC Holdings declared a cash dividend of 20 cents per share of its common stock for the second quarter of 2016; payable on or about Jun 24, 2016 to stockholders of record at the close of business as on Jun 10, 2016.

2016 Outlook

Assuming that the lower sales trend will continue in the remaining quarters of 2016, GNC Holdings has slashed its bottom-line projection for 2016. The company currently expects to post adjusted EPS in the range of $2.80–$2.90 for full-year 2016, compared with the previous guided range of $3.15–$3.35 (excluding the net gain from corporate to franchise store conversions). The current Zacks Consensus Estimate for 2016 EPS is pegged at $3.23, above the company’s guidance.

For the second quarter of 2016, the company expects to record a pre-tax refranchising gain of approximately $20 million, which includes $17 million related to the sale of 84 stores to Sun Holdings (a new franchise partner for GNC). This refranchising gain is excluded from the guidance provided above.

Our Take

2016 started off on a disappointing note for GNC Holdings, with its first-quarter results squarely missing the Zacks Consensus Estimate. Moreover, the company’s failure to maintain the previous quarter’s rebound in terms of positive domestic company-owned same-store sales, concerns us. The first-quarter segmental performance was also disappointing, particularly as far as the retail and franchise segments are concerned.  

On the other hand, despite the heavy investments in marketing, the returns were not up to management’s expectations. Further, the trimmed EPS outlook for 2016 dims hopes of a turnaround in the near term.

Despite such adversities, GNC Holdings managed to make some significant progress through the launch of key proprietary products, including expansion in categories like Lean Shake Burn ready-to-drink shakes, Total Lean vegan shakes, Total Lean CLA powders and Total Lean Advanced Diet Cleanse. Encouragingly, before the effect of cannibalization, GNC Holdings had been able to multiply sales of the new products, reaching revenues to $6 million in Mar 2016 from $3 million in Jan 2016.

Zacks Rank & Key Picks

Currently, GNC Holdings carries a Zacks Rank #3 (Hold). Better-ranked medical stocks are Baxter International Inc. BAX, Orthofix International N.V. OFIX and Boston Scientific Corp. BSX. While Baxter and Orthofix sport a Zacks Rank #1 (Strong Buy), Boston Scientific carries a Zacks Rank #2 (Buy).

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