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GNC Holdings, Inc. Reports Second Quarter 2018 Results

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GNC Holdings, Inc. Reports Second Quarter 2018 Results

- Same store sales decreased 0.4%; excluding impact of loyalty points redeemed, same store sales increased 1.3%

- Net income of $13.3 million and adjusted net income of $16.9 million

- Adjusted EBITDA of $63.5 million

PR Newswire

PITTSBURGH, July 26, 2018 /PRNewswire/ -- GNC Holdings, Inc. (NYSE:GNC) (the "Company") reported consolidated revenue of $617.9 million in the second quarter of 2018, compared with consolidated revenue of $650.2 million in the second quarter of 2017.  The sale of Lucky Vitamin on September 30, 2017 resulted in a $22.6 million reduction to revenue.

Same store sales decreased 0.4% in domestic company-owned stores (including GNC.com) in the second quarter of 2018.  Excluding the impact of higher loyalty points redemption in the current quarter compared with the prior year quarter as the program matures, same store sales increased 1.3%.  In domestic franchise locations, same store sales decreased 4.0%.

For the second quarter of 2018, the Company reported net income of $13.3 million compared with $16.6 million in the prior year quarter. Diluted earnings per share ("EPS") was $0.16 in the current quarter compared with $0.24 in the prior year quarter.  Excluding the expenses outlined in the table below, adjusted net income was $16.9 million in the current quarter compared with $28.8 million in the prior year quarter and adjusted EPS was $0.20 in the current quarter compared with $0.42 in the prior year quarter.

Adjusted EBITDA, as defined and reconciled in the table below, was $63.5 million in the current quarter compared with $74.8 million in the prior year quarter.

"During the second quarter of 2018, although we experienced some softness in our U.S. brick and mortar business, we delivered meaningful growth in our e-commerce and international businesses consistent with our long-term growth initiatives" said Ken Martindale, chief executive officer.  "Our focus remains building on the fundamental strengths of GNC through product and service innovation, effectiveness of our loyalty programs, leveraging the strength of the GNC brand and delivering an integrated customer experience."

Key Updates

  • Growth in our international segment driven by China and our franchise business.
  • Harbin Pharmaceutical Group transaction expected to close in 2018.
  • Strong performance from category-defining Slimvance weight-management product line and re-launch of Beyond Raw and Amp brands, with additional innovation and new proprietary products expected in the latter half of the year.
  • GNC brand mix for domestic system-wide sales increased to 50% compared with 43% in the second quarter of 2017.
  • Increase in loyalty membership of 14.3% in the current quarter compared to March 31, 2018; now 14.6 million members, including over 1.0 million members enrolled in PRO Access, an 8.8% increase from March 31, 2018.

Segment Operating Performance

U.S. & Canada

Revenues in the U.S. and Canada segment decreased $10.5 million, or 2.0%, to $517.3 million for the three months ended June 30, 2018 compared with $527.8 million in the prior year quarter. E-commerce sales were 8.3% of U.S. and Canada revenue, an increase of 2.8% over the prior year quarter and 1.2% over the first quarter of 2018.

Company-owned net store closures contributed an approximate $9 million decrease compared with the prior year quarter, while domestic franchise revenue declined $8.2 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 $9.9 million relating to the Company's loyalty programs; PRO Access paid membership fees and the myGNC Rewards change in deferred points liability.

Excluding a $0.2 million refranchising gain in the current quarter, operating income decreased $7.1 million to $45.4 million for the three months ended June 30, 2018 compared with $52.5 million for the same period in 2017. Operating income, excluding the gain, as a percentage of segment revenue was 8.8% in the current quarter compared with 9.9% in the prior year quarter primarily due to one-time vendor funding support received in the prior year (which had an approximate impact of 100 basis points), and expense deleverage, partially offset by a higher sales mix of proprietary product.

International

Revenues in the International segment increased $4.8 million, or 11.0%, to $48.6 million in the current quarter compared with $43.8 million in the prior year quarter primarily due to an increase in China e-commerce sales of $3.7 million and an increase in sales to our international franchisees of $0.9 million.

