GNC's Stock Is Heading Up

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

GNC Holdings (NYSE: GNC) operates as a retailer of health and wellness products. The company was founded way back in 1935, and has since risen to prominence in the fitness industry. The massive company, headquartered in Pittsburgh, currently has more than 8,200 locations, of which more than 6,200 are in the United States. 

GNC most recently reported revenue of approximately $2.5 billion. This was accompanied by an EBITDA of nearly $491.0 million. The corporation has been able to consistently increase the amount of revenue being brought in throughout the past few years, as shown by the chart below. 

GNC Revenue Quarterly data by YCharts

At the moment

In its most recent 10-Q, GNC reported quite impressive results. Revenue jumped about 6% from $624 million to $665 million. Net income also increased, going from $64 million to $73 million. Clearly, the company is being guided in the right direction toward growth and success. GNC uses a plan consisting of five goals to become a successful company:

  • Grow company retail earnings
  • Expand company-owned square footage
  • Expand international footprint
  • Expand e-commerce business
  • Further leverage the GNC brand

Management has no doubt been organized and effective in their efforts to improve the company. As a result of these ambitious goals, a great amount of progress was made by GNC in a few different areas. Just to name a few:

  • Same-store sales increased 1.9%, including an 18.8% increase from the GNC.com business (which clearly indicates that the goal of expanding e-commerce was met.)
  • 32 net new stores were added in the first quarter of 2013.
  • Retail segment sales increased 5.0%, and operating income increased 5.8%.
  • Franchising revenue increased 6.3%, and operating income rose 11.6%.

These are only a few of the multitudinous statistics that support the idea that GNC is successfully expanding and improving operations. 

Looking forward

Is this type of growth sustainable? For GNC, yes, it is. GNC has been a leader in the health and wellness industry for years, and has experienced little-to-no trouble obtaining and keeping a large share of the market. The industry is expected to grow at an average annual rate of 6.5% through 2020. This should not be a surprise to anyone, as we all go through life seeing the growing influence and encouragement of living a healthy lifestyle, which is supported by everyone from the government, to corporations, to non-profit organizations.

Luckily, GNC will be able to benefit from this obsession with health that is becoming prevalent in our nation. GNC, though, is likely to grow at an even faster rate than the industry because of the leadership position and "disproportionate market share"  that the company holds when it comes to health and wellness. Also, over the next five years, GNC plans to increase the number of its international franchise stores.

With GNC having all five parts of its plan covered, what is stopping the company? To be honest, the company faces few serious risks at the moment. At the top of the list are a few concerns that could throw earnings off track:

  • An overall decline in consumer spending would decrease revenue.
  • Many of GNC's products contain controversial ingredients that people do not yet know the long-term effects of.
  • Increased costs associated with government regulations as health and wellness becomes a more common topic of political debate. 
  • The effects (which could be either positive or negative) of the publicity that GNC's products receive. 

Also, GNC has some competition in its industry. The most effective amongst these competitors are Amazon.com (NASDAQ: AMZN), CVS Caremark (NYSE: CVS), and Walgreen (NYSE: WAG). Of the four companies, GNC is undoubtedly the smallest, with a market cap of $4.5 billion. The next smallest company is Walgreen, which has a market cap of $42.9 billion.

So clearly, GNC doesn't find its competitive advantage by overpowering its rivals. Instead, GNC stands out by carving out a niche for itself and operating effectively within its boundaries. GNC is, without doubt, a leader in the health and wellness industry. One of the most impressive aspects of GNC's business is its efficiency. Let's compare GNC and its competitors in a few areas:

Company Profit Margin Operating Margin Return on Assets Return on Equity
GNC 10.08% 17.87% 10.68% 25.57%
AMZN  0.51%  1.04%  1.71%  -1.12%
CVS  3.30%  6.11%  7.12%  10.65%
WAG  2.91%  4.86%  6.92%  12.19%

Clearly, GNC has the upper hand over its competitors when it comes to efficiency. As a result, GNC has been able to operate within its niche in an extremely successful manner.

Do not misunderstand this idea, though. Overall, each of the competitors I have mentioned are powerful, growing, and successful companies. Let's take a deeper look at each one of them to understand this:

  • Amazon.com: Never has a company ever executed so perfectly the idea that one can go on a computer, hit a few buttons, and have a package of what they want sitting at their door the next day. This is why Amazon reported annual revenue of nearly $64.0 billion. But the important thing here is that this revenue is not coming entirely from dietary supplements. It is coming from books, televisions, beds, phone accessories, clothes, and just about everything else you could possibly think of. GNC, on the other hand, has operated only in the health and wellness field. GNC seems to be the much more effective company, as Amazon only brought in $2.7 billion EBITDA, which is reflected in its poor margins addressed above.
  • CVS Caremark: CVS is much more involved in the sale of health products than Amazon, but still not quite as focused in that area as GNC is. Also, CVS specializes more in drug and medicine types of products, while GNC focuses on dietary supplements. So again, we see that GNC has the upper hand when it comes to the niche that both companies are involved in, despite the fact that CVS is much larger, with revenue of more than $120 billion.
  • Walgreen: Finally, there's Walgreen. This is a very similar company to CVS, and what I brought up previously about product specialization applies here as well. Walgreen, a company with a market cap of more than $40 billion, may be much larger, but it is also much less efficient than GNC. The profitability of both companies can be seen in the chart above. 
Although each of the three competitors are companies with great power and success, none of them are as distinguished in the health and wellness industry as GNC. For this reason, GNC has the ability to take the wheel as their industry heads for a few years of prosperous growth. 

The bottom line

GNC has been quite profitable and efficient in its operations, which has guided the company to a leading position in the health and wellness industry. As the company continues to grow and expand with the guidance provided by its five-part plan, investors can jump aboard and enjoy the journey to success. 

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Bryan Wagman has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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