GNC Could Make Your Portfolio Big & Strong

GNC's stock received no love in response to what I would call, a VERY strong set of numbers. Crazy silly strong comparable store sales figures. Slower compared to two-year “stacked” (shout out convicted jargon users) same-store sales comparisons, yes. But, on a stand-alone basis, the near double-digit percentage figure was far and away the best compared to other specialty retailers in the mall (which is how you have to size up GNC, in my view). Margins, they looked healthy too (pardon the lame pun). The deal here is that Mr. Market got very upset by management's decision to tweak the Gold Card promotion program, in a nutshell offering more competitively priced products for cardholders instead of a 20% discount in the first week of the month. The market read this as: a future weaker trend in gross profit margins that will lead to negative earnings surprises, but the stock is still valued pretty strongly today so let's mark this puppy down accordingly. I feel Mr. Market missed a couple aspects here, and think the stock is worthy of attention on weakness: •Stores where the new program has been implemented same-store sales have popped, driving more operating profit dollars. Gross margin does in fact take a hit (200 bps to be precise), but the net earnings are still there in a robust manner. •Test markets have shown an ability to bring gross margins back up after an initial hit from the raised pricing structure. Why? GNC has pricing analysts dissect the data to see what products are selling the best, and then marks the price up. •Oh, and let's not overlook this, GNC is landing a boatload of information on new Gold Card members. More information, tighter direct marketing, solidly profitable sales. Moreover, it costs money to get the Gold Card, so an increased number of members off the initial trial suggests quarters of profitable deferred revenues.