GNC Holdings Inc. (NYSE: GNC), a leading global specialty retailer of health and wellness products, reported its financial results for the quarter and year-to-date period ended Dec. 31, 2013.
Fourth quarter performance
For the fourth quarter of 2013, the Company reported consolidated revenue of $613.7 million, an increase of 8.6 percent over consolidated revenue of $565.0 million for the fourth quarter of 2012. Revenue increased in each of the Company's segments: retail by 7.8 percent, franchise by 9.4 percent, and manufacturing/wholesale by 13.3 percent.
Same store sales increased 5.0 percent in domestic company-owned stores (including GNC.com sales) in the fourth quarter of 2013 representing the Company's 34th consecutive quarter of positive same store sales growth. In domestic franchise locations, same store sales increased 3.3 percent.
For the fourth quarter of 2013, the Company reported GAAP net income of $47.7 million, compared to $47.4 million for the fourth quarter of 2012. GAAP net income for the fourth quarter of 2013 included non-recurring expenses totaling $12.2 million associated with the Transportation Network Transition, and $8.3 million associated with the Term Loan Transactions. Excluding these non-recurring expenses and the related tax impact, adjusted net income for the fourth quarter of 2013 increased $10.8 million to $60.6 million, 21.7 percent over adjusted net income of $49.8 million for the fourth quarter of 2012. Adjusted diluted earnings per share were $0.63 for the fourth quarter of 2013, a 26.0 percent increase over adjusted diluted earnings per share of $0.50 for the fourth quarter of 2012.
In the fourth quarter of 2013, the Company's effective tax rate was 28.5 percent, reflecting a total of $4.7 million in net discrete tax benefits related primarily to the reduction of certain deferred tax liabilities and reserves.
Joe Fortunato, chairman, president and CEO, said, "Despite the challenging retail environment, our business performed well, generating solid top- and bottom-line growth in the quarter. This culminated in a strong year where we delivered a 22.3 percent increase in adjusted earnings per share and returned more than $350 million to shareholders, all the while making significant investments in the business which allows us to maintain growth momentum and to capitalize on our industry growth, optimize our customer base, and position the Company for new growth opportunities."
The Company has reached a master franchise agreement with Rusvit for its market entry into Russia. Rusvit—headquartered in Moscow—is lead by founder and Chairman Alex Kovaler, who has been instrumental in building successful consumer businesses in Russia, including Wendy's, Nathan's and RC Cola. Beginning in 2014, a GNC presence will be established initially in Moscow with stores, kiosks and store-within-a-store locations with premier retailers.
Fourth quarter segment operating performance
For the fourth quarter of 2013, retail segment revenue grew 7.8 percent to $443.5 million, compared to $411.5 million for the fourth quarter of 2012, driven primarily by a 5.0 percent same store sales increase, the addition of $6.6 million from DiscountSupplements.com (UK)—which was acquired on Oct. 2, 2013—and 154 net new stores since the end of the fourth quarter of 2012. Operating income decreased by 1.0 percent, from $69.4 million to $68.6 million, and was 15.5 percent of segment revenue for the fourth quarter 2013, compared to 16.9 percent for the fourth quarter of 2012. Operating income was negatively impacted primarily by planned gross product margin investments and lower Gold Card revenue recognition related to the Member Pricing rollout, and incremental promotions initiated to effectively react to the challenging retail environment in November and December.
For the fourth quarter of 2013, franchise segment revenue grew 9.4 percent to $103.1 million, compared to $94.3 million for the fourth quarter of 2012, driven primarily by increased wholesale product sales and royalty income in both domestic and international franchise operations. Operating income increased 17.7 percent, from $33.4 million to $39.3 million, and was 38.1 percent of segment revenue for the fourth quarter of 2013, compared to 35.4 percent for the fourth quarter of 2012. The increase in operating income percentage was driven by higher gross profit margin.
