Follow This CEO and Buy His Company's Stock

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Insider activity is usually a good indicator of where a company is headed. Nobody has a better look at the business than the people that manage the company. So when GNC’s (NYSE: GNC) CEO, Joe Fortunato, bought nearly $500,000 worth of his own company last Friday, I decided to look into it.

GNC released its Q3 earnings on Nov. 1. The stock was selling for $37.69 at the start of trading that day. Fortunato was able to snatch up the stock at an average price of $32.95 per share just two weeks later. That’s a 12.5% discount after a great earnings report. No wonder Fortunato wanted to up his stake. With the stock still trading below where it was before earnings, I believe GNC shares are still priced to buy.

GNC reported fantastic earnings results for the third quarter. Net income grew 32.6% to $0.61 per share, topping analysts’ estimates of $0.58. Revenue rose 15.5% to $621.6 million, which also bested estimates. This is just part of a long streak of great earnings reports since the company made its IPO on April 1, 2011.

There are three factors that will lead GNC to continue providing investors with great earnings quarter after quarter.

Premium Products

The shelves of GNC stores are packed with high-end premium sports supplements, many of which are exclusively provided through GNC. GNC’s product development team focuses on creating innovative, customized, and unique formulas for its customers, which builds brand loyalty.

GNC’s flagship brand, Pro Performance, has grown into the largest sports nutrition brand in the country, with $275 million in sales. Growth was driven by product line extensions such as Pro Performance AMP products, which are the result of extensive customer and nutrition research.

GNC has seen similar success and expansion with other house brands. Beyond RAW, the company’s line of mass gainer products, added 5 new products this year. The company expects sales of the product line to increase nearly 50% this year. Additionally, the company expects its Total Lean brand sales to improve more than 50% this year. It also expects its popular Vitapaks to continue growing at their average growth rate of 25% since their launch about 4 years ago.

GNC’s combination of great exclusive products and a relatively quick product development life cycle provide the company with a competitive advantage over other specialty nutrition retailers.

Gold Card Membership

The Gold Card is one of the better business models in member rewards programs. Customers are enticed to pay the $15 membership fee with a 20% discount on their purchase the day they open the account. That means it might actually save the customer money just to open an account on their first trip to GNC.

Once the customer opens up the Gold Card account, he or she is able to reap the rewards of membership every month with more promotional discounts. This creates tremendous brand loyalty and drives sales.

The Gold Card stands in stark contrast to many specialty retailers’ rewards programs. For example, competitor Vitamin Shoppe’s (NYSE: VSI) Healthy Awards Program is free to sign up for, but customers don’t realize the benefits until the beginning of each calendar year when they’re sent an “Awards Certificate.” This doesn’t produce brand loyalty at the rate a Gold Card does with its immediate and recurring rewards.

Recently, GNC has experimented with improving Gold Card members experience. The one complaint customers have is that the 20% discount is only available for the first week of every month. In 2010, GNC started experimenting with providing Gold Card members a discount every day of the month in certain stores. Compared to stores using the old system, these stores generated higher comparable store sales growth and higher membership sign up rates. The new system provides GNC with a look into customer purchasing behavior for 90% of sales.

The company plans to continue expanding the every day discount program to more stores in the coming year. Based on the experimental results, this ought to drive sales and provide the product development team with further insight into its customer's needss. Additionally, an increase in Gold Card membership will improve the company’s direct marketing campaigns.

Partnerships

Last year, GNC partnered with Wal-Mart’s (NYSE: WMT) Sam’s Club stores to sell its Pro Performance AMP Whey Protein and Total Lean Lean Shake in the stores’ expanding healthcare section. The partnership provides access to price-conscious consumers who usually avoid GNC stores because of their reputation for high prices. Considering the usual discount for Gold Card members is 20%, GNC can certainly afford to lower its price per unit for Sam’s Club.

In 2010, GNC made an interesting partnership with PetSmart (NASDAQ: PETM). PetSmart has been shifting toward premium pet products since 2009, attracting more affluent pet owners toward higher margin products. The company has seen great success with the strategy so far.

The idea for GNC to expand into pet products, one of the faster growing segments in retail, came from customers requesting quality nutrition products for their pets. The company set itself up for success with its pet product line, as it already knew there was a demand. Indeed, the company continues to see its market share grow, and has expanded the line from nutritional supplements to include snacks and shampoos.

GNC also has partnerships with RiteAid and drugstore.com. In total, these partnerships have increased wholesale revenues by 17.9% in Q1, 10.7% in Q2, and 9.5% in Q3. I expect this number to continue to grow at the high single-digit to low double-digit level.

Bottom Line

Joe Fortunato got a Gold Card discount from the market last week. Despite releasing great earnings quarter after quarter, the company’s stock price went down after its most recent report. This is usually caused by external concerns. Most likely it's due to fears of the fiscal cliff, which has pummeled retail stocks as of late, putting a damper on the stock. Now, with apparent progress in negotiations between Republicans and Democrats, GNC’s value can shine through, and the stock price ought to rise.


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