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GNC Holdings (GNC) Misses Q4 Earnings, Revenues Decline Y/Y

Zacks

GNC Holdings Inc. GNC reported fourth-quarter 2016 adjusted earnings per share (EPS) of 37 cents, reflecting year-over-year deterioration of 88.1%. The quarter’s adjusted EPS also missed the Zacks Consensus Estimate by 81.1%.

Including one-time items, the company’s reported loss was $6.35 per share, wider than the loss of $4.12 in the prior-year quarter.

Full-year 2016 adjusted earnings came in at $2.15 per share which also lagged the Zacks Consensus Estimate of $2.46 by 12.6%.

GNC Holdings, Inc. Price, Consensus and EPS Surprise


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

Total Revenue

Revenues during the reported quarter dropped 9.4% year over year to $569.9 million. The figure however was almost in line with the Zacks Consensus Estimate of $570 million.

The decline in revenue can be attributed to lower sales at the company’s U.S. & Canada international and manufacturing/wholesale segments.

Same-store sales dropped 12% in domestic company-owned stores (including GNC.com sales) during the fourth quarter; while the same fell 6% at domestic franchise locations.

Full-year 2016 revenues were $2.54 billion, also in line with the Zacks Consensus Estimate.

Segment in Details

Starting fourth-quarter 2016, GNC Holdings has been reporting its operations under three segments: U.S. & Canada – including company-owned stores in the U.S., Puerto Rico and Canada, franchise stores in the U.S. and e-commerce; International – including franchise locations in approximately 50 countries, The Health Store and China operations, and Manufacturing/Wholesale – comprising manufactured product 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 8% to $472.6 million, primarily because of a decline in same store sales in both company-owned and franchise stores. Domestic franchise revenues however rose 2.7% to $72.6 million, mainly due to a net increase in the number of franchise stores from 1,084 as of Dec 31, 2015 to 1,178 at Dec 31, 2016. This was partially offset by the impact of negative retail same stores sales of 6.0%. Weakness in the food and protein categories as well as significant decrease in e-commerce sales due to better aligning web promotions to the company's stores, largely affected this segment in the fourth quarter.

Revenues at the international segment declined 18.5% to $39.7 million despite an increase of 5.1% in international franchisees same store sales, at constant exchange rate. Revenues from franchisees decreased by $9.4 million from the prior-year quarter primarily related to challenges in several markets as well as a net decrease in the number of franchise stores from 2,095 as on Dec 31, 2015 to 1,973 as on Dec 31, 2016.

Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 7.4% to $57.7 million. Within this segment, third-party contract manufacturing sales increased 8.4% to $33.8 million, which was partially offset by a 23.3% decline in wholesale sales to $24.7 million and a 23.7% plunge in intersegment sales to $46.2 million.

Margin

Gross profit deteriorated 25.4% in the reported quarter to $170.2 million. Consequently, gross margin contracted 642 basis points (bps) to 29.8% owing to lower sales and product margins at the company’s GNC.com business and deleverage of occupancy costs as a result of negative same-store sales.

Selling, general and administrative expenses rose 5.1% to $148.4 million. However, adjusted operating margin deteriorated 857 bps to 4.5% owing to a wider decline in gross profit.

Financial Position

GNC Holdings exited fiscal 2016 with cash and cash equivalents of $34.4 million, down from $56.4 million in the prior year. As of Dec 31, 2016, the company used cash of $22.4 million in operating activities, compared with $45.6 million in the prior year.

Further, the company generated free cash flow of $185.7 million for the full-year 2016, reflecting a decline of 39.8% from the prior-year.

During 2016, management repurchased 7.9 million shares of the company's stock for $229.2 million. No shares were repurchased by the company under its share buy-back program in the fourth quarter of 2016. The remaining $197.8 million, authorized under the current program, is not expected to be utilized during fiscal 2017.

Outlook Related Update: ‘One New GNC’ Plan

Post the third-quarter debacle, management announced several strategies to deliver improved performance in the near future. It plans to revamp its existing business model. The model, dubbed as the ‘One New GNC’, would include the lower single product pricing policy, a new product pipeline, free and paid loyalty program, new customer friendly technology which includes terminals, tablets, Wi-Fi and a new mobile app that improves and personalizes the shopping experience. By 2017, more clarity on the entire matter is expected. Management has therefore not provided any guidance for 2017.

Our Take

GNC Holdings exited fiscal 2016 on a dismal note as earnings failed to meet the Zacks Consensus Estimate. During the fourth quarter, the company saw top-line sluggishness from its old model which is characterized by complex non-competitive pricing and ineffective loyalty program.

Not only did the company lag in the domestic market, its overseas operating results were quite disappointing. The company delivered dismal performances across all of its segments. The significant decline in the company’s share price during the fourth quarter, coupled with the short-term expected decline in the operational results primarily due to the strategic changes around One New GNC. However, management’s latest plan for operational improvement raises optimism.

Zacks Rank & Key Picks

GNC Holdings currently has a Zacks Rank #3 (Hold). Better-ranked medical stocks are Glaukos Corporation GKOS, Cardiovascular Systems CSII and Neogen Corp. NEOG. Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Glaukos gained over 100% in the last one year in comparison to the S&P 500’s gain of 22.4%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year in comparison to the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 34.6% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth rate of 16.7% for the next five years compared to the industry average of 15.2%.

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