GNC Holdings Inc. reported consolidated revenue of $569.9 million in the fourth quarter of 2016, compared with consolidated revenue of $629.1 million for the fourth quarter of 2015.
Same-store sales decreased 12 percent in domestic company-owned stores (including GNC.com sales, which contributed 4.5 percent of the decrease) in the fourth quarter of 2016. In domestic franchise locations, same-store sales decreased 6 percent in the fourth quarter of 2016.
For the fourth quarter of 2016, the company reported a net loss of $433.4 million. It recorded $473.5 million in non-cash long-lived asset impairments in the current quarter, of which $471.1 million related to goodwill and $2.4 million related to property and equipment. The non-cash goodwill impairment charges were recorded on the Domestic Stores, Manufacturing and Canada reporting units for $366.4 million, $90.5 million and $14.2 million, respectively. Diluted loss per share was $6.35 for the fourth quarter of 2016. Adjusted diluted EPS was 7 cents for the fourth quarter of 2016.
Bob Moran, interim chief executive officer, commented, “GNC’s performance in the fourth quarter, while well below expectations, does not reflect the fundamental changes we have made to the business model. Customers are responding well to the new model, which launched in late December and includes simplified, more competitive pricing and new loyalty programs. We are aware that the changes we have made have short-term financial impacts and while it is still in the early days, and it will take time for our investments to bear fruit, we are encouraged by the trends we’re seeing and believe the One New GNC can help the company return to profitable growth.”
Key elements of the One New GNC launch:
- Pricing model: Following more than a year of consumer tests and pilot programs, the company rolled out a single-tiered pricing strategy in domestic company-owned and franchise locations.
- MyGNC Rewards and PRO Access loyalty programs: Following extensive research, a free loyalty program, myGNC Rewards, and a paid program, PRO Access, were launched. The initial focus was to have the myGNC Rewards program well entrenched with customers and direct additional resources to a more comprehensive sales focus on PRO Access later in the first quarter of 2017. Further developing and encouraging active customer participation through robust loyalty programs is an important step towards the goal of attracting new customers and building long-term connections with existing customers.
- GNC.com: In the third quarter, prices at GNC.com were aligned with stores to eliminate any competition between selling channels, including franchisees. As an element of its omni-channel strategy, early in the first quarter the company launched a GNC storefront on Amazon.
Segment Operating Performance
U.S. & Canada
Revenue in the U.S. and Canada segment decreased $41.1 million, or 8 percent, to $472.6 million for the three months ended December 31, 2016 compared with $513.7 million in the prior year quarter. E-commerce sales, which include GNC.com and Lucky Vitamin, were 8.8 percent of U.S. and Canada revenue for the three months ended December 31, 2016, compared with 11.4 percent in the prior-year quarter.
Negative domestic retail same-store sales of 12 percent, which includes GNC.com, were primarily due to lower sales in the Vitamins, Protein, Food/Drink and Weight Management categories, partially offset by improvement in the Health and Beauty category, and include the impact of a significant decrease in GNC.com sales due in part to a meaningful reduction in web promotion as well as lower point-of-sale gold card sales. In addition, negative same-store sales include a 1 percent impact of closing corporate stores on December 28, 2016 in connection with the rollout of the One New GNC. The number of corporate stores decreased from 3,584 at December 31, 2015 to 3,513 at December 31, 2016.
Domestic franchise revenue increased $3.2 million to $72.6 million in the current quarter compared with $69.4 million in the prior-year quarter, primarily due to a net increase in the number of franchise stores from 1,084 at December 31, 2015 to 1,178 at December 31, 2016, partially offset by the impact of negative retail same stores sales of 6 percent.
Operating loss was $361.4 million for the three months ended December 31, 2016, compared with income of $78.4 million for the same period in 2015. Long-lived asset impairments were recorded in the current quarter totaling $383 million as explained above. Excluding these non-cash impairment charges and gains on re-franchising of $0.8 million and $5.1 million the current quarter and prior-year quarter, operating income was 4.4 percent and 14.3 percent of segment revenue, respectively.
The decrease in operating income as a percentage of segment revenue excluding asset impairment charges and gains on re-franchising compared with the prior-year quarter was primarily due to: deleverage in occupancy and salaries expense associated with negative company-owned same store sales; lower domestic retail product margin rate as a result of higher reserves on certain third-party product that could not be returned to vendors as well as higher estimated reserves on certain proprietary products as a result of recent sales trends and to a lesser extent the impact of promotional pricing; and the launch of the One New GNC (which lowered operating income by approximately $10 million).
