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Edited Transcript of GNC earnings conference call or presentation 22-Jul-19 12:30pm GMT

Q2 2019 GNC Holdings Inc Earnings Call

PITTSBURGH Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of GNC Holdings Inc earnings conference call or presentation Monday, July 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth A. Martindale

GNC Holdings, Inc. - Chairman & CEO

* Matt Milanovich

GNC Holdings, Inc. - Senior Director of IR, Analysis & Strategy

* Tricia K. Tolivar

GNC Holdings, Inc. - Executive VP & CFO

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Conference Call Participants

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* Damian Andrew Witkowski

G. Research, LLC - Research Analyst

* Hale Holden

Barclays Bank PLC, Research Division - MD

* Robert William Summers

The Buckingham Research Group Incorporated - Research Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the GNC Holdings, Inc. Second Quarter 2019 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Matt Milanovich, Head of Investor Relations. Please go ahead, sir.

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Matt Milanovich, GNC Holdings, Inc. - Senior Director of IR, Analysis & Strategy [2]

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Good morning, and thank you for joining us for GNC's Second Quarter 2019 Conference Call. I would like to remind everyone that during this conference call, GNC management will make certain forward-looking statements about its outlook that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believe, plan, intends, expects, anticipate or similar expressions.

Forward-looking statements are protected by the safe harbor contained in the Private Securities Litigation Reform Act of 1995. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstance that are difficult to predict and many of which are outside of the company's control. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in GNC's filings with the SEC. GNC is making these statements as of July 22, 2019, and assumes no obligation to publicly update or revise any forward-looking statements.

In addition to the GAAP results, GNC will provide certain non-GAAP financial measures. GNC's earnings press release for the second quarter of 2019 can be found under the news release link on the Investor Relations page of the company's website at www.gnc.com. The tables attached to that earnings press release include reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

With that, I'll turn it over to our Chairman and CEO, Ken Martindale.

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [3]

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Thanks, Matt. Good morning, everyone, and thanks for joining us. As you know, the GNC team is heavily focused on stabilizing and strengthening our core U.S. business. We are pursuing a deliberate thoughtful plan and are pleased by our overall progress. As we continue to reposition the business, we are learning a great deal about the consumer and continue test ways to drive sales growth and optimize our profitability.

Early in the second quarter, we made some adjustments to some of our promotional offers and our marketing vehicles, and we saw a direct negative impact to the top line. We quickly course corrected and saw sales strengthen throughout the remainder of the quarter. Included in that course correction was an increased focus on our PRO customers. We are encouraged by the level of engagement our customers have with our loyalty programs as we saw a very strong PRO week in June helping to offset the softness in retail comps earlier in the quarter.

In addition, the negative trends in traffic that we've seen in mall stores over the past several years has accelerated during the past few quarters putting additional pressure on comps. As part of our work to optimize our store footprint, we're increasing our focus on mall locations, and as you know, we have a great deal of flexibility to take further action here due to the short lease terms we have across our store portfolio. It's important to note that our strip center locations are relatively stable from a comparable sales perspective. As a reminder, 61% of our existing store base is located in strip centers while only 28% reside in malls.

In response to the challenges we mentioned last quarter in our Amazon business, which contributed to softness in online sales early in the quarter, our team has been working closely with their counterparts at Amazon to identify and implement sales-driving initiatives. This partnership has and continues to strengthen, and we're pleased with the progress we're making here.

On the GNC.com front, we made a decision not to anniversary several one-time promotions that we ran a year ago, which was the right thing to do from a probability perspective but made for difficult sales comparison. Coming out of the quarter, the online business began to gain momentum, and we expect e-commerce comps to improve in the back half of the year.

Even with the top line softness we encountered in the second quarter, we're very encouraged by the traction we're getting in the U.S. business and for the second quarter in a row, operating income was up year-over-year in the U.S., Canada segments. This stabilization in the U.S. operating income is a result of ongoing initiatives that our team has been implementing during the past year. We remain on pace to achieve our 2019 and 2020 cost savings targets, and the results from our store optimization effort continue to meet our expectations. As a result of the current mall traffic trends, it's likely that we will end up closer to the top end of our original optimization estimate of 700 to 900 store closures.

