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GNC Holdings (GNC) Q3 Earnings, Revenues Lag Estimates

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GNC Holdings Inc. (GNC - Free Report) reported third-quarter 2016 adjusted earnings per share (EPS) of 59 cents, reflecting a year-over-year deterioration of 21.3% despite an 18.6% drop in the company’s weighted average number of common shares outstanding.

The quarter’s adjusted EPS also missed the Zacks Consensus Estimate by 16.9%.

Including one-time items, the company’s reported EPS was 47 cents, down 12.9% year over year.

GNC HOLDINGS Price, Consensus and EPS Surprise

 

GNC HOLDINGS Price, Consensus and EPS Surprise | GNC HOLDINGS Quote

Total Revenue

Revenues dropped 8.1% year over year to $627.9 million and also missed the Zacks Consensus Estimate of $648 million. This decline can be attributed to lower sales in the company’s U.S. & Canada and international segments, which was partially offset by sales improvement in the manufacturing/wholesale segment, excluding intersegment sales.

Same-store sales dropped 8.5% in domestic company-owned stores (including GNC.com sales) during the second quarter; while the same fell 8.9% in domestic franchise locations.

Segment in Details

Starting third-quarter 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 –including 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 7% to $525.5 million, primarily because of a decline in same store sales in both company-owned and franchise stores. Domestic franchise revenues fell 2.7% to $85.8 million, mainly due to lower wholesale sales and royalties. 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’s growth in the second quarter.

Revenues at the international segment declined 18.7% to $41.1 million despite an increase of 3.9% in international franchisees same store sales, at constant exchange rate. Revenues from franchisees decreased $11.3 million due to challenges in Chile, Saudi Arabia and Mexico. The termination of the company's franchise agreement in Turkey, which resulted in the closing of 85 stores, and the earlier timing of the annual franchise convention impacted sales by $4.0 million  in the quarter.  Partially offsetting the above decrease was an increase in revenue of $1.8 million associated with the company's China business.

Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 0.5% to $61.3 million. Within this segment, third-party contract manufacturing sales increased 6.3% to $36.6 million, which was partially offset by a 9% decline in wholesale sales of $24.7 million and a 21.4% plunge in intersegment sales of $53.0 million.

Margin

Gross profit deteriorated 14.1% in the reported quarter to $215.4 million. Consequently, gross margin contracted 238 basis points (bps) to 34.3%, owing to lower sales and product margins in 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 535 bps to 10.7% owing to a wider decline in gross profit.

Financial Position

GNC Holdings exited the reported quarter with cash and cash equivalents of $37.2 million, compared with $48.2 million at the end of second-quarter 2016. As of Sep 30, 2016, the company generated cash of $169.7 million from operating activities, compared with $274.7 million a year ago.

Further, the company generated free cash flow of $162.8 million, reflecting a year-over-year decline of 80.8%.

Moreover, during the second-quarter earnings release, GNC Holdings declared a cash dividend of 20 cents per share of its common stock for fourth-quarter 2016; payable on or about Dec 30, 2016 to its stockholders of record at the close of business as on Dec 16, 2016.

Outlook Related Update: ‘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 ‘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 the end of 2016, we expect more clarity on the entire matter.

Our Take

GNC Holdings ended third-quarter 2016 on a disappointing note as its revenue figure failed to meet the Zacks Consensus Estimate.  

Not only did the company lag in the domestic market, its overseas operating results were equally disappointing. Foreign currency also played spoilsport, particularly in Mexico. In Turkey, macroeconomic challenges hampered growth. Weak pricing policy was also an issue for its brand. However, management’s latest plan for operational improvement raises optimism.

Zacks Rank & Key Picks

GNC Holdings currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector are GW Pharmaceuticals plc , Baxter International Inc. (BAX - Free Report) and Boston Scientific Corporation (BSX - Free Report) . GW Pharmaceuticals and Baxter international sport a Zacks Rank #1 (Strong Buy), while Boston Scientific carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 67.4% year to date compared to the S&P 500’s 4.4% over the same period. The company’s four-quarter average earnings surprise is 41.6%.

Baxter international rallied 25% in the past one year, above the S&P 500’s 2.1%. It has a trailing four-quarter average positive earnings surprise of 27%.

Boston Scientific recorded an 18.2% gain in the past one year, higher than the S&P 500’s 2.1%. The company has a trailing four-quarter average earnings surprise of 6.3%.

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