GNC Seen Posting Healthy Q3 Profit, Sales Gains


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Like a lot of its customers,GNCHoldings ( GNC ) is looking fitter than ever.

All bulked up with popular proprietary products and new offerings, the vitamin and nutrition store operator will likely deliver a healthy showing when it reports third-quarter results Tuesday.

GNC has posted double-digit sales and earnings growth every quarter since its market debut on April 1, 2011. It's also topped Wall Street's sales and earnings forecasts every quarter over that time.

If followers are right, GNC kept up the pace in the third quarter. Analysts polled by Thomson Reuters estimate earnings will pop 26% to 58 cents a share. They see sales rising 15% to $617.35 million.

"I don't see any reason why the third quarter won't be as strong as the other ones they've reported this year," said Brian Sozzi, chief equities analyst at NBG Productions. "I think they're going to beat big as they have been doing consistently. They are one of the best specialty retail marketers in the business."

Sales Momentum

He says constant online and in-store promotions consistently drive strong traffic into both retail channels. And proprietary products like its Vitapak pocket-sized pack of nutritional supplements differentiate GNC from rivals likeVitamin Shoppe ( VSI ).

"People should be watching the revenue momentum we're seeing at GNC," added Great Lakes Review analyst Elliott Schlang. "I don't think many companies are seeing 14% or 15% revenue increases in this environment. If they come up with that in the third quarter, we'll be very pleased."

GNC's proprietary products are its biggest sellers and drive the strongest margins, says Sozzi, since they're the company's own label.

These brands represent 57% of total retail sales at company-owned stores. They include Mega Men, Ultra Mega, GNC Total Lean and Pro Performance.

The company has evolved and extended the reach of its proprietary flagship brands through ongoing reformulations, brand development and line extensions, said Chief Executive Joe Fortunato on the second-quarter conference call.

Wedbush Securities analyst Kurt Frederick expects new product offerings helped GNC keep up its strong momentum in the third quarter.

"I think it's going to be another good quarter based on favorable feedback from conversations with store employees regarding recent product launches," he said.

Helping to drive that growth are recent new offerings, such as GNC Total Lean Lean Shake 25 meal replacement product, and GenetixHD Meta-Ignite metabolism booster, which have gotten positive reviews, Frederick says.

Also on the new product front, in August GNC announced the nationwide availability of Marked, a new line of performance nutrition products developed by GNC in partnership with actor Mark Wahlberg. The line, which consists of seven sports and active nutrition products, is available in GNC stores and GNC expects it to be widely available through other retailers in the U.S. and abroad this year. A portion of all sales will benefit the Mark Wahlberg Youth Foundation.

Frederick says the Marked line is providing incremental sales increases and noted in a report that it should see continued growth over the next several quarters.

GNC has more than 7,800 locations, of which more than 6,000 retail locales are in the U.S. That includes 933 franchise and 2,157Rite Aid ( RAD ) franchise store-within-a-store locations, and franchise operations in 55 countries. It generates retail revenue by sales at company-owned stores and its websites -- and It gets franchise revenue from product sales to franchisees, royalties on franchise retail sales and franchise fees.

Manufacturing/wholesale revenue is generated by sales of manufactured products to third parties, generally for third-party private-label brands; the sale of proprietary and third-party products to and through Rite Aid and; and the sale of GNC proprietary products to and throughPetSmart ( PETM ) and Sam's Club, owned byWal-Mart Stores ( WMT ).

In the second quarter, 74.1% of sales came from its retail segment; 16.7% from its franchise segment and 9.2% from manufacturing/wholesale.

GNC's biggest business is in sports nutrition products, which generate roughly 45% of retail revenue. Vitamins, minerals, herbal and specialty supplements account for about 39%.

And customers go in for its products in a big way.

The company enjoys a customer base that's very committed to brand, says BMO Capital Markets analyst Karen Short.

"They have huge customer loyalty," she said. "That customer is resilient and committed regardless of income."

GNC's customers are "regimented and consistent" with fitness as the key element of their lifestyle, the company said at the Goldman Sachs Global Retailing Conference in September.

Customers tend to cross-shop with nearly 50% of sports customers buying vitamins and 25% of vitamin customers buying sports products.

A Robust Q2

Prospects for a healthy third quarter come after an impressive second quarter. Earnings rose 59% to 62 cents a share. Sales grew 19% to $619.1 million. Same-store sales in U.S. company-owned stores popped 12.9%, including sales.

Frederick expects third-quarter same-store sales at U.S. company-owned stores to rise 9% vs. a year earlier. While that would be less than the second quarter's gain, it's still very robust growth, he says.

Analysts polled by Thomson Reuters see full-year earnings rising 49% to $2.26 a share. They expect an 18% gain in 2013.

The overall climate for GNC's business remains as healthy as ever, watchers say.

"People are absolutely obsessed with health and wellness, and this is a pure play in that market," said Schlang.

And GNC's customer base is younger and better educated and more affluent than the general shopper, he adds.

The environment is very good for GNC's business, given the secular trends in favor of increased interest in fitness, adds Frederick.

He says the recession has left a lot of Americans without health insurance or with coverage that's not as good as they had in the past. As a result, there's a big push to stay healthy by taking vitamins, supplements and other products GNC sells.

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 Stocks: GNC , PETM , RAD , VSI , WMT

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