Moving to our International business. As we mentioned last quarter, the year-over-year revenue comparison in the International was more difficult in Q2 than Q1, but we remain encouraged with the overall business results. International franchise stores, which make up the majority of our global business, grew by 2% in the second quarter versus last year. We continue to gain traction in India, have delivered our initial product shipments to our Japanese and Australian partners and just signed a new partnership agreement that will give us a presence in the $3 billion Brazilian market.

As you know, we recently launched our joint venture with Harbin Pharmaceutical Group, which will expand our presence in China. This is a significant transition for us, and while it's taking a bit longer than expected, we're happy with our progress and continue to feel good about our opportunities in this $25 billion market.

Consumer demands and expectations are changing rapidly today. What they want, need, expect and value have changed. More than ever before, brands need to be where the customers are and when the customers are ready to buy. To effectively do this, we need a deep understanding of the consumer and we need to develop new competences and strategies to serve them. One of the ways that we're accomplishing this is by developing new strategic partners in our wholesale channel. These relationships provide us opportunities to offer customized product selections to targeted customer segments with like-minded retail partners. With that in mind, we are finding new channels for GNC products and new ways to put our brands in front of consumers that wouldn't routinely shop it at GNC store.

Last fall, we launched a partnership with DICK'S Sporting Goods by offering approximately 50 GNC-branded sports fitness products in 10 pilot stores and expanded it to an additional 35 stores by May. This is an interesting opportunity to leverage 2 strong brands to meet a specific consumer need, and we're optimistic about the opportunity ahead.

We've also developed a partnership with Hudson News to serve consumers' growing demand for quick, convenient travel needs. Hudson News has nearly 1,000 stores in airports, commuter terminals and tourist destinations, and as of today we are selling GNC-branded products in 250 of them. The partnership, which has grown quickly since we launched it in August of last year, puts our brand and our products in front of consumers who want to sleep better, boost their energy or manage their wellness while traveling. And it also gives us the opportunity to convert these customers into GNC loyalists.

Our work with new channel partners like DICK's and Hudson News as well as long-term partners like Rite Aid and Sam's Club helps ensure that GNC products are available when and where consumers want to shop. But we also recognize that increasingly consumers want to shop online, use their mobile devices to engage with brands and value digital personalized experiences. Our myGNC Rewards and PRO Access loyalty membership base provide the foundation for all of our personalization efforts. Of the 18 million members in our program, roughly 10 million have actively shopped with us during the past 12 months. This very rich database puts us closer to customers, helps us understand how they shop and what is important to them. It also provides us with the tremendous platform to deliver personalized offers, education and digital experiences.

We recently launched additional personalization tools via new media channels such as mobile app notifications and e-receipts. In Q3, we will further expand into personalized text messaging. And by the first quarter of next year, we will complete the implementation of our new order management system that will provide customers with convenient and seamless multichannel experiences that they're looking for.

Our team is in the midst of building a robust compelling digital ecosystem that gives customers exceptional, personalized experiences however, wherever and whenever they want to engage with us. And we're excited that Ryan Ostrom has joined GNC as our new Chief Brand Officer to help us in this effort. His broad e-commerce, digital and brand experience will be critical in developing a sharper focus on these rapidly changing customers so that we can meet their needs, serve their aspirations and give them consistently exceptional experiences.

There is still a great deal of work ahead as we continue to reposition GNC for the future, but we're clear-eyed about the challenges we face. We have a solid plan to stabilize and grow the business, and I feel great about the team that we have to make it happen.

Now I'll turn it over to Tricia to provide some additional details about the quarter.

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [4]

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Thanks, Ken, and good morning, everyone. Our quarterly adjusted EBITDA of $62 million was down 3% over the second quarter of last year driven by lower sales from the transfer of the Nutra Manufacturing and China businesses to their newly formed joint ventures.

For the second quarter in a row, operating income from our largest operating segment, U.S. and Canada, increased compared to the corresponding period of 2018. Second quarter operating income in this segment was $49 million, up 8% over the second quarter of 2018, driven by lower occupancy costs and salaries and benefits as a result of our store optimization and cost reduction initiatives. These initiatives help drive improvements in operating income margin of 150 basis points in this key segment from 8.8% in 2018 to 10.3% in 2019.

Second quarter consolidated revenue was $534 million compared with $618 million in the prior year. The decrease is primarily attributable to the transfer of the Nutra Manufacturing and China businesses to their newly formed joint ventures, negative same-store sales and the closure of company-owned stores from our store operation -- store optimization initiative.

