GNC Holdings Inc. reported consolidated revenue of $499.1 million in the third quarter of 2019, compared with consolidated revenue of $580.2 million in the third 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, the closure of company-owned stores under our store portfolio optimization strategy, U.S. and Canada negative same-store sales of 2.8 percent and lower International franchise revenue.

Key Updates

  • U.S. and Canada segment drove 190 bps of incremental operating income margin compared with the third quarter of 2018, excluding the long-lived asset impairment charges in the prior year quarter and immaterial gains on refranchising in the current quarter and prior year quarter
  • E-Commerce revenues grew 12 percent compared with the third quarter of 2018 driven by increased conversion rates due to an improved site experience
  • In early October, formally launched GNC4U, our personalized, high quality supplement program that delivers customized vitamin packs monthly to a customer’s home.
  • C

ompany continues to evaluate debt refinancing alternatives and expects to complete the process in the fourth quarter of 2019
  • Cash provided by operating activities is $98 million; Year-to-date free cash flow(1) is $87 million and Adjusted EBITDA(2) is $166 million
  • Ended third quarter with $190 million in liquidity

For the third quarter of 2019, the company reported net loss of $2.4 million compared with net loss of $8.6 million in the prior year quarter. Diluted loss per share was $0.09 in the current quarter compared with diluted loss per share of $0.10 in the prior year quarter. Excluding the expenses outlined in the table below, adjusted net income(3) was $3.1 million in the current quarter, compared with adjusted net income(3) of $2.1 million in the prior year quarter.  Adjusted diluted loss per share(3) was $0.02 in the current quarter compared with adjusted diluted earnings per share(3) (“EPS”) of $0.02 in the prior year quarter.
Adjusted EBITDA(2), as defined and reconciled to net income in the table below, was $37.1 million, or 7.4 percent of revenue, in the current quarter compared with $50.1 million, or 8.6 percent of revenue, in the prior year quarter.

“In the third quarter, GNC continued to make strides stabilizing the US retail business driven by continued success with our store optimization and cost saving initiatives.  Additionally, as outlined on last quarter’s call, we made progress in addressing e-commerce opportunities and drove solid growth in the quarter,” said Ken Martindale, GNC’s Chairman and CEO.  “While we did face headwinds in our international business, we remain excited about the long-term growth opportunities abroad.”

U.S. & Canada

Revenues in the U.S. and Canada segment decreased $31.8 million, or 6.7 percent, to $444.7 million for the three months ended September 30, 2019 compared with $476.5 million in the prior year quarter. E-commerce sales comprised 8.6 percent of U.S. and Canada revenue for the three months ended September 30, 2019 compared with 7.2 percent in the prior year quarter.

The decrease in revenue compared with the prior year quarter was largely due to the closure of company-owned stores under our store portfolio optimization strategy, which contributed a $14.8 million decrease in revenue, and negative same store sales of 2.8 percent, which resulted in a revenue decrease of $9.7 million. In domestic franchise locations, same store sales for the third quarter of 2019 decreased 0.8 percent over the prior year quarter.

Operating income increased $21.2 million to $32.7 million, or 7.4 percent of segment revenue, for the three months ended September 30, 2019 compared with $11.5 million, or 2.4 percent of segment revenue, for the same period in 2018. In the prior year quarter, we recorded long-lived asset impairment and other store closing charges totaling $14.6 million. Excluding the long-lived asset impairment charges in the prior year quarter and immaterial gains on refranchising in the current quarter and prior year quarter, operating income was $32.7 million, or 7.3 percent of segment revenue, in the current quarter, compared with $26.0 million, or 5.4 percent of segment revenue. The increase in operating income percentage was driven by lower occupancy expense, salaries and benefits.

International

Revenues in the International segment decreased $14.5 million, or 28.1 percent, to $36.9 million for the three months ended September 30, 2019 compared with $51.4 million in the prior year quarter. Revenue from our international franchisees decreased $9.1 million in the current quarter compared with the prior year quarter primarily due to lower sales in Hong Kong and other temporary challenges in Saudi Arabia and South Korea.  Revenue from China decreased by $5.1 million in the current quarter compared with the prior year quarter due to the transfer of the China business to the newly formed joint venture, effective February 13, 2019.

Operating income decreased $3.8 million to $12.7 million, or 34.3 percent of segment revenue, for the three months ended September 30, 2019 compared with $16.5 million, or 32.0 percent of segment revenue, for the same period in 2018.  The prior year quarter included China joint venture start-up costs of $1.0 million, of which $0.6 million related to costs incurred in the first six months of 2018 within corporate costs that was reclassified to International in the third quarter of 2018. Excluding the China joint venture start-up costs, operating income was $17.4 million, or 33.9 percent of segment revenue, for the three months ended September 30, 2018. The increase in operating income percentage compared to the prior year quarter 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 $34.9 million, or 66.7 percent, to $17.4 million for the three months ended September 30, 2019 compared with $52.3 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 $11.8 million to $5.1 million, or 29.0 percent of segment revenue, for the three months ended September 30, 2019 compared with $16.9 million, or 14.5 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 nine months of 2019, the company reported consolidated revenue of $1,597.8 million, a decrease of $207.9 million compared with consolidated revenue of $1,805.7 million for the first nine months of 2018. The decrease in revenue during the first nine months of 2019 compared to the prior year period was largely due to the transfer of the Nutra manufacturing and China e-commerce businesses to the newly formed joint ventures, which resulted in a decrease in revenue of approximately $97 million, the closure of company-owned stores under our store portfolio optimization strategy, which resulted in a decrease in revenue of approximately $44 million, and negative same store sales of 3.0 percent, which resulted a decrease in revenue of approximately $33 million.

For the first nine months of 2019, the company reported net loss of $1.6 million and diluted loss per share of $0.18 compared with net income of $10.9 million and diluted EPS of $0.13 for the first nine months of 2018. Excluding the expenses outlined in the reconciliation table below, adjusted EPS(3) was $0.30 and $0.47 in the first nine months of 2019 and 2018, respectively.

Cash Flow and Liquidity Metrics

For the nine months ended September 30, 2019, the company generated net cash from operating activities of $97.6 million compared with $55.7 million for the nine months ended September 30, 2018. The increase was driven primarily by an increase in accounts payable as a result of the company’s cash management efforts as well as the establishment of payables associated with the manufacturing joint venture.

For the nine months ended September 30, 2019, the company generated $86.7 million in free cash flow(1) compared with $42.3 million(1) for the nine months ended September 30, 2018. The company defines free cash flow as cash provided by operating activities less capital expenditures. At September 30, 2019, the company’s cash and cash equivalents were $121.9 million and debt was $858.6 million. No borrowings were outstanding on the company’s Revolving Credit Facility at the end of the third quarter of 2019.

The company is reviewing a range of refinancing options, including discussions with financing sources in the United States and Asia, to further optimize the company’s capital structure and enhance its financial flexibility.  The Board has created a committee of independent directors to conduct this review process.  While there can be no assurances, the company is pleased with its progress in reviewing refinancing options and expects to complete the process in the fourth quarter.