Sales flat at GNC

Sales flat at GNC

Weak Q2 results reflect widespread retail traffic challenges and a slower industry growth rate, compounded by GNC's increased dependence on bundled-product promos and a lack of third-party product innovation.

GNC Holdings Inc. (NYSE: GNC), a leading global specialty retailer of health and wellness products, today reported its financial results for the quarter and year-to-date period ended June 30, 2014.

Second quarter performance
For the second quarter of 2014, the Company reported consolidated revenue of $675.2 million, a decrease of 0.2 percent as compared to consolidated revenue of $676.3 million for the second quarter of 2013. Revenue increased in the Company's retail segment by 0.6 percent. Revenue decreased in the Company's franchise and manufacturing segments, by 0.4 percent and 5.8 percent, respectively.

Same store sales as measured on a product only basis decreased 4.0 percent in domestic company-owned stores (including GNC.com sales) in the second quarter of 2014, as compared to a 6.8 percent increase in the second quarter of 2013. Adjusting for the impact of the Easter shift, same store sales as measured on a product only basis decreased approximately 3.3 percent in domestic company-owned stores (including GNC.com sales) in the second quarter of 2014. Including the sales of Gold Cards—which the Company offered to customers for no charge during the Member Pricing launch in May and June 2013—same store sales decreased 1.7 percent in domestic company-owned stores (including GNC.com sales) in the second quarter of 2014. In domestic franchise locations, same store sales decreased 2.7 percent in the second quarter of 2014.

For the second quarter of 2014, the Company reported net income of $69.9 million, compared to $71.7 million for the second quarter of 2013. Diluted earnings per share were $0.77 for the second quarter of 2014, a 5.5 percent increase over diluted earnings per share of$0.73 for the second quarter of 2013.

Joe Fortunato, chairman, president and CEO, said, "Our second quarter results reflect a difficult environment with widespread retail traffic challenges, a slower industry growth rate, and a tough anniversary of our very successful chain-wide Member Pricing launch. These pressures were compounded by our increased dependence on bundled-product promotions and a lack of third-party product innovation. To address this we will continue to drive marketing through the launch of our dunnhumby efforts this quarter, and transition of our Beat Average campaign from branding to an emphasis on GNC's superior products. We will also focus squarely on improving our overall positioning with more exclusive vendor relationships, streamlined pricing and event-driven promotions, the combination of which we expect will correspond to an elevated product value position. We expect to see progress on these efforts as the year progresses."

Second quarter segment operating performance
For the second quarter of 2014, retail segment revenue grew 0.6 percent to $505.5 million, compared to $502.5 million for the second quarter of 2013, driven primarily by growth in our e-commerce businesses (including GNC.com, Lucky Vitamin.com, and Discount-Supplements.co.uk), the addition of 149 net new company owned GNC stores since the end of the second quarter of 2013, and 9 Health Store locations in Ireland acquired in April 2014. These gains were partially offset by negative same store sales, and approximately $2 million due to the exchange rate trend of the Canadian dollar. Operating income decreased by 5.9 percent, from $100.3 million to $94.4 million, and was 18.7 percent of segment revenue for the second quarter of 2014, compared to 20.0 percent for the second quarter 2013. Operating income was negatively impacted primarily by lower Gold Card revenue recognition related to the Member Pricing rollout in 2013, higher advertising spend corresponding with the Company's Beat Average campaign launch, and expense deleverage associated with negative same store sales.

For the second quarter of 2014, franchise segment revenue declined 0.4 percent to $110.1 million, compared to $110.6 million for the second quarter of 2013. Operating income increased 12.2 percent, from $36.7 million to $41.1 million, and was 37.3 percent of segment revenue for the second quarter of 2014, compared to 33.1 percent for the second quarter of 2013. Second quarter 2014 operating income includes the conversion of 9 company owned stores to franchise stores. The increase in operating income percentage was driven primarily by higher gross profit margin and a $3.3 million gain from these conversions.

For the second quarter of 2014, manufacturing/wholesale segment revenue, excluding intersegment revenue, declined 5.8 percent to $59.6 million, compared to $63.2 million for the second quarter of 2013. The year-over-year decline was due primarily to lower purchases by one of our wholesale partners. Operating income decreased 10.1 percent, from $25.5 million to $22.9 million, and was 38.5 percent of segment revenue for the second quarter of 2014, compared to 40.3 percent for the second quarter of 2013. The decrease in operating income percentage was driven primarily by a lower mix of proprietary product sales.

Consolidated gross profit as a percent of sales was 38.3 percent in the second quarter of 2014 as compared to 37.8 percent in the second quarter of 2013, reflecting less promotional activity as we anniversaried the Member Pricing launch in last year's second quarter. Total operating income for the second quarter of 2014 was $121.1 million, as compared to $123.7 million for the second quarter of 2013. Second quarter 2014 operating income includes a $3.3 million gain associated with the conversion of 9 company owned stores to franchise stores.

Year-to-date performance
For first six months of 2014, the Company reported consolidated revenue of $1,352.5 million, an increase of 0.9 percent over consolidated revenue of $1,341.0 million for the first six months of 2013. Revenue increased in the Company's retail segment by 1.9 percent. Revenue decreased in the Company's franchise and manufacturing segments, by 0.9 percent and 4.0 percent respectively.

For first six months of 2014, the Company reported net income of $139.8 million, compared to $144.3 million for the first six months of 2013. Diluted earnings per share were $1.52 for first six months of 2014, a 4.1 percent increase over 2013 results.

For the first six months of 2014, the Company opened 63 net new domestic company-owned stores, 52 net new international franchise locations, 38 net new domestic franchise locations, 17 net new Rite Aid franchise store-within-a-store locations, 9 new company-owned stores in Canada and acquired 9 The Health Store locations in Ireland. The Company now has 8,781 store locations worldwide.

For the first six months of 2014, the Company generated net cash from operating activities of $153.3 million, incurred capital expenditures of $36.1 million, repurchased $190.2 million in common stock, paid $29.0 million in cash dividends on our common stock, and used $6.4 million for the acquisition of The Health Store. The Company generated $116.9 million in free cash flow (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions) and at June 30, 2014, the Company's cash balance was $118.5 million.

Capital structure
The Company's Board of Directors declared a cash dividend of $0.16 per share of its common stock for the third quarter of 2014. The dividend will be payable on or about September 26, 2014 to stockholders of record at the close of business on September 12, 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.

The Company has $250.7 million remaining on its previously authorized $500 million share repurchase authorization.

At the end of the second quarter of 2014, diluted shares outstanding were approximately 90.3 million.

Current 2014 outlook
The Company's current 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.

Following is the Company's current outlook for 2014, which is being updated from the previous outlook provided on May 6, 2014: consolidated earnings per diluted share ("EPS") of approximately $2.85 for the full year 2014, or approximately equal to 2013 Adjusted EPS of $2.85.

Key assumptions underlying the full year EPS guidance are as follows:

  • Consolidated revenue is expected to be approximately flat. This is based on achieving a domestic company-owned same store sales result—including the impact of GNC.com—of a mid-single decrease for the remainder of 2014. For the third quarter of 2014, which is on a product only basis, the year-over-year comparison is more challenging as we anniversary 2013's Member Pricing launch.
  • Continued regulatory and macro-economic challenges in our international franchise business.
  • Share repurchase activity completed through the second quarter of 2014.

 

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