GNC goes public (again)

GNC goes public (again)

GNC's IPO proceeds of nearly $240 million go to easing heavy debt load, and its plans for store expansions may help company diversify product lines and decrease employee turnover.


The advisors of Ares Management and The Ontario Teacher's Pension Plan breathed a sigh of relief on April 1, 2010, when GNC finally went public. After two abandoned IPOs by Apollo Management, GNC's previous owners, and having failed to reach a merger agreement with potential Chinese buyer Bright Food, the IPO seemed ill-fated and last-ditch. However, last week,GNC issued 22.5 million shares, at $16 a pop, and raised $360 million in equity. Net proceeds of nearly $240 million will go towards reducing GNC's heavy load of $1.3 billion in long term debt. Most of this debt was accrued during leveraged buyouts as control of the company constantly changed hands. Hopefully repaying some of the debt will free up resources, enabling the company to focus on their future rather than the aggressively financed deals of the past.

The company appears to have done some introspection, and is taking some old advice. GNC's ex-CEO, Greg Horn—who saw sales increase by $1.1 billion during his tenure in management—left the company with a vision. Horn saw the future in building larger retail stores to help the company remain competitive and grow the market, via a broader product offering, economies of scale and better employee knowledge and satisfaction. Now under the leadership of Joe Fortunato and Beth Kaplan, the company revealed in its 2010 annual report that it will test new 2,000 to 3,000 square foot retail store outlets, nearly twice the size of current GNC stores.

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In the past, smaller stores made it difficult for the retailer to remain competitive with supermarkets, pharmacies, and even retail companies such as Sephora, which is now luring women away from GNC with promises of beauty supplements alongside make-up, hair and skincare products. GNC's larger stores will enable the company to carry products beside supplements to provide customers with a fuller shopping experience. However, GNC needs to incorporate innovative products to entice customers and differentiate them from competitors like Sephora. If GNC introduces more commodity-like products, it will simply be competing with more experienced retailers while selling products with lower margins.

At the same time, doubling its retail space going forward may help GNC improve employee satisfaction and retention. In the past, small retail spaces supported only one employee, isolating them in a non-social environment and leading to greater employee turnover. Furthermore, with GNC's gold card program, most sales occur during the first seven days of the month when gold card members get 20% off, leaving GNC employees to become bored during the month's remaining quiet days. Increasing store size will hopefully lead to more sales and an increased number of employees per store.

Despite the positive momentum of the IPO and store expansion, GNC still has a significant debt burden. In addition, the company focuses the majority of its marketing on just 26% of its customer base, men between the ages of 19 and 29. This target market demographic happens to be shrinking as baby boomers age. GNC would benefit from focusing less on its Mega Men, Ultra Mega and Pro performance products and more on its WELLbeING and Longevity lines. This is especially true given the growth of cafes in gyms and the increased availability of muscle building supplements through strategically placed retailers.

Overall, GNC seems to be taking positive actions, but the company may struggle to compete given its huge debt load. Although the annual report hints at increasing store sizes and a more diverse product offering, GNC needs to use the extra retail space productively or the company will simply be taking on additional costs.

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