It has been about a month since the last earnings report for GNC Holdings, Inc. GNC . Shares have lost nearly 6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
GNC Holdings reported fourth quarter of 2016 adjusted earnings per share (EPS) of $0.37, reflecting year-over-year decline of 88.1%. The quarter's adjusted EPS also missed the Zacks Consensus Estimate by 81.1%.
Including one-time items, the company's reported loss was $6.35 per share, wider than the loss of $4.12 in the prior-year quarter.
Full-year 2016 adjusted earnings came in at $2.15 per share which also lagged the Zacks Consensus Estimate of $2.46 by 12.6%.
Revenues during the reported quarter dropped 9.4% year over year to $569.9 million. The figure however was almost in line with the Zacks Consensus Estimate of $570 million.
The decline in revenue can be attributed to lower sales at the company's U.S. & Canada international and manufacturing/wholesale segments.
Same-store sales dropped 12% in domestic company-owned stores (including GNC.com sales) during the fourth quarter; while the same fell 6% at domestic franchise locations.
Full-year 2016 revenues were $2.54 billion, also in line with the Zacks Consensus Estimate.
Segment in Details
Starting fourth quarter of 2016, GNC Holdings has been reporting its operations under three segments: U.S. & Canada - including company-owned stores in the U.S., Puerto Rico and Canada, franchise stores in the U.S. and e-commerce; International - including franchise locations in approximately 50 countries, The Health Store and China operations, and Manufacturing/Wholesale - comprising manufactured product sold to other segments, third-party contract manufacturing and sales to wholesale partners.
During the reported quarter, GNC Holdings' revenues from the U.S. & Canada segment dropped 8% to $472.6 million, primarily because of a decline in same store sales in both company-owned and franchise stores. Domestic franchise revenues however rose 2.7% to $72.6 million, mainly due to a net increase in the number of franchise stores from 1,084 as of Dec 31, 2015 to 1,178 as of Dec 31, 2016. This was partially offset by the impact of negative retail same stores sales of 6.0%. Weakness in the food and protein categories as well as significant decrease in e-commerce sales due to better aligning web promotions to the company's stores, largely affected this segment in the fourth quarter.
Revenues at the international segment declined 18.5% to $39.7 million despite an increase of 5.1% in international franchisees same store sales, at constant exchange rate. Revenues from franchisees decreased by $9.4 million from the prior-year quarter primarily related to challenges in several markets as well as a net decrease in the number of franchise stores from 2,095 as on Dec 31, 2015 to 1,973 as on Dec 31, 2016.
Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 7.4% to $57.7 million. Within this segment, third-party contract manufacturing sales increased 8.4% to $33.8 million, which was partially offset by a 23.3% decline in wholesale sales to $24.7 million and a 23.7% plunge in intersegment sales to $46.2 million.
Gross profit declined 25.4% in the reported quarter to $170.2 million. Consequently, gross margin contracted 642 basis points (bps) to 29.8% owing to lower sales and product margins at the company's GNC.com business and deleverage of occupancy costs as a result of negative same-store sales.
Selling, general and administrative expenses rose 5.1% to $148.4 million. However, adjusted operating margin deteriorated 857 bps to 4.5% owing to a wider decline in gross profit.
GNC Holdings exited fiscal 2016 with cash and cash equivalents of $34.4 million, down from $56.4 million in the prior year. As of Dec 31, 2016, the company used cash of $22.4 million in operating activities, compared with $45.6 million in the prior year.
Further, the company generated free cash flow of $185.7 million for the full-year 2016, reflecting a decline of 39.8% from the prior-year.
During 2016, management repurchased 7.9 million shares of the company's stock for $229.2 million. Notably, the company did not repurchase any share under its buy-back program in the fourth quarter of 2016. The remaining $197.8 million, authorized under the current program, is however unlikely to be utilized during fiscal 2017.
Outlook Related Update: 'One New GNC' Plan
Post the third-quarter debacle, management announced several strategies to deliver improved performance in the near future. It plans to revamp its existing business model. The model, dubbed as the 'One New GNC', would include the lower single product pricing policy, a new product pipeline, free and paid loyalty program, new customer friendly technology which includes terminals, tablets, Wi-Fi and a new mobile app that improves and personalizes the shopping experience. By 2017, more clarity on the entire matter is expected. Management has therefore not provided any guidance for 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been four downward revisions for the current quarter. In the past month, the consensus estimate has shifted downward by 33.9% due to these changes.
GNC Holdings, Inc. Price and Consensus
GNC Holdings, Inc. Price and Consensus | GNC Holdings, Inc. Quote
At this time, GNC Holdings' stock has a subpar Growth Score of 'D', however its Momentum is doing a bit better with a 'C'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.
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