GNC: Health Products, Healthy Stock
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GNC Holdings Inc. (NYSE: GNC) has seen its stock soar 37.3% YTD, significantly buoyed by its positive earnings for the first quarter of 2012. On April 25, GNC reported EPS of $0.60, beating estimates by $0.08; it also reported revenue of $624M, which beat analyst estimates by $38M and constituted a 23% increase YOY. Moreover, same store sales increased 15.8% in domestic company-owned stores, representing the Company's 27th consecutive quarter of positive same store sales growth.
However, GNC has not been without its share of negative developments. Recently, it has been adversely affected by the FDA's crackdown on supplements with the stimulant DMAA, which are bestsellers among fitness enthusiasts. DMAA is an ingredient which the FDA claims could lead to cardiovascular and blood pressure complications. GNC is currently facing a lawsuit concerning a DMAA-based product and has recently seen the U.S. military pull several DMAA-based products from the GNC stores situated on military bases. Despite the controversy surrounding DMAA, GNC continues to sell DMAA-based products.
GNC is a specialty retailer of health and wellness products that sells products made under its GNC proprietary brand as well as under third-party brands. GNC products range from vitamins, minerals, and herbal supplement products to sports nutrition and diet products.
One of the biggest appeals of GNC right now is its proprietary brand business. This business not only differentiates GNC from its competitors, but it also helps promote brand loyalty among customers who often cannot find the same products elsewhere in other vitamin/health retailers. Moreover, GNC's proprietary brand business is extremely profitable, as GNC produces its own products and then sells them with much higher profit margins than simply selling third-party brands. Thus, an extremely positive development in GNC's first quarter report was its announcement that sales from proprietary GNC brands accounted for nearly 60% of total sales. GNC President and CEO Joe Fortunato notes that the increase in proprietary sales "will increase our margins." One significant product driving this increase in proprietary sales is the Total Lean brand, which has found huge success in the weight management marketplace.
Moreover, GNC has also distinguished itself from other competitors by also emphasizing the online experience. In its first quarter of 2012, GNC saw a 34.1% growth rate in sales from GNC.com as the website remains a hit with a large segment of GNC's consumers. GNC is also aggressively cementing and expanding its presence online; on August 31, 2011, GNC acquired LuckyVitamin.com, a discount vitamin site. GNC's development of its online business is crucial because, as shown by the growth of such e-commerce companies as Amazon.com and eBay, more and more consumers depend on online transactions instead of visiting brick-and-mortar shops.
GNC is broadening its presence through partnerships with other organizations and people as well. One of its most significant partnerships is with major drug store Rite Aid Corporation (NYSE: RAD). This strategic alliance, formed in 1999, has resulted in the creation of more than 2,125 GNC "store-within-a-store" locations inside Rite-Aid establishments as well as a line of vitamins and nutritional supplements called PharmAssure™. More recently, in April 2012, GNC announced a partnership with Mark Wahlberg to develop, market, and sell a nutritional supplement line named MARKED. In May 2012, GNC became the presenting sponsor and exclusive sports nutrition provider to the 2012 ESPNHS Games. These partnerships and strategic alliances could prove to be extremely beneficial for GNC in the long run, not only increasing its presence in terms of store locations but also in terms of generating publicity.
In terms of its niche in the stock market right now, GNC is currently positioned as a very favorable play on not only the health of the company, but the robustness of the vitamin sector. In fact, at its current PE of 23, GNC is more attractive than its competitor Vitamin Shoppe Inc. (NYSE: VSI), which has a PE of 29.6. On May 17, Deutsche Bank actually downgraded Vitamin Shoppe to a Hold from Buy; one of the reasons was their belief that Vitamin Shoppe was trading at a premium multiple to GNC, a development which Deutsche Bank believed was unjustified.
GNC is currently firing on all cylinders in terms of financial performance. Its EPS increased 82% YOY from the first quarter of 2011 to the first quarter of 2012. Moreover, in its last three quarters, GNC has reported an average EPS growth rate of 84%. Estimates for the current quarter are strong and the consensus estimate is that GNC will report an EPS that constitutes a 33% YOY increase. From a broader perspective, GNC is expected to report an annual EPS increase of 38.41%, which, if fulfilled, would mark the fifth consecutive year of annual EPS growth for GNC. In terms of profitability, GNC has a solid annual ROE of 20.1% and an annual Pre-Tax Margin of 12.2% (a bit on the low side).
A not-so-stellar component of GNC's financials is its 3-Year Sales Growth Rate, which comes in at a paltry 9%. However, sales seem to have picked up as of late: last quarter, GNC reported a 23% increase in sales YOY. Joe Fortunato has stated that sales from new products have exceeded historical rates, while cross selling has also increased: 40% of customers that bought sports nutrition products also bought vitamins last quarter.
Overall, GNC has a lot of positive factors going for it and its stock has significant upside potential. As for the recent DMAA controversy, JPMorgan analysts recently pointed out that DMAA only makes up a mid-single-digit percentage of GNC sales and called the recent weakness in GNC stock a "buying opportunity." GNC has also experienced 3 consecutive quarters of increasing fund ownership and saw a 26% increase in fund ownership in its first quarter of 2012. I heavily recommend that prospective investors look more into GNC's operations and formulate their own decisions.
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