GNC New Member Discount Program Seen Lifting Profits

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If there's one thing Americans learned during the Great Recession, it's how to get more bang for the buck.

Budget-minded consumers continued to apply that lesson even as the economy slowly recovered. Retailers of all stripes have worked hard to feed that appetite for value.

That includes vitamin and nutritional supplement retailerGNC Holdings ( GNC ), which this month began rolling out a new customer loyalty program with an everyday variable discount to more than 3,000 U.S. company-owned stores.

Under the new "Member Price" program, customers save 5% to 50% on every item everyday at any GNC store or on GNC.com.

The program is a simplified version of GNC's Gold Card program, which has more than 7 million active members. Under the old program, you paid $15 for a one-year membership and got 20% off what you bought in the first week of every month. You pay the same fee under the new program, but you can use it for discounts anytime.

The rollout follows a test for up to two years in selected markets such as Chicago, New York and GNC's home base of Pittsburgh. GNC found the program produced higher store traffic, increased revenue and strong margins. It also saw increased customer retention and found that new card holders made more shopping trips spread more evenly throughout the month.

The new program is getting good reviews on Wall Street:

"The reason why I like the stock is because GNC is rolling the member-price program out nationwide," said Brian Sozzi, chief executive of research firm Belus Capital Advisors. "The program will boost earnings significantly."

Sozzi says the initial rollout may hurt GNC's margins a little in the second quarter as the program's everyday discounts are expanded to all stores. But by the third quarter, he says, GNC should start to see a "reacceleration" of earnings. By the fourth quarter, he adds, it could see a significant increase in earnings as more members join the program and spend more frequently and more per transaction.

GNC expects the rollout to be "EPS neutral" for the year, said CEO Joe Fortunato on the April 26 first-quarter conference call. He expects the company's investment in the program rollout of 5 cents to 6 cents a share in the second quarter to be recovered throughout the third and fourth quarters combined.

In new Member Price markets, GNC estimates it will see a mid-single-digit lift in company-owned same-store sales starting in the third quarter.

Sozzi says GNC is realizing a 1% to 3% same-store sales benefit in those stores where the program has already launched.

For the first two months, GNC is waiving the $15-a-year membership fee to customers in new markets who make a purchase of $10 or more in a store or online. The company expects to add another 1.5 million to 2 million members after the giveaway.

"The prior program was confusing and not very customer friendly," said Wells Fargo Securities analyst Kate Wendt. "This is a more simplified message that we think should improve their value positioning vs. competitors."

The new program offers GNC a number of benefits vs. the prior one, adds Wedbush Securities analyst Kurt Frederick. Under the new program, GNC should be able to recoup sales it may have lost in weeks two, three and four when it didn't offer the member discount. And its sales will be more spread out throughout the month vs. a big sales surge in the first week of the month under the old program.

Also, with discounts ranging from 5% to 50% under the new program, GNC can customize the discounts based on demand and maximize sales, says Frederick. So it may offer only 5% off a hot seller, while under the old program it was tied to a flat discount of 20%.

As a result of its Member Pricing initiatives, GNC is collecting purchasing data on all of its Gold Card customer transactions, allowing it to use targeted offers and cross-selling opportunities like "never before," said Fortunato on the conference call.

Sozzi says GNC is marketing directly to customers via email. It's a way to stay in front of consumers with the new program's strong discounts, he says, giving them reason to shop at its stores more often.

"We anticipate greater contribution from the rollout in 2014 as GNC is able to tweak product pricing to lessen the initial gross margin percentage drag and utilize more customized and targeted marketing as it gathers customer purchase behavior," wrote Frederick in a report.

Meanwhile, GNC has been flexing its muscle on the financial front with double-digit profit growth since it went public in April 2011. In the most recent first quarter, earnings rose 22% to 73 cents a share.

Revenue rose 6% to $665 million. That followed a string of double-digit sales gains. But sales were hurt by a few factors, including an early Easter and a difficult sales comparison with 2012.

Retail segment revenue rose 5% to $493.5 million, driven primarily by a 1.9% increase in domestic company-owned stores vs. a year ago.

Its manufacturing-wholesale segment revenue, which is generated mainly by third-party sales at its manufacturing facility and product sales to Rite Aid and other retailers, grew 19.6% to $63.3 million, which includes an 11.2% increase in third-party manufacturing contract sales. As of March 31, GNC had more than 8,200 locations, of which more than 6,200 retail locations are in the U.S. That includes 958 franchise and 2,190Rite Aid ( RAD ) franchise stores-within-a-store and franchisees in 55 countries.

Wendt says GNC is gaining share from both multichannel and online competitors. "The member pricing program should only improve their competitive positioning, which could further allow them to gain share," she said. The climate for GNC's business, she adds, is very strong. "That speaks to the trend toward healthy living, which includes their vitamins and supplements to support healthy and active lifestyles," she said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
Referenced Symbols: GNC , RAD

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