Second quarter same-store sales, including e-commerce, were down 4.6%. E-commerce sales were 8.1% of U.S. and Canada revenue in the current quarter compared with 8.3% in the prior year quarter.

Revenue from domestic franchise locations was down nearly $4 million driven by a down 1.8% comp. As Ken mentioned earlier, we faced challenges early in the quarter in terms of comps for both retail and e-comm. However, we saw improvement sequentially throughout the quarter, which is carrying into Q3.

Revenue from our International business, excluding China, was up 1.3%, driven by strong performance from franchisees in the Middle East and Asia, partially offset by a timing shift in the prior year that I mentioned on the prior call. Separately, as mentioned previously, the transfer of the China business to the joint venture resulted in an expected decrease in revenue. Note that the China-related sales were $23 million for the second half of 2018.

Manufacturing and wholesale revenues, excluding intersegment sales, decreased $98.7 million primarily due to the asset transfer to the newly formed manufacturing JV as a result of the transaction with International Vitamin Corporation on March 1 of this year.

As a reminder, the transaction impact revenues as follows: in the U.S. and Canada segment, International segment and Rite Aid, PetSmart, Sam's Club portion of the wholesale business, there will be no change in revenue. The revenues generated by the manufacturing business related to other contract manufacturing and formerly included as part of GNC's wholesale revenue will now be recognized by the newly formed joint venture and no revenues will be recorded by GNC. 2018 sales previously included in the manufacturing and wholesale segment, excluding intersegment sales, which are now part of the manufacturing joint venture, were approximately $31 million in Q2 of 2018.

As mentioned on our prior call, as a result of the establishment of this joint venture, we expect to realize a $25 million to $30 million annual reduction to EBITDA reflected in our manufacturing and wholesale segment. However, we expect this to be offset by $10 million to $15 million in earnings from the JV.

Second quarter gross profit was 36.3% of sales compared with 33.6% in the prior year. The improvement was primarily driven by occupancy savings and increased proportion of sales from GNC branded products. As mentioned on the prior call, gross profit will be negatively impacted by 80 to 100 basis points in Q3 going forward as a result of the transfer of assets to the newly formed manufacturing JV in March of 2019. Further, gross profit typically declines in the back half of the year largely due to seasonality.

At 26.9% of sales, second quarter SG&A was up 128 basis points from last year, primarily driven by deleverage in salaries and benefits, increased commissions and higher consulting costs associated with our cost savings initiatives, partially offset by more normalized marketing expense. SG&A dollars were down $14.7 million compared to the second quarter of 2018, and we continue to expect that SG&A will be down more than $30 million in 2019 driven by cost savings and store optimization initiatives. As a percentage of revenue, we expect SG&A to range from 26% to 28%.

Shifting back to the overall business, we expect consolidated gross profit to range from 32% to 34% for the remainder of the year with the reminder that the manufacturing joint venture and seasonality will have a larger negative impact in the back half of 2019.

We ended the quarter with $96 million in cash and an undrawn revolver. Year-to-date free cash flow increased $18 million to $59 million. The increase was driven by favorable working capital changes primarily due to an increase in accounts payable as a result of the company's cash management efforts and the increase in account payable related to the establishment of the manufacturing joint venture. We expect free cash flow for 2019 to range from $90 million to $100 million.

Finally, I'd like to take a moment to discuss our debt and the progress we continue to make with our capital structure. In the last year, we have established 2 joint ventures and issued preferred shares to our partner, Harbin. These 3 transactions have enabled us to reduce our debt by almost $400 million or 32% in the last 12 months. Additionally, during the second quarter, we reduced debt by an additional $34 million. Repurchasing convertible notes is part of our overall deleveraging strategy. Given the level of liquidity available and expected going forward as well, we were able to retire about $30 million in convertible debt for approximately $25 million. Selective repurchases at a discount to par is a prudent use of liquidity accretive to our stakeholders and consistent with our intention to ultimately fully refinance this debt. We will consider other alternatives with the remaining balance in the upcoming weeks and months.

I also want to point out that when we received the first $100 million from Harbin in 2018, we applied the debt reduction in such a way that it eliminated the requirement to make term loan amortization payments in the future. As it relates to our preferred shares, we expect to continue to pay the preferred share dividend in kind at a conversion price of $5.35 per share. The convertible preferred stock is also now included in diluted EPS and adjusted diluted EPS calculations on an as -- on an if-converted basis. However, we are pleased that despite monetizing these assets, we've been able to demonstrate both year-to-date EBITDA growth and increased free cash flows compared to the prior year while continuing to earn income from joint ventures, which is recorded below operating income.

