GNC Holdings Inc. reported a 4.6 percent decline in same-store sales in its U.S. & Canada in the second quarter but operating earnings in the region improved.

Consolidated revenue reached $534.0 million in the second quarter of 2019, compared with consolidated revenue of $617.9 million in the second quarter of 2018. The decrease in revenue was primarily a result of the transfer of the Nutra manufacturing and China businesses to the newly formed joint ventures, negative same-store sales and the closure of company-owned stores under our store portfolio optimization strategy.

Key Updates

  • U.S. & Canada segment achieved second consecutive quarter year-over-year operating income growth. Operating income margin increased 150 basis points to 10.3 percent from 8.8 percent in the second quarter of 2018
  • GNC brand mix increased to 53 percent compared with 51 percent in the second quarter of 2018
  • Recently launched Lit AF, an enhanced, next-generation pre-workout dietary supplement in the $135 million Beyond Raw GNC brand
  • Reduced debt by an additional $34 million during the second quarter of 2019 to further deleverage the capital structure
  • Ended second quarter with $171 million in liquidity

For the second quarter of 2019, the company reported net income of $16.1 million compared with net income of $13.3 million in the prior year quarter. Diluted earnings per share (EPS) was $0.11 in the current quarter compared with diluted EPS of $0.16 in the prior year quarter. Excluding the expenses outlined in the table below, adjusted net income was $18.3 million1 in the current quarter, compared with adjusted net income of $16.9 million1 in the prior year quarter. Adjusted diluted EPS was $0.131 in the current quarter compared with $0.201 in the prior year quarter. Diluted EPS and Adjusted diluted EPS in the current quarter reflects the impact of convertible preferred stock on an if-converted basis.

Adjusted EBITDA was $61.6 million, or 11.5 percent of revenue, in the current quarter compared with $63.5 million, or 10.3 percent of revenue, in the prior-year quarter.

“During the second quarter of 2019, although we experienced some softness in our sales, we delivered meaningful growth in our operating income margins consistent with our long-term strategy,” said Ken Martindale, GNC’s chairman and CEO. “The quarter represented solid progress towards our store optimization and cost savings initiatives. Recently, Ryan Ostrom joined us as chief brand officer bringing extensive marketing and digital experience with industry leading brands. We are confident he will expand our omni-channel capabilities, and look forward to his leadership to grow our brand across the globe.”

Segment Operating Performance

U.S. & Canada

Revenues in the U.S. and Canada segment decreased $41.2 million, or 8.0 percent, to $476.1 million for the three months ended June 30, 2019 compared with $517.3 million in the prior-year quarter. E-commerce sales comprised 8.1 percent of U.S. and Canada revenue for the three months ended June 30, 2019 compared with 8.3 percent in the prior-year quarter.

The decrease in revenue compared with the prior-year quarter was primarily due to negative same store sales of 4.6 percent, which resulted in a revenue decrease of $17.5 million, and the closure of company-owned stores under our store portfolio optimization strategy, which contributed a $14.9 million decrease in revenue. In domestic franchise locations, same store sales for the second quarter of 2019 decreased 1.8 percent over the prior-year quarter.

Operating income increased $3.6 million to $49.2 million, or 10.3 percent of segment revenue, for the three months ended June 30, 2019 compared with $45.6 million, or 8.8 percent of segment revenue, for the same period in 2018. The increase in operating income was primarily due to lower occupancy, salaries and benefits, marketing, and distribution and transportation costs as compared to the same period in 2018. The increase in operating income percentage was driven by lower occupancy expense partially offset by expense deleverage in salaries and benefits associated with a decrease in company-owned same store sales.

International

Revenues in the International segment decreased $9.2 million, or 18.9 percent, to $39.4 million for the three months ended June 30, 2019 compared with $48.6 million in the prior-year quarter mostly due to the transfer of the China business to the newly formed joint venture, effective February 13, 2019. The decline was partially offset by a $0.7 million increase in sales to our international franchisees.

Operating income decreased $1.4 million to $14.3 million, or 36.2 percent of segment revenue, for the three months ended June 30, 2019 compared with $15.7 million, or 32.3 percent of segment revenue, for the same period in 2018. The increase in operating income percentage was primarily a result of the transfer of the China business to the newly formed joint venture.

Manufacturing/Wholesale

Revenues in the Manufacturing/Wholesale segment, excluding intersegment sales, decreased $33.5 million, or 64.4 percent, to $18.5 million for the three months ended June 30, 2019 compared with $52.0 million in the prior-year quarter primarily due to the transfer of the Nutra manufacturing business to the newly formed manufacturing joint venture with International Vitamin Corporation, effective March 1, 2019.

Operating income decreased $3.8 million to $12.1 million, or 65.5 percent of segment revenue, for the three months ended June 30, 2019 compared with $15.9 million, or 13.6 percent of segment revenue, in the prior-year quarter. revenue decreased as a result of the transfer of the Nutra manufacturing business to the newly formed joined venture. However, operating income margins were positively impacted as the Manufacturing/Wholesale segment recognized profit margin that resulted from maintaining consistent pricing to what was charged to our other operating segments prior to the inception of the manufacturing joint venture, and recorded profit on intersegment sales associated with inventory produced prior to the transfer of the Nutra manufacturing business to the joint venture.

Year-to-Date Performance

For the first six months of 2019, the company reported consolidated revenue of $1,098.8 million, a decrease of $126.7 million compared with consolidated revenue of $1,225.5 million for the first six months of 2018. The decrease in revenue during the first six months of 2019 compared to the prior-year period was primarily due to the transfer of the Nutra manufacturing and China e-commerce businesses to the newly formed joint ventures, which resulted in an approximate $61 million decrease in revenue, the closure of company-owned stores under our store portfolio optimization strategy, which resulted in an approximate $29 million decrease in revenue, and negative same-store sales of 3.1 percent.

For the first six months of 2019, the company reported net income of $0.8 million and diluted loss per share of $0.09, which included the reduction to net income for the cumulative undeclared dividends of $8.7 million, compared with net income of $19.5 million and diluted EPS of $0.23 for the first six months of 2018. Excluding the expenses outlined in the reconciliation table below, adjusted EPS was $0.28 and $0.44 in the first six months of 2019 and 2018, respectively. Adjusted Diluted EPS in the current year reflects the impact of the convertible preferred stock on an if-converted basis

Cash Flow and Liquidity Metrics

For the six months ended June 30, 2019, the company generated net cash from operating activities of $65.3 million compared with $49.1 million for the six months ended June 30, 2018. The increase was driven by favorable working capital changes primarily due to an increase in accounts payable as a result of the company’s cash management efforts as well as the establishment of the manufacturing joint venture.

For the six months ended June 30, 2019, the company generated $58.9 million3 in free cash flow compared with $40.8 million3 for the six months ended June 30, 2018. The company defines free cash flow as cash provided by operating activities less capital expenditures. At June 30, 2019, the company’s cash and cash equivalents were $95.9 million and debt was $854.7 million. No borrowings were outstanding on the company’s Revolving Credit Facility at the end of the second quarter of 2019.

GNC Holdings Inc. is a leading seller of performance and nutritional supplements.. As of June 30, 2019, GNC had approximately 8,000 locations, of which approximately 5,900 retail locations are in the United States (including approximately 2,000 Rite Aid licensed store-within-a-store locations) and the remainder are locations in approximately 50 countries.