International
Revenues in the International segment decreased $9 million, or 18.5 percent, to $39.7 million in the current quarter compared with $48.7 million in the prior-year quarter. Despite our international franchisees reporting an increase in retail same-store sales of 5.1 percent in the current quarter (excluding the impact of foreign exchange rate changes relative to the U.S. dollar), revenue from franchisees decreased $9.4 million compared with the prior-year quarter primarily related to challenges in several markets, as well as a net decrease in the number of franchise stores from 2,095 at December 31, 2015 to 1,973 at December 31, 2016.
Operating income decreased $2.5 million, or 15.1 percent, to $14 million for the three months ended December 31, 2016 compared with $16.5 million in the prior-year quarter. Operating income was 35.2 percent of segment revenue in the current quarter, which increased compared with the prior-year quarter of 33.8 percent as a result of higher product margin rate due in part to a higher mix of proprietary sales.
Manufacturing/Wholesale
Revenues in the Manufacturing/Wholesale segment, excluding inter-segment sales, decreased $4.6 million, or 7.4 percent to $57.7 million for the three months ended December 31, 2016 compared with $62.3 million in the prior-year quarter. Third-party contract manufacturing sales increased $2.6 million, or 8.4 percent, to $33.8 million in the current quarter compared with $31.2 million in the prior-year quarter. This increase was partially offset by a decrease in sales to our wholesale customers of $7.3 million, or 23.3 percent from $31.1 million in the prior-year quarter to $23.8 million in the current quarter. Inter-segment sales decreased $14.4 million from $60.6 million in the prior-year quarter to $46.2 million in the current quarter, primarily due to lower proprietary sales in the U.S. and Canada and International segments.
Operating loss was $73.7 million for the three months ended December 31, 2016 compared with income of $22.6 million in the prior-year quarter. Excluding the $90.5 million non-cash goodwill impairment charge described above, operating income was $16.8 million, or 16.2 percent of segment revenue in the current quarter compared with 18.4 percent in the prior-year quarter. The decrease in operating income as a percentage of segment revenue excluding the current-quarter impairment charge compared with the prior-year quarter was primarily due to lower inter-segment sales, which resulted in unfavorable manufacturing variances, and a higher mix of third-party contract manufacturing sales, which generally contribute lower margins.
Full-Year Performance
For the full year 2016, the company reported consolidated revenue of $2,540 million, a decrease of 5.3 percent compared with consolidated revenue of $2,683.3 million for the full year 2015. Revenue in the U.S. & Canada and International segments decreased by 4.3 percent and 12.2 percent, respectively, compared with the prior year. Revenue in the Manufacturing/Wholesale segment was flat compared with the prior year, excluding inter-segment sales.
Same-store sales decreased 6.5 percent in domestic company-owned stores (including GNC.com sales, which contributed 1.8 percent to the decrease) for fiscal 2016. In domestic franchise locations, same-store sales decreased 6.8 percent in fiscal 2016.
For the full year 2016, the company reported a net loss of $286.3 million, compared with net income of $219.3 million for the full year 2015. The net loss in 2016 includes $476.6 million of non-cash long-lived asset impairment charges. Diluted loss per share was $4.12 for full year 2016 compared with $2.60 in 2015. Adjusted diluted EPS was $2.15 for the full year 2016 compared with $2.87 in 2015.
Operating Metrics
At year end, the company had 3,513 corporate stores in the U.S. and Canada, 1,178 domestic franchise locations, 2,358 Rite Aid franchise store-within-a-store locations and 1,973 international stores. It now has 9,022 store locations worldwide. As part of ongoing reviews of the company’s store portfolio giving consideration to the most recent trends and developments, GNC intends to exit approximately 100 stores whose leases terminate in 2017 and lowering the rate of new store openings to maximize the return on investment of the capital invested in new stores.
For the full year 2016, the company generated net cash from operating activities of $208.2 million and invested $59.6 million in capital expenditures. It generated free cash flow of $185.8 million (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions), which includes $39.2 million of proceeds associated with re-franchising transactions. As of December 31, 2016, the company’s cash and cash equivalents were $34.5 million, long-term debt was $1.5 billion and the company had $167.2 million available under the Revolving Credit Facility.
Dividends And Share Repurchases
The Board of Directors has approved management’s recommendation to suspend the company’s quarterly dividend. The dividend suspension is part of a broader plan to utilize a greater portion of the company’s free cash to reduce debt. By suspending what has been a 20 cents per share quarterly dividend, the company intends to reallocate approximately $55 million of cash annually, primarily to reduce debt through the pay-down of its revolver. GNC remains focused on creating longterm shareholder value by returning GNC to sustainable growth, strengthening its balance sheet and restoring financial flexibility and strong liquidity.
During 2016, the company repurchased 7.9 million shares of the company’s stock for $229.2 million. No shares were repurchased by the company under its share repurchase program in the fourth quarter of fiscal 2016. The remaining $197.8 million authorized under the current program is not expected to be utilized during fiscal 2017.
Photo courtesy GNC