As we look to the second half, we are encouraged by the results of our cost reduction initiatives and store optimization initiatives, which have helped to stabilize the bottom line of our core U.S. business and look forward to continuing to aggressively work to refinance our overall capital structure.

Later today, we will post a presentation outlining our company's go forward strategy. Focusing on improving our capital structure and driving improved returns to our shareholders continues to be our highest priority. As such, we plan to discuss these materials in one-on-one sessions with key lenders and investors in the coming days and weeks. We are excited about the progress we have made thus far to stabilize the core business and look forward to future growth opportunities.

With that, Simon, let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question over the phone comes from Bob Summers from Buckingham.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [2]

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Just a little more on the cadence of comps, if you could, I guess, dig a little more into that. It sounds like you said specifically, it strengthened sequentially, carried it into 3Q, I'd be curious if that's a positive number. And maybe, within that, talk about the categories that were strong and the ones that were weak. And then maybe just articulate why you tried to change sort of the go-to-market approach? What was the thought behind that? And what you learned?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [3]

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Yes, I'll start with that, Bob. First things first, kind of heading into the second quarter, we made a strategic switch with one of the providers, the marketing providers, service providers that we have, and there were some transitional issues as we worked through that process, and it took us a low while to identify exactly what was occurring. But we took some action, our partner took some action, and we've seen quite a bit of correction in June and it continues to strengthen in July. So we think we've gotten past that. It was the right decision to make. It's just we faced a few transition issues as we switched the providers. We mentioned the mall traffic deceleration. We're taking a deeper look at that. That's couple of quarter in now and it has not rebounded. So that specifically, we're looking at a bunch of tactical stuff that we can do in the short-term to try and drive a little bit additional traffic into those stores. But I think the real key here is, as you know, we've got pretty short lease triggers on many of these stores, and so we're going to take a closer look at the optimization model with all these mall stores and we may see a few more of those mall stores hitting that optimization model. E-comm was another issue, and we talked in last couple of quarters about some of the headwinds that we had with Amazon, our teams spent a lot of time with them over the last 6 months, put a lot of plans into place. And we feel pretty good about where that business is starting to head now. So we do think that, that is the strengthening that we're seeing in Amazon will continue, and GNC.com was really a one-time issue. There were some promotions that we ran last year when we looked at it. They just didn't make sense from a profitability perspective. And with a focus that we've got right now, I'm trying to improve the operating earnings in the U.S., Canada segment. We made the decision that we knew that there would be some headwinds from a comp perspective, that was the right thing to do for the business. So when you add those all up, that's really what put pressure on the quarter from a comp perspective.

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [4]

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Bob, regarding some of the factors driving the performance, we saw strong comps in performance supplements, which includes pre-workouts and largely driven by a lift in our Beyond RAW category, so there was strength there. Additionally, we're seeing strength in health and beauty. One of the new entrants there is a third-party exclusive partner, Alani Nu, that has items included in that category that are attracting a new customer to our store, meaning female customers that haven't been in before. And additionally in health and beauty included some male testosterone and other categories that generally perform well for us.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [5]

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Okay. And then just digging back into the comments around mall, I think it's the most specific commentary you had in a while and if I'm hearing you right in that the freestanding or sort of stripper flattish, let's call it. I mean back into the number where the comp decline is anywhere between, call it, 11% to 13%. You just made a comment that it sounds like that traffic -- that pattern has been in place for a couple of quarters now. I mean that's a group. Are those stores even EBITDA-positive?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [6]

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Bob, these stores are EBITDA-positive and their operating performance is quite consistent with the strip centers because they typically have larger volume, but certainly, it's something we want to watch. We're not seeing comps in the malls like you suggested. So there is a high single-digit negative -- mid- to high single-digit negative comp number, but it’s something that has shown a divergence from trends in the past 2 quarters and we're keeping a close eye on it. And luckily, our lease terms are short so we can take corrective actions pretty quickly.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [7]

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Okay. And then just real quick pivoting to the debt and the convert, and correct me if I'm wrong here, but I think the May 2020 pay down prior to whatever you did was $138 million and change. It sounds like that's now down to $130 million or sort of $108 to avoid the springing aspect of that. Is that right roughly?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [8]

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So we had 190 -- $189 million in converts and we've paid down approximately $30 million, bringing it down to about $159 million in converts outstanding, that are due in August of 2020 but will trigger a springer in May of 2020 if those balances are not brought down to $50 million or below. But keep in mind, we've got over $90 million of cash available in the balance sheet and $71 million to $81 million of availability under -- liquidity under our revolver. So we have more than enough cash to address them, but we'll evaluate opportunities and options between now and then in the process.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [9]

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So -- if I mean -- the cash flow is nice and liquidity seems good, I mean -- and seems like you were able to buy this at a discount, I mean why not do more?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [10]

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So we'll certainly continue to selectively evaluate opportunities and address the market over the next coming weeks and months.