Operating income of $15.7 million in the current quarter was relatively flat compared with the prior year quarter, and as a percentage of segment revenue was 32.3% in the current quarter compared with 36.0% 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.  In addition, as we invest to grow the brand in China, marketing expense increased in our China business compared with the prior year quarter.

Manufacturing / Wholesale

Revenues in the Manufacturing / Wholesale segment, excluding intersegment sales, decreased $4.0 million, or 7.2%, to $52.0 million for the three months ended June 30, 2018 compared with $56.0 million in the prior year quarter primarily due to a $3.6 million decrease in third-party contract manufacturing sales. Intersegment sales increased $9.2 million reflecting the Company's increasing focus on proprietary products.

Operating income decreased $2.7 million, or 14.7%, to $15.9 million for the three months ended June 30, 2018 compared with $18.6 million in the prior year quarter.  Operating income as a percentage of segment revenue decreased from 16.6% in the prior year quarter to 13.6% in the current quarter primarily due to a lower margin rate from third-party contract manufacturing, partially offset by higher intersegment sales, which contribute higher margins.

Year-to-Date Performance

For the first six months of 2018, the Company reported consolidated revenue of  $1,225.5 million, a decrease of $79.7 million compared with consolidated revenue of $1,305.2 million for the first six months of 2017. The decrease was primarily due to the sale of Lucky Vitamin on September 30, 2017, which resulted in a $45.4 million reduction to revenue, and the termination of the U.S. Gold Card Member Pricing program in the prior year, which resulted in a $23.0 million decrease in revenue.

Same store sales increased 0.1% in domestic company-owned stores (including GNC.com sales) for the first half of 2018 and excluding the impact of loyalty points redeemed, same store sales increased 1.9%. In domestic franchise locations, same store sales decreased 3.0%.

For the first six months of 2018, the Company reported net income of $19.5 million and EPS of $0.23 compared with net income of $41.4 million and EPS of $0.61 for the first six months of 2017. Excluding the expenses outlined in the table below, adjusted EPS was $0.44 and $0.80 in the first six months of 2018 and 2017, respectively.

Cash Flow and Liquidity Metrics

For the six months ended June 30, 2018, the Company generated net cash from operating activities of $49.1 million, a $23.8 million decrease compared with the six months ended June 30, 2017 of $72.9 million. The decrease was primarily related to the refinancing of our long-term debt, which resulted in $16.3 million in fees paid to third-parties and higher interest payments, partially offset by lower tax payments.

For the six months ended June 30, 2018, the Company generated $58.2 million in free cash flow, an increase of $4.0 million or 7.4% compared with $54.2 million for the six months ended June 30, 2017. 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. At June 30, 2018, the Company's cash and cash equivalents were $43.4 million and debt was $1.3 billion. No borrowings were outstanding on the Revolving Credit Facility.

Conference Call

GNC has scheduled a live webcast to report its second quarter 2018 financial results on July 26, 2018 at 8:30 a.m. ET. To participate on the live call, listeners in North America may dial (800) 263-0877 and international listeners may dial (323) 794-2094.  In addition, a live webcast of the call will be available on www.gnc.com via the Investor Relations section under "About GNC."  A replay of this webcast will be available through August 9, 2018.

About Us

GNC Holdings, Inc.  (NYSE:GNC) - Headquartered in Pittsburgh, PA - is a leading global specialty health, wellness and performance retailer.

GNC connects customers to their best selves by offering a premium assortment of heath, wellness and performance products, including protein, performance supplements, weight management supplements, vitamins, herbs and greens, wellness supplements, health and beauty, food and drink and other general merchandise. This assortment features proprietary GNC and nationally recognized third-party brands.

GNC's diversified, multi-channel business model generates revenue from product sales through company-owned retail stores, domestic and international franchise activities, third-party contract manufacturing, e-commerce and corporate partnerships. As