For the fourth quarter of 2013, manufacturing/wholesale segment revenue, excluding intersegment revenue, increased 13.3 percent to $67.1 million, compared to $59.2 million for the fourth quarter of 2012. Operating income increased 24.8 percent from $22.3 million to $27.8 million and was 41.5 percent of segment revenue for the fourth quarter of 2013 compared to 37.7 percent for the fourth quarter of 2012. The increase in operating income percentage was driven primarily by a higher mix of proprietary product sales.
Total operating income for the fourth quarter of 2013 was $86.3 million, as compared to $87.5 million for the fourth quarter of 2012. Fourth quarter 2013 operating income included $12.2 million in costs associated with the Transportation Network Transition.
Full year performance
For full year 2013, the Company reported consolidated revenue of $2,630.3 million, an increase of 8.2 percent over consolidated revenue of $2,430.0 million for the full year 2012. Revenue increased in each of the Company's segments: retail and franchise both by 7.9 percent, and manufacturing/wholesale by 11.1 percent.
For the full year 2013, the Company reported GAAP net income of $265.0 million, compared to $240.2 million for the full year 2012. The Company reported adjusted net income of $278.0 million for the full year 2013, 10.6 percent of revenue and a 13.8 percent increase compared to $244.2 million for the full year 2012, after adjusting for expenses related to the Offerings, Term Loan Transactions and Transportation Network Transition. Adjusted diluted earnings per share were $2.85 for the full year 2013, a 22.3 percent increase over 2012 adjusted results of $2.33.
For the full year 2013, the Company opened 149 net new domestic company-owned stores, 192 net new international franchise locations, 63 net new domestic franchise locations, 34 net new Rite Aid franchise store-within-a-store locations, five net new company-owned stores in Canada, and two new company-owned stores in China. The Company now operates 8,593 stores worldwide.
For the full year 2013, the Company generated net cash from operating activities of $238.1 million, increased its term loan by $252.5 million, incurred capital expenditures of $50.2 million, repurchased $310.6 million in common stock, paid $57.4 million in cash dividends on our common stock and used $27.6 million for the acquisition of Discount Supplements. The Company generated $186.3 million in free cash flow (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions) and at Dec. 31, 2013, the Company's cash balance was $226.2 million.
The Company's Board of Directors declared a cash dividend of $0.16 per share of its common stock for the first quarter of 2014, representing a 6.7 percent increase over its prior quarterly dividend. The dividend will be payable on or about March 28, 2014 to stockholders of record at the close of business on March 14, 2014. The Company currently intends to pay regular quarterly dividends; however, the declaration of such future dividends is subject to the final determination of the Company's Board of Directors.
In the fourth quarter of 2013, the Company repurchased $72.2 million in shares of its common stock. The Company has $440.7 million remaining on its previously authorized $500 million share repurchase authorization. Additional details of the program can be found in the section entitled Forward-Looking Statements Involving Known and Unknown Risks and Uncertainties.
At the end of 2013, diluted shares outstanding were approximately 94.8 million.
Current 2014 outlook
The Company's initial outlook for 2014 is based on current expectations and includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Below is the Company's initial outlook for 2014:
- Consolidated earnings per diluted share ("EPS") of approximately $3.18 - $3.24 for the full year 2014, a 12 percent to 14 percent increase over 2013 Adjusted EPS of $2.85.
- A high single digit increase in consolidated revenue for the full year 2014. This is based on achieving a domestic company-owned same store sales result—including the impact of GNC.com—of flat for the first quarter of 2014 reflecting a very challenging January and February retail environment, and a mid-single-digit increase for the remainder of 2014.
- Tax rate of approximately 36.5 percent to 37 percent for the full year 2014.
- Capital expenditures of approximately $70 million for the full year 2014, including expenditures for the Company's previously announced fourth distribution center.
- Depreciation and amortization of approximately $56 million, combined, for the full year 2014.
- New store expectations for the full year 2014: approximately 200 total net new domestic retail locations (including both company owned and franchised stores), approximately 200 to 225 net new international locations, and approximately 45 net new GNC-Rite Aid store-within-a-store locations.