GNC - GNC Holdings

[Chalk bag]

Anyone has a view?

 

GNC is an interesting case at this juncture. The company holds a leading position in a long-term growing industry which is facing short to medium term headwinds at the moment. The company has been around for 80 years, having established a strong retail brand as well as propriety brands. At the moment, the company has some ~8,500 stores around the world, of which about 40% are company-owned(nearly 3,000 stores). Net debt remains reasonable at ~2-2.5x EBITDA and ~3.5-4x EBITDAR, while valuation remains unchallenging at 12-13x forward 2014EV/uFCF, 11-12x 2014PE, and 8x 2014EV/EBITDAR. Firepower to buy back shares is strong and the international venue of growth is as visible as ever. Given the strong financials could GNC be of strategic interest to a FoodCo, Private Equity or even LBO? Bright Food had expressed an interest pre IPO, and GNC was owned by a PE shop just 4 years ago.

[Mark Jr.]

I would say that now, years later and much lower there is a case to be made for buying GNC. With Goldman Sachs downgrading them with a $5 price target and short interest over 10X the daily volume, we could consider this close to the point of "maximum pessimism". Meanwhile interim CEO, and board members buying a non-trivial amount of stock on open market.

 

It's a got a bit of hair on it, but they could turn this thing around.

[Spekulatius]

I would say that now, years later and much lower there is a case to be made for buying GNC. With Goldman Sachs downgrading them with a $5 price target and short interest over 10X the daily volume, we could consider this close to the point of "maximum pessimism". Meanwhile interim CEO, and board members buying a non-trivial amount of stock on open market.

 

It's a got a bit of hair on it, but they could turn this thing around.

 

Buy VSI instead - similar valuation (taking into account the leverage), better comps,less dependency on indoor mall foot traffic. I like their stores much better.

[BG2008]

The problem with GNC and/or Vitamin Shoppe is that their products are readily available anywhere.  When I used to work out much more than I do today, the prices charged by GNC was outrageous and they still are today.  I would go to Vitamin Shoppe from time to time and buy a 5 pound bag of protein powder.  VSI's price was much more reasonable.

[Gray Fox]

-They killed the loyalty program.  The new "transparent pricing" system may work.  The loyalty cards provided a lot of pure margin revenue and ringfenced the best customers.

-EBITDA is shrinking, leverage is a real issue. 

-Capital allocation:  They have repurchased $1.3bn of stock in the past 5 years.  The current market cap is $500mm.  It seems some value got destroyed along the way.

-Operating leverage: They have a $148mm of non-cancellable lease obligations next year. 

-The majority of company owned stores are in shopping malls and strip malls.  Retail foot traffic trends are well known.

 

 

And the elephant in the room:  Amazon

 

All of the sell-side reports do detailed cost comparisons between supplement prices on Amazon vs. GNC.  Amazon wins consistently by a meaningful margin.  If I buy protein powder, glutamine, and creating every month why would I pay more to go to a store when I know I can get it to my front door for less in two days?

 

GNC has some good proprietary brands.  Health and wellness spending will increase.  But the combination of sales declines, an overbuilt store map, financial leverage, operating leverage, and the AMZN risk for a retail business is deadly. 

 

The convertible bonds trade at 62.5 and yield 16.6%.  I'm an equity guy, but the bonds do provide an overall glimpse into the perceived viability of the company for distressed companies.  I really wanted to like this but couldn't justify the risk that it goes to zero.

 

 

[JayGatsby]

I would say that now, years later and much lower there is a case to be made for buying GNC. With Goldman Sachs downgrading them with a $5 price target and short interest over 10X the daily volume, we could consider this close to the point of "maximum pessimism". Meanwhile interim CEO, and board members buying a non-trivial amount of stock on open market.

 

It's a got a bit of hair on it, but they could turn this thing around.

 

Buy VSI instead - similar valuation (taking into account the leverage), better comps,less dependency on indoor mall foot traffic. You like their stores much better.

VSI is down on sector weakness (GNC) and an acquisition that didn't really pan out? Their SSS were down but not a massive drop. Overall sales increasing as they continue to open stores. $17M of additional cost savings in 2017 will help. Thu number of GNC stores closing is probably immaterial to VSI at this point, but doesn't hurt.

[dyow]

This is an interesting area.  Amazon is a problem, but the question is whether this is already priced into these stocks.  Not a simple answer, but can be figured out by an astute investor.

 

[Mark Jr.]

And the elephant in the room:  Amazon

 

All of the sell-side reports do detailed cost comparisons between supplement prices on Amazon vs. GNC.  Amazon wins consistently by a meaningful margin.  If I buy protein powder, glutamine, and creating every month why would I pay more to go to a store when I know I can get it to my front door for less in two days?

 

GNC has some good proprietary brands.  Health and wellness spending will increase.  But the combination of sales declines, an overbuilt store map, financial leverage, operating leverage, and the AMZN risk for a retail business is deadly. 

 

So two things here which I've been wrestling with myself and which will probably prevent me from taking a position.

 

#1) Amazon. As you say, the elephant in the room. Though GNC has now started selling directly through Amazon, it doesn't solve their problem. If sales go good enough, Amazon may decide to enter the space a la "AmazonBasics" brand or some other brand. (Sure, maybe if that happens then maybe GNC gets the private label business, or maybe VSI does...)

 

#2) We buy a lot of health supplements in our household and we never buy GNC because it's not that great. There are far better product lines out there like Pure Synergy which have less additives and fillers. If GNC was making "the good stuff" it would be a lot easier to have some conviction about it.

