Why Is GNC Holdings (GNC) Down 22.8% Since the Last Earnings Report?

It has been about a month since the last earnings report for GNC Holdings, Inc. GNC. Shares have lost about 22.8% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

GNC Holdings reported first-quarter 2017 adjusted earnings per share (EPS) of $0.37, reflecting a massive 46.4% year-over-year deterioration. However, the quarter’s adjusted EPS surpassed the Zacks Consensus Estimate by 12.1%.

The year-over-year decline was due to underperformance of the U.S. & Canada and manufacturing/wholesale segments.

Including one-time items, the company’s reported earnings were $0.35 per share, down 49.3% year over year.

Revenues

Revenues during the reported quarter dropped 3.6% year over year to $644.8 million. The figure however outpaced the Zacks Consensus Estimate of $631.4 million.

The decline in revenue can be attributed to lower sales at the U.S. & Canada international and manufacturing/wholesale segments.

Same store sales decreased 3.9% in domestic company-owned stores (including GNC.com sales) in the first quarter of 2017. In domestic franchise locations, same store sales declined 4.6%.

Segment in Details

GNC Holdings reports its operations under three segments: U.S. & Canada – including company-owned stores in the U.S., Puerto Rico and Canada, franchise stores in the U.S. and e-commerce; International – including franchise locations in approximately 50 countries, The Health Store and China operations; and Manufacturing/Wholesale – comprising manufactured product sold to other segments, third-party contract manufacturing and sales to wholesale partners.

During the reported quarter, GNC Holdings’ revenues from the U.S. & Canada segment dropped 3.8% to $552.9 million, primarily because of a decline in same store sales in both company-owned and franchise stores. Domestic franchise revenues however rose 1.6% to $83.1 million, driven by a net increase in the number of franchise stores from 1,082 as of Mar 31, 2016, to 1,164 as on Mar 31, 2017. This was partially offset by the impact of negative retail same stores sales of 4.6% in the reported quarter. Weakness in the food and protein categories as well as significant decrease in e-commerce sales due to better aligning web promotions to the company's stores, largely affected this segment in the fourth quarter.

Revenues at the international segment increased 7% to $39.4 million. Revenues from international franchisees increased $1.3 million primarily due to an increase in wholesale sales and in retail same store sales of 3.8% in the current quarter (excluding the impact of foreign exchange rate changes relative to the U.S. dollar). Revenues from the China business increased $1.2 million in the current quarter compared with the prior quarter.

Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 8.6% to $52.5 million. Within this segment, third-party contract manufacturing sales increased 0.9% to $30.7 million, which was partially offset by a 19.3% decline in wholesale sales to $21.8 million and a 2.7% drop in intersegment sales to $61.3 million, primarily due to lower proprietary sales in the U.S. & Canada segment.

Margin

Gross profit deteriorated 9.7% in the reported quarter to $212.9 million. Consequently, gross margin contracted 223 basis points (bps) to 33% owing to lower sales and product margins at the company’s GNC.com business and deleverage of occupancy costs as a result of negative same-store sales.

Selling, general and administrative expenses rose 12.2% to $160.5 million. However, adjusted operating margin deteriorated 231 bps to 32.3% owing to a wider decline in gross profit.

Financial Position

GNC Holdings exited the reported quarter with cash and cash equivalents of $39.8 million, down from $34.4 million at the end of fiscal 2016. Long-term debt was $1.50 billion at the end of the quarter, compared with $1.52 billion at the end of fiscal 2016. In the first quarter, the company used cash of $46.1 million in operating activities, compared with $142.3 million a year ago.

Further, the company generated free cash flow of $33.4 million in the reported quarter as compared to $132.1 million in the year-ago quarter.

‘One New GNC’ Plan Update

Earlier, management had announced plans to revamp its existing business model, dubbed as the ‘One New GNC”. The company has already started seeing transformational changes during the first quarter 2017. GNC Holdings recorded 9.3% growth in the reported quarter and its management is encouraged by the new loyalty programs under this plan. As of the end of the first quarter of 2017, 5 million consumers joined the myGNC Rewards Program.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one upward revision for the current quarter compared to three downward. In the past month, the consensus estimate has shifted upward by 7.1% due to these changes.

GNC Holdings, Inc. Price and Consensus

 

GNC Holdings, Inc. Price and Consensus | GNC Holdings, Inc. Quote

VGM Scores

At this time, GNC Holdings' stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the stock is suitable for value and growth investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of these revisions looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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