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Risk-Reward With GNC Holdings

- By Jonathan Poland

To take a flyer or not to take a flyer on GNC Holdings (GNC)? That is the question.

On one hand, the company has suffered revenue declines over the last five years and seen margins erode and its book value fall to negative $2.25 per share. More importantly, it has piled up more than $1.41 billion in debt.

On the other, free cash flow is still 6x greater than capital spending at $120 million, and GNC's stores are still generating over $564 million in quarterly sales, with the April earnings announcement reporting a slight rise in Ebita to $65.9 million. Meanwhile, year-over-year revenue was down 7.0%, same-store sales fell 1.6% domestically during the quarter, and international sales were up 13%.


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GNC is changing with the times, and even getting ahead of the curve in the upcoming boom for cannabis-related products with its April announcement that it is now offering topical cream products containing cannabidiol (CBD) in select retail locations and online across 23 states and the District of Columbia.

GNC CEO Ken Martindale said in a statement, "As the market changes, GNC is committed to offering high-quality, innovative products that are being introduced in new categories like CBD."

The challenge is that GNC isn't a strong enough brand to command attention from the marketplace like it once did. It's too easy to go directly to the consumer, and many health and supplement makers are doing just that. It's also an industry mired in skepticism as new product claims sometime can seem too good to be true, and often are. GNC should do a better job of being known for select curation of the best quality, but it looks like a retail lemming instead.

But, interest rates are unlikely to rise any further, and its debt could roll over at relatively favorable terms. Also, GNC's private-label products as well as many of its branded partner's products are made in the U.S. So, even if the U.S. trade talks with China continue to stall and tariffs rise, the health and wellness industry should make out just fine.

GNC turns 85 years old next year, so how long the company can remain relevant is the most important question. It has a network of over 2 million people across its main social accounts, filled with content that appears to be on trend. Even in one of the toughest industries with extremely low barriers to entry, GNC has held on.

Four years ago, GNC traded north of $50 per share. And, with the company now priced under $2 a share, it's worth a flyer.

Disclosure: I am not long or short GNC.

This article first appeared on GuruFocus.