Vitamin-seller GNC said the company plans to shutter roughly 200 stores this year while reporting earnings declined in the first quarter.

Consolidated revenue was $607.5 million in the first quarter of 2018, compared with consolidated revenue of $654.9 million in the first quarter of 2017. Analysts were calling for $654.9 million.

The decrease was primarily due to the sale of Lucky Vitamin on September 30, 2017, which resulted in a $22.7 million reduction to revenue, and the termination of the U.S. Gold Card Member Pricing program in the prior year quarter, which resulted in a $23.0 million decrease in revenue.

Same-store sales increased 0.5 percent in domestic company-owned stores (including GNC.com) in the first quarter of 2018. In domestic franchise locations, same-store sales decreased 1.9 percent.

For the first quarter of 2018, the company reported net income of $6.2 million compared with $24.7 million in the prior year quarter. Diluted earnings per share was 7 cents per share in the current quarter compared with 36 cents in the prior year quarter. In the first quarter of 2018, the company recorded a $16.7 million loss on debt refinancing.

Excluding this item and other expenses, adjusted net income was $20.1 million in the current quarter compared with $26.0 million in the prior year quarter, and adjusted EPS was 24 cents in the current quarter compared with 38 cents in the prior year quarter. Wall Street analysts expected 22 cents a share.

Adjusted EBITDA was $59.3 million in the current quarter compared with $73.7 million in the prior year quarter. The prior year quarter includes the impact of $23.0 million in revenue and gross profit associated with the termination of the Gold Card Member Pricing program, as well as higher marketing expense of approximately $6 million in connection with the launch of the media campaign around the One New GNC.

“During the first quarter of 2018, we continued to see the business improve, and were pleased with the progress of our strategic growth initiatives,” said Ken Martindale, CEO. “Notably, we delivered meaningful gross margin growth, driven primarily by increased penetration of our private label brands. We continue to work to leverage our strength in innovation, expand our international presence and deliver a consistent, compelling experience at every customer touch point.”

Key Updates

  • GNC brand mix for domestic system-wide sales increased to 50 percent in the first quarter compared with 48 percent in the fourth quarter of 2017 and 43 percent in the first quarter of 2017.
  • Slimvance, the category defining weight loss product, has successfully attracted new customers, drove a larger basket and despite overall sales declines, increased the share of the U.S. weight management market.
  • As of March 31, 2018, loyalty membership increased 12.3 percent to 12.8 million members compared with December 31, 2017. Included in loyalty membership at March 31, 2018 are 935,000 members enrolled in PRO Access, a 23.6 percent increase compared with December 31, 2017.
  • In the first quarter, the company improved financial flexibility through the extension of debt maturities. In addition, the company’s strong sustainable cash flow will continue to be used to pay down debt.

Segment Operating Performance

U.S. & Canada

Revenues in the U.S. and Canada segment decreased $24.2 million, or 4.5 percent, to $512.4 million for the three months ended March 31, 2018 compared with $536.6 million in the prior year quarter.

In the prior year quarter, the discontinuation of the Gold Card Member Pricing program in the U.S. resulted in the recognition of deferred revenue of $23.0 million. In addition, company-owned store closures contributed an approximate $7 million decrease compared with the prior year quarter, while domestic franchise revenue declined $7.8 million due to a decrease in retail same-store sales, as well as a reduction in the number of franchise stores. Partially offsetting the above decreases in revenue was an increase of $12.9 million relating to the company’s loyalty programs, PRO Access and myGNC Rewards.

Operating income decreased $7.0 million to $43.5 million for the three months ended March 31, 2018 compared with $50.5 million for the same period in 2017. Operating income as a percentage of segment revenue was 8.5 percent in the current quarter compared with 9.4 percent in the prior year quarter. Excluding the impact of the prior year quarter recognition of deferred revenue related to the Gold Card Member Pricing program and the prior year quarter marketing costs in support of the One New GNC media campaign, operating income as a percentage of segment revenue increased 2.0 percent due to a higher sales mix of proprietary product.

International

Revenues in the International segment increased $0.3 million, or 0.8 percent, to $40.1 million in the current quarter compared with $39.8 million in the prior year quarter, primarily due to an increase of $3.4 million in China cross-border e-commerce sales.

Operating income decreased $0.4 million, or 2.7 percent, to $14.5 million in the current quarter compared with $14.9 million in the prior year quarter. Operating income was 36.1 percent of segment revenue in the current quarter compared with 37.4 percent in the prior year quarter. The decrease in operating income percentage was primarily due to a higher mix of China sales, which contribute lower margins relative to franchise sales.

Manufacturing/Wholesale

Revenues in the Manufacturing/Wholesale segment, excluding intersegment sales, decreased $0.7 million, or 1.4 percent, to $55.1 million for the three months ended March 31, 2018 compared with $55.8 million in the prior year quarter primarily due to a $0.9 million decrease in third-party contract manufacturing sales. Intersegment sales increased $3.4 million, reflecting the company’s increasing focus on proprietary products.

Operating income decreased $2.3 million, or 13.3 percent, to $15.0 million for the three months ended March 31, 2018 compared with $17.3 million in the prior year quarter. Operating income as a percentage of segment revenue decreased from 14.7 percent in the prior year quarter to 12.5 percent in the current quarter primarily due to a lower margin rate from third-party contract manufacturing.

Cash Flow and Liquidity Metrics

For the three months ended March 31, 2018, the company generated net cash from operating activities of $25.1 million, a $21.0 million decrease compared with the three months ended March 31, 2017 of $46.1 million. The decrease was primarily related to $15.8 million in fees paid to third-parties in connection with the Amendment to the company’s Senior Credit Facility.

For the three months ended March 31, 2018, the company generated an increase in free cash flow of $4.0 million, or 12.0 percent, from $33.4 million for the three months ended March 31, 2017 to $37.4 million for the three months ended March 31, 2018. The company defines free cash flow as cash provided by operating activities (excluding fees relating to the debt refinancing) less cash used in investing activities (excluding acquisitions except for store acquisitions). At March 31, 2018, the company’s cash and cash equivalents were $53.9 million and debt was $1.3 billion, which includes $17.5 million in borrowings outstanding on its Revolving Credit Facility.

Store Count

At March 31, 2018, the company had 3,385 corporate stores in the U.S. and Canada, 1,083 domestic franchise locations, 2,428 Rite Aid franchise store-within-a-store locations and 2,009 international locations. The company now has 8,905 store locations worldwide. As part of the ongoing optimization of the company’s store portfolio, the company intends to close approximately 200 stores in 2018. Efforts toward favorable lease renegotiations or relocation opportunities are ongoing and may impact the amount of stores closings. The company expects a limited number of new store openings in 2018.

Update on Harbin Pharmaceutical Transaction

On April 26, 2018, shareholders of Harbin Pharmaceutical Group Holding Co., Ltd (“Hayao”) voted to approve the company’s $300 million investment in GNC.

As previously announced, on April 25, 2018, GNC convened and adjourned the company’s Special Meeting of Stockholders (the “Special Meeting”) to allow additional time to solicit proxies and obtain a quorum for the meeting. A substantial majority (over 92 percent) of the proxies received by GNC as of April 25, 2018 authorized a vote in favor of the issuance of convertible preferred shares to Hayao (the “Share Issuance Proposal”) in connection with Hayao’s strategic investment in GNC. However, holders of only approximately 36 percent of the outstanding shares of the company’s common stock submitted proxies to vote at the Special Meeting and the necessary quorum was not reached. GNC will reconvene the company’s Special Meeting at 10:00 a.m., Eastern Time, on May 9, 2018.