GNC Holdings, Inc.

GNC Holdings, Inc. ( GNC - Snapshot Report ) has been delivering positive earnings surprises ever since its initial public offering in April 2011, resulting in a more than two-fold growth in its stock price. With an average earnings surprise of about 20.4% over the last four quarters and a long-term growth projection of about 18.0%, this health supplement retailer is a solid pick for growth.

With earnings estimates scaling up continuously, the company became a Zacks #1 Rank (Strong Buy) on May 23, 2012.

Robust First Quarter

On April 25, 2012, GNC Holdings reported first quarter 2012 adjusted earnings of 60 cents per share, beating the Zacks Consensus Estimate by 15.4% and the year-ago earnings by 81.8%. Revenues increased 23% year over year to $624.3 million on the back of growth in all the three segments – retail (+22.4%), franchise (+31.1%) and manufacturing/wholesale (+17.9%). The retail segment contributed 75% to total revenue on the back of robust same-store sales growth, the addition of LuckyVitamin.com (which was acquired in August 2011) and 139 net new stores.

The company notched 15.8% same store sales growth in domestic company-owned stores, its 27th straight quarter of positive results.

Adjusted operating income soared 60% year over year to $112.7 million. In addition, operating margin improved approximately 400 basis points to 18.1% on the back of expense leverage.

Management also declared a cash dividend of 11 cents per share to be payable on June 29, 2012. It continues to repurchase shares to mitigate the dilutive impact of employee stock option exercises.

Raised Guidance and Rising Earnings Estimates

GNC Holdings raised its 2012 revenue and earnings guidance following strong first quarter results. The company now expects to report revenues of $2.37 billion (versus the previous guidance of $2.28 billion), representing 14.5% growth. This guidance is based on achieving 8% same store sales growth for the balance of the year. The earnings guidance was boosted by 12.6% to $2.05, representing 35% growth.

In response to the increased company guidance, earnings estimates moved up significantly over the last 60 days. The Zacks Consensus Estimate for 2012 has risen 8.3% to $2.09 per share, representing year-over-year growth of more than 37%. For 2013, the Zacks Consensus Estimate increased 8.1% to $2.40 per share, reflecting an annualized growth of 14.9%.

Stretched Valuation

GNC Holdings’ valuation looks stretched compared to its peers by most metrics. Based on 2012 earnings estimates, the company is trading at a P/E of 17.44x, a 15% premium to the peer group average of 15.15x. The price-to-book of 3.68x is also substantially higher than the peer group average of 2.45x. However, we believe premium for the company is warranted given its strong earnings potential.

Valuation, however, looks better with respect to PEG ratio. Given the long-term growth projection of 18%, the PEG ratio comes to 0.97, a 3% discount to the benchmark of 1 for a fairly valued stock.

Chart Looks Attractive

GNC Holdings’ price performance has been reasonably strong with the chart showing an upward trend with minor pullbacks. The price and consensus chart shows that estimates have consistently been on the rise with the stock price moving in concert with estimate revisions. Rising estimates for both 2012 and 2013 thus suggest a corresponding rise in the stock price, given past trends.

GNC Holdings, Inc, which has a market cap of $3.9 billion, is a global specialty retailer of health and wellness products that derives revenues primarily from products sold through company-owned stores, online (through both GNC.com and LuckyVitamin.com), franchises as well as to third parties. The company’s product portfolio includes vitamins, minerals and herbal supplements, sports nutrition, diet and other wellness products.

With manufacturing facilities in South Carolina and distribution centers in Arizona, Pennsylvania and South Carolina, the company’s products are sold through its worldwide network of more than 7,700 locations (under the GNC brand name) and strong franchise base that is spread across US and 56 countries in the international market.