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Operator [11]

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Our next question over the phone comes from Steph Wissink from Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [12]

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We wanted to unpack the gross margin a bit further, I know you talked about the occupancy leverage and some of the mix benefits, but your guidance doesn't imply a pretty significant drop off in the second half, I know there's some seasonality in there. But can you just walk us through potentially the bridge that you saw in the second quarter? And then what components of the strength you expect to fall away beyond the seasonality to get to that 32% to 34% for the full year?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [13]

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So the first thing I will call out is the impact of the manufacturing joint venture on gross profit itself. So in the third and fourth quarter, we anticipate and fully expect 80 to 100 basis points of deleverage as it relates to that transaction. So effectively, we were able to make more profit on those sales prior to the joint venture, and now that the joint venture is fully formed and we've sold through all the inventory that we purchased at historical prices, it will be a negative impact to gross margin. So that's the biggest component of it. The remainder there is driven by the seasonality in the business as we move forward. So I think the biggest call out is the margin impact related to the joint venture and then seasonality and then lastly, to a lesser extent, it will see a decline in occupancy benefit in the teams from a basis point perspective through the back half of the year as we had more closures in the back half of 2018. So there's less of an ability to show a continued occupancy reduction at the same magnitude as we did in the first half.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [14]

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Okay. That's extremely helpful. And is there anything that we need to take note of in the new lease accounting standards? I know you've been calling that out in your footnotes, anything with respect to occupancy benefit that we should know it in the back half with respect to that change in accounting?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [15]

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No, we adopt -- thanks, Steph. We adopted the standard at the beginning of the year. There was a positive impact as a result of the adoption and that will continue on an ongoing basis. But there's no changes that have taken place. There are no anomalies in the results that we've presented or expect in Q3 and Q4 related to that.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [16]

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Okay. Very helpful. And then last one is just on bringing in new talent to really lead the vision behind the brand or the collection of portfolio of brands. How should we think about the portability of some of your brand strategies and your digital asset investments across your retail and your wholesale businesses? Is that something that we should think about in the future as something you can leverage? Or do you really think about these 2 channels very distinctly and are building marketing and brand programs distinctly for the 2?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [17]

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It's a great question. From the day that I walked into this business, it appeared to me that the strength of not only the GNC brand but the product brands that we have was really under-leveraged. And we've been so busy working on a lot of the other issues that we haven't been able to spend as much time against that as we would have liked to. But bringing Ryan in to really take charge of our brand is going to make a big difference. We're also doing some things structurally to build out greater capabilities to manage these brands. We do look at it on a -- from a holistic perspective though. All of these different channels that we're building out work very well together. So when you think about it, our brand team is going to focus on working with both the U.S. corporate and franchise teams as well as the e-comm team as well as the International team and the wholesale team to try and find ways to leverage these brands across all those channels. So as Ryan gets more engaged, he's starting his fourth week, he's already gotten really deeply into this, we're pretty excited about the ability that we have to leverage these brands further.

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Operator [18]

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Our next question over the phone comes from Hale Holden from Barclays.

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Hale Holden, Barclays Bank PLC, Research Division - MD [19]

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Just quickly. Tricia, I heard you mention that you'd be at the upper end of the 700 to 900 store closure range, mostly related to mall closures or additional mall closures. I just want to -- on a pro forma basis, when you're done with this, what do you think your mall exposure will be?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [20]

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That's a great question. So I think it could be likely that we'll reduce our mall count by nearly half. So we've got a little over 800 malls today and over the long term, it could bring that closer to 400 to 500.

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Hale Holden, Barclays Bank PLC, Research Division - MD [21]

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And will you have additional cash cost from the second half of this year to exit more stores than -- or particularly upper end of that?

