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Bear of the Day: GNC Holdings (GNC)

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The decline of brick-and-mortar stores has been well-documented, but specialty retailers like GNC Holdings (GNC - Free Report) are finding it particularly challenging to compete right now. Even as we head into the busy holiday shopping season, investors will probably want to avoid GNC right now.

GNC Holdings is a specialty retailer with a focus on health and nutritional supplements. In addition to its GNC-branded stores, the company also produces its own supplements under brand names like Mega Men, Ultra Mega, and GNC WELLbeING.

After posting yet another disappointing earnings report last week, shares of GNC are now down nearly 40% year-to-date. The stock currently carries a Zacks Rank #5 (Strong Sell) and catalysts for positive momentum are nowhere to be seen.

Latest Earnings Results

For the third quarter, GNC reported earnings of 32 cents per share, missing the Zacks Consensus Estimate of 31 cents and plummeting more than 45% from the year-ago period. Meanwhile, revenues of $609.5 million were down nearly 3% year-over-year and below our consensus estimate of $616 million.

Same-store sales in domestic, company-owned stores—which includes sales—gained about 1.3% in the quarter. However, comps at domestic franchised locations declined 1.7%. Overall, revenues in the company’s U.S. & Canada segment fell about 3.5%, while sales in its manufacturing/wholesale unit slumped more than 13%.

What’s worse, gross margin contracted by 200 basis points to 32.3%, and general and administrative expenses rose 1.7%. Accordingly, adjusted operating margin deteriorated 320 bps to 7.5%.

While management’s “One New GNC” plan promised necessary changes, it has thus far resulted in deteriorating margins, sluggish revenues, and weak earnings—a cocktail that could prove to be deadly in today’s retail sector.

Estimate Revisions and Outlook

As we can see, GNC’s earnings estimates are slipping on the back of nearly-universal negative sentiment. The company’s current-quarter estimate has already moved four cents lower since its report, and what’s worse, analysts are becoming increasingly bearish on GNC’s next fiscal year.

This should concern investors because the company’s lifeline is not particularly long, especially as it continues to bleed cash. “One New GNC” might pay off eventually, but with year-over-year cash flow growth at -28.3% and RoE at -133.4%, the company isn’t positioned particularly well for a turnaround.

Other Options

As mentioned, there isn’t a ton of strength to go around in the world of specialty retail right now. Still, investors looking for a niche option in the pharmacy and health space might be interested in Diplomat Pharmacy (DPLO - Free Report) , which currently sports a Zacks Rank #2 (Buy). Industry giants CVS (CVS - Free Report) and Walgreens (WBA - Free Report) are both sporting Zacks Rank #3 (Hold) rankings.

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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