Diving Into GNC's Retail Structure With Wall Street Analysts

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In a report rolled out Monday morning, analysts at Deutsche Bank look into GNC Holdings Inc's
GNC
retail margin structure, reiterating a Hold rating and a $48 price target on the stock. GNC is up almost 4.5 percent year-to-date, versus the S&P 500's 1.08 percent, on the back of very strong profitability from the company's retail segment, which the analysts believe "is attributable in part to company-specific factors, including GNC's vertically-integrated model and high penetration of private brands, as well as the ability to lever a low-single digit comp." However, investors have been debating the results recently, so Deutsche Bank's analysts decided to take a closer look at profitability of the segment by making some adjustments (often overlooked by investors): 1) they back out the contribution from Gold Cards; 2) they back out an allocation for Warehouse/Distribution costs; 3) they back out an allocation for corporate costs. Bottom line, "adjusting for these items takes op margins into the HSD/LDD range, down from high-teens. This indicates, in our [the analysts'] view, that GNC's margin structure at retail is sustainable (assuming Gold Card Income is). In fact, adjusted Retail op. margins are fairly consistent with VSI's." Based on these adjustments, the firm believes that "GNC's Retail segment does not appear to be over-earning and that margins appear to be reasonable and sustainable, particularly given GNC's greater penetration of higher-margin private label (private brands account for over 55% of sales at GNC's Retail segment vs. 19% of sales at VSI)."
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Posted In: Analyst ColorNewsPrice TargetReiterationAnalyst RatingsDeutsche Bank
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