 

 

[JayGatsby]

This is an interesting area.  Amazon is a problem, but the question is whether this is already priced into these stocks.  Not a simple answer, but can be figured out by an astute investor.

Is there any moat / competitive advantage with these companies? Feels a bit like best-buy / radioshack, where the products are basically commodities, but a certain % of people like to buy in person, want to talk to an expert, whatever. I've been inside a GNC once or twice and never been in a vitamin shoppe. This is a bit dated (2011), but interesting: http://blueshiftideas.com/reports/101105VitaminShoppesInStoreServiceLowPricesDriveSales.pdf

 

In the How I Built This podcast on 5-Hour Energy, the founder said "It turns out GNC always is looking for new products because once the product gets mass GNC is sort of out of it. Because you know if it's in walmart and everywhere else, nobody is going to buy it at GNC."

[flesh]

Interesting idea, from a cursory look, I'd be interested if it moves lower by 50%. Anyone know what was recently a large write down?

[dyow]

This is an interesting area.  Amazon is a problem, but the question is whether this is already priced into these stocks.  Not a simple answer, but can be figured out by an astute investor.

Is there any moat / competitive advantage with these companies? Feels a bit like best-buy / radioshack, where the products are basically commodities, but a certain % of people like to buy in person, want to talk to an expert, whatever. I've been inside a GNC once or twice and never been in a vitamin shoppe. This is a bit dated (2011), but interesting: http://blueshiftideas.com/reports/101105VitaminShoppesInStoreServiceLowPricesDriveSales.pdf

 

In the How I Built This podcast on 5-Hour Energy, the founder said "It turns out GNC always is looking for new products because once the product gets mass GNC is sort of out of it. Because you know if it's in walmart and everywhere else, nobody is going to buy it at GNC."

 

Its hard to say if they have a comp adv without looking at it.  I have often noticed that if a company has a moat/comp adv it is not so obvious what exactly it is when you initially look at it.  Maybe you don't need a moat here.  If they have enough brand value, enough stickiness with some of their customers, that could be enough to make it a cigar butt investment.

 

[Oreo]

What is GNC fundamental service/product to the customer?

It's selling 'health', 'dieting', 'self-esteem'.

How are those 3 things not in structurally greater supply due to forces like Amazon, Sweetgreen  / salad bars / salad chains, guys like Krogers increasing the shelf/fridge space dedicated to healthier & organic products, etc? 

Then, with operating / off-balance sheet leverage, how could GNC be in the top-10 things to look at from the long-side?

 

The only long argument that I could possibly make is that management will re-purpose the real estate for something else, e.g. a high-traffic salad chain. But that's speculative. Maybe I could say that management is buying stock b/c they think someone will come in and bail them out. But when I step back and look at these arguments, it's kinda weak.

 

I'd probably be short this but I don't want to shell out the 10% borrow cost.

[ritrading]

I want to go long GNC. Their latest FCF is about 150M for 2016. If I assume that they will make 100M FCF per year in perpetuity, the 500M market cap valuation is a 20% return per year.

 

What's holding me back is that there's no end in sight to their drop in revenues. They need to refinance soon and are very overleveraged. My guess is that the customers they lost to AMZN are not coming back.

 

What is Vitamin Shoppe doing differently than GNC? Both sell product via Amazon. Why is VSI doing so much better in terms of increasing revenues?

[awindenberger]

I want to go long GNC. Their latest FCF is about 150M for 2016. If I assume that they will make 100M FCF per year in perpetuity, the 500M market cap valuation is a 20% return per year.

 

What's holding me back is that there's no end in sight to their drop in revenues. They need to refinance soon and are very overleveraged. My guess is that the customers they lost to AMZN are not coming back.

 

What is Vitamin Shoppe doing differently than GNC? Both sell product via Amazon. Why is VSI doing so much better in terms of increasing revenues?

 

VSI has a much smaller store footprint, so they are still adding 5-10% new stores annually, vs 1-3% for GNC.

 

GNC just recently started selling on Amazon.

[Oreo]

The probability of a donut here is way too high to place any kind of bet on the long side. It's crazy.

 

Consider the following.

1. They make $20-30m of free cash (after interest) per quarter. The likelihood of this going any higher is near zero, in my view.

2. They got about $35m of cash & securities on hand.

3. Take a look at the table of contractual obligations, below.

http://i.imgur.com/PTls0mh.png

They got $1.2b of term loan coming due in 2018/19 and $250m on a convertible in 2020.

Who the hell is going to refinance them? Unless they show an unbroken string of 3-4 quarters of mid single-digit SSS %, no one's going to refinance them. And then, they're dead. The brand is not worth anything. When you buy vitamins / whey /etc on Amazon, do you care if it's GNC or some other brand? No. All you care is whether it has enough 5 star customer reviews and whether it's Prime-eligible.

 

Vitamin Shoppe has the same fundamental industry headwinds, but the key difference is that Vitamin Shoppe has not been stupid enough to lever their balance sheet and buy back stock. Maybe once GNC goes Ch.11 in 2018/19 Vitamin Shoppe wins some market share, or something. I doubt it, though. VSI will be a slow-melting ice cube. GNC a rapidly melting one.

 

P.S. The 2020 GNC converts are so far trading at a high-teens yield / 60ish cents on the dollar; the conversion price per share is laughable ($66/sh).

 

[JayGatsby]

There's a snippet in here copied from a GS report that's pretty interesting. Basically GS claims both GNC and Vitamin Shoppe are 30%-40% more expensive than Amazon. Seems like a pretty simple analysis to do, so I assume it's accurate: https://seekingalpha.com/article/4062360-gnc-goldman-sachs-reiterates-sell-rating-5-price-target