It has been about a month since the last earnings report for GNC (GNC). Shares have added about 5.1% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is GNC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
GNC Holdings’ Q4 Loss Narrows, Gross Margin Expands
GNC Holdings reported fourth-quarter 2019 adjusted loss per share of 7 cents (excluding the impact of certain non-recurrring items such as increase in the valuation allowance against certain deferred tax assets and senior executives retention program), narrower than the year-ago adjusted loss per share of 13 cents. The bottom line came in significantly narrower than the Zacks Consensus Estimate of loss of 52 cents per share.
Reported loss per share for the quarter was 46 cents, marking a huge decline from earnings of 62 cents reported in the prior year.
Full-year adjusted earnings per share came in at 25 cents, marking a 26.4% decline from 2018
Revenues
Revenues for the fourth quarter came in at $470.4 million, down 14.1% year over year. The top line, however, exceeded the Zacks Consensus Estimate by 1.1%. The year-over-year decline in revenues was primarily a result of the transfer of the Nutra manufacturing and China businesses to joint ventures, the closure of the company-owned stores under GNC Holding’s ongoing store portfolio-optimization strategy and a 2.4% U.S. company-owned same store sales drop.
In 2019, the company registered revenues of $2.07 billion, indicating a 12.1% drop from the year-ago period. However, it topped the Zacks Consensus Estimate by a close margin of 0.5%.
Quarterly Segmental Details
GNC Holdings operates under three segments — U.S. & Canada (including company-owned stores in the United States, Puerto Rico and Canada, franchise stores in the United States, and e-commerce), International (inclusive of franchise locations in approximately 50 countries, The Health Store and China operations), and Manufacturing/Wholesale (comprising manufactured products sold to other segments, third-party contract manufacturing and sales to wholesale partners).
In the reported quarter, GNC Holdings’ revenues from the U.S. & Canada segment fell 7.3% year over year to $412.4 million. Notably, e-commerce sales accounted for 11.5% of U.S. and Canada revenues, up from the prior-year quarter’s 9.3%.
Company-owned net store closures negatively impacted revenues by $17.6 million. Further, a decline of 2.4% in U.S. company-owned same store sales led to a fall of $7.7 million in the segment’s revenues. Moreover, in domestic franchise locations, same-store sales declined 3.2% from the year-ago period.
Revenues in the International segment dipped 20.4% to $10.4 million during the reported quarter. This downside chiefly resulted from the transfer of the China business to the newly-formed joint venture (with Harbin Pharmaceutical Group Co., Ltd. or Hayao), effective Feb 13, 2019.
The Manufacturing / Wholesale segment’s revenues registered 66.78% year-over-year plunge to $17.1 million, excluding intersegment sales. This mainly resulted from the transfer of the Nutra manufacturing business to the newly-formed manufacturing joint venture with International Vitamin Corporation, effective Mar 1, 2019.
Margins
Gross profit declined 10.1% year over year to $142.1 million. However, gross margin expanded 146 basis points (bps) to 32.9% in the December-end quarter.
Selling, general and administrative expenses declined 8.7% to $138.5 million. Despite that, adjusted operating profit fell 20.8% to $16.4 million. Adjusted operating margin contracted 29 bps to 3.5%.
Financial Position
GNC Holdings exited 2019 with cash and cash equivalents of $117 million compared with $67.2 million at the end of 2018. Total long-term debt was $862.6 million in the year, down from the $1.15 billion at the end of the previous year.
Full-year net cash flow from operating activities totaled $96.5 million compared with the $95.9 million recorded in the year-ago period.
Further, the company generated full-year free cash flow of $81.4 million compared with $76.9 million in the prior-year quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted -180% due to these changes.
VGM Scores
Currently, GNC has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, GNC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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