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GNC Faces Poor Domestic Sales, Margins Still Under Pressure

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On Dec 5 2016, we issued an updated research report on Pittsburgh, PA-based GNC Holdings, Inc. (GNC - Free Report) , a leading global specialty retailer of products for health and wellness, including vitamins, minerals, herbal supplement, sports nutrition and diet. The company currently carries a Zacks Rank #5 (Strong Sell).

Greater part of last six months witnessed GNC underperforming the Zacks categorised Retail-Drug Stores industry with respect to price movement. A disappointing third-quarter 2016 performance with both earnings and revenues lagging the respective Zacks Consensus Estimate, resulted in further decline in share price return of the company.

While the domestic market demonstrated poor performance, GNC Holdings’ operating results in overseas markets were also unsatisfactory. Overall the company’s stock lost 46.98%, much wider than 8.52% loss of the broader industry over the last six months. A negative estimate revision trend with seven downward revisions over the past two months with no upward movement, indicate very low chances of near-term recovery. Earnings estimates declined 8.4% over this period.

Foreign currency also played spoilsport, particularly in Mexico. That said, it is worth mentioning that management still believes that international markets hold a tremendous potential for GNC Holdings. The company is thus engaged in capitalizing on opportunities there.

We are also looking forward to the company’s latest business plan termed as ‘New GNC' where management announced several strategies to revamp its existing business model. The model includes lowering of 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.

On the flip side, the nutritional supplements industry is characterized by rapid and frequent changes in demand for products and new product introductions. Moreover, GNC Holdings’ international competitors include large international pharmacy chains, major international supermarket chains and other large U.S.-based companies with global operations.

Management fears that in the face of stiff competition, the company may fail to function effectively and its attempts to do so may require it to reduce prices, which in turn may hurt margins. Further, currency devaluation in Mexico adversely affected consumer demand within GNC Holdings’ international business.

Stocks to Consider

Some better-ranked stocks in the medical sector include NxStage Medical Inc. , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation . NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 27.3% over the last one year compared with the S&P 500’s 7.2% growth over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 18.3% over one year, much higher than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 124.3% gain in the past one year, way better than the S&P 500. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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