Description

Overview of Company/Industry

GNC Holdings is the leading pure-play nutrition retailer in the world.  The vitamin and supplements industry is growing 5-7% per year and is expected to continue growing at such “healthy” rates for the next 5-10 years.  GNC is by far the largest player in this fragmented industry ($32 billion in the U.S.), with a company-owned presence that represents 5-6% of supplement sales.  GNC is heavily represented in the industry’s fastest growing category – Sports Nutrition – which will help fuel share gains for years to come.        

GNC traces its roots back to 1935, when David Shakarian opened the first General Nutrition store in Pittsburgh, PA.  Today GNC distributes products across a multitude of channels.  The company has a presence in 8,148 stores around the world, including 3,199 owned stores in the U.S., 949 franchised stores in the U.S. and 1,800 franchised stores internationally, and 2,181 “store within a store” locations in Rite Aid stores.  GNC’s operations are divided into three segments: Retail (73% of sales, 60% of profit), Franchise (17% of sales, 24% of profit), and Manufacturing/Wholesale (10% of sales, 16% of profit).  Product mix breaks down as follows: Vitamins/Minerals/Herbs/Supplements 40% of sales, Sports Nutrition 43%, Diet Products 12%, and Other 7%.  Stores are generally 1-2K square feet in size and carry 1,800 SKUs, with a typical store doing $500K in annual revenues at a mature level

Vertical Integration

We consider GNC’s vertically integrated structure to be a competitive advantage.  The company has in-house product development teams and best-in-class manufacturing facilities that churn out proprietary products accounting for 57% of retail sales.  GNC’s superior speed to market helps drive innovation and differentiation.  These products tend to be higher margin.  Over the long run, we regard the manufacturing/wholesale channel as a large opportunity.

Loyalty Program

GNC’s rollout of its new Gold Card should drive comps and earnings over the next 2-3 years.  The company is transitioning its legacy loyalty program into an everyday member pricing model.  Members can use the card ever day of the month (as opposed to the first week only, previously).  Discounts range from 5%-50% depending on the item.  In test markets, the Gold Card program delivered a high single digit lift in sales and accretion in gross margins by months 3 or 4.  A rollout across the chain in expected by summertime.  It should bring a lift to comps and EPS but also improve direct marketing via superior segmenting and supply efficiencies. 

Management Team

GNC’s Chairman and CEO is Joe Fortunato, who joined the company in 1990.  He has been CEO since 2005 and previously was in charge of retail operations and store development in 2000-2001 and COO from 2003-2005.  GNC’s CFO is Mike Nuzzo, who joined the company in 2008.  Previously, he worked in the accounting department at ANF.  The management team owns approximately 5% of the company.  They have done a very nice job running this company and we anticipate continued execution.

Value of Business

GNC is a top notch GARP-style name.  We believe the company will deliver 9-10% sales growth comprised of mid single digits comps and 4-5% retail square footage growth as well as similar growth in the franchised and manufacturing/wholesale segments.  We model high incremental margins since GNC only requires 1-2% retail comps to leverage its fixed cost base.  Combined with share buybacks (GNC should produce about $200 million in free cash per year), we get to EPS growth of high teens plus a dividend.  Yet despite this high growth profile, the shares sell for only 13-14x fiscal 2014 EPS.  We model the company keeping a debt/cap ratio of around 50%, which is just slightly below the 60% ratio it had averaged prior to its IPO in 2011.  This is equivalent to 2.0-2.5x Debt/EBITDA or 4.5x Debt/EBITDAR.  A business of this caliber with this growth potential should be worth at least a high teens multiple at this point in its growth cycle.

Risk Factors

Product safety issues could cause or slowdown in growth of the supplement category.  FDA and FTC oversee products and advertising.

Increased competition or irrational pricing could develop given the favorable market characteristics

Catalyst