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Tricia K. Tolivar, GNC Holdings, Inc. - Executive VP & CFO [22]

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So keep in mind, the acceleration will happen over time. We'll be opportunistic in 2019, but we do not expect any additional increases in cost as the vast majority of these leases we exit at the end of the lease term and have minimal costs related to those activities.

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Operator [23]

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Our next question over the phone comes from Damian Witkowski from G. Research.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [24]

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Stepping back, looking at the industry, I know that there -- your same-store sales being negative. Can you just sort of put it in a backdrop of an industry? Are the categories where you're competing, are they still growing? And if so, who is taking majority of that share? Is it the mass channel or is it the online?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [25]

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Yes, Damian, I think depending on which category you're looking at, obviously, they are all growing at a different rates. But overall, the categories that we compete in are still fairly strong, both in the U.S. and globally. And I would tell you that nothing has really changed. We're seeing continued pressure obviously in mass. They've expanded the product selection that they have over the last couple of years. And so they are a more formidable force in any of the categories that we operate in. And clearly, there's a lot more going on in e-commerce, and it's one of the reasons that we are so focused on building out our digital ecosystem so that we can more effectively compete there. We're a bit behind the game right now, but we're more excited about the technology improvements that we're making internally to put us in a position to compete more effectively online. So it's pretty much the traditional guys that we've been talking about for the last few years. It's primarily e-comm and mass.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [26]

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Okay. And I mean your sense, does the mass channels still have a lot of shelf space that they want to allocate to this? I mean, I guess, they've been -- are they actually allocating more and more shelf space? Or is it they're just getting great velocity through the space they already have? Because you see that they've done a lot over the last few years. At some point, you would think that they would just sort of run out of space to allocate to this.

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [27]

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Yes. We're not seeing a tremendous increase in the space allocation at this point. I think some of it's running its course. All the mass players have traditionally been pretty strong in vitamins and a lot of the supplement areas. They're much newer in the sports, and I think customers over time realize that they've got the product and start looking and shopping there. So I do expect that to mitigate over time, but they're clearly a pretty strong force as we continue to move forward. I think one of the ways that we have to combat that is by driving innovation into our stores. Most of the time, what they're looking at are very commoditized products, a lot of the products are fairly late in their life stage with us and so it's incumbent upon us to do more and more from an innovation perspective. We also see an opportunity to combat this by introducing more wholesale partners. The partnership with DICK's is very interesting to us. This is a consumer that in many cases isn't coming to GNC yet. We can introduce them to the brand and hopefully over time, they will shop not only at DICK's but also at GNC. So the landscape is changing. We have to change with it, and we feel fairly well about how we're positioning ourselves to do that.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [28]

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And are you seeing any noticeable variability geographically across the U.S. in terms of performance?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [29]

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No. It's pretty consistent. I mean we have the normal seasonality and weather stuff. But yes, in general, we're not seeing any trends in one part of the country that are any different than anywhere else.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [30]

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Okay. And then just remind me, what was the issue with Amazon? I understand the GNC.com running for almost last year and sort of lapping that and I wanted to do it. But what was the issue with Amazon.com?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [31]

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Amazon is a different business. Getting into the marketplace business is very, very different than running our own .com business. And it's taken us a while. We started out very, very quickly. We ramped up quickly over the first year and once we started lapping that, it became a little more challenging for us to continue to grow it. And it's different because we don't necessarily drive everything ourselves. We have to partner with the Amazon team. And it's just taken us a while to figure out how to do that more effectively. Our team has been working really close with them over the last 6 months but even more focused over the last 2 or 3 months, and we're seeing benefits by getting our team out there sitting down at the table with their team and doing a little bit better job planning going forward. So we feel like we're in a better place with Amazon now to grow the business going forward.

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Damian Andrew Witkowski, G. Research, LLC - Research Analyst [32]

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Okay. And just lastly very quickly, I mean you've -- I think you said that 28% of your stores are in the malls. When you look at your franchisees, I think it's a much smaller percentage, right?

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [33]

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That's correct. They don't have many stores in the malls.

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Operator [34]

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At this time, we have no further questions in the queue. And I will turn the call back over to CEO, Ken Martindale.

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Kenneth A. Martindale, GNC Holdings, Inc. - Chairman & CEO [35]

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Thank you, Simon. Thanks everybody for joining us. We appreciate your ongoing interest, and we look forward to talking to you again in another quarter. Have a great day.

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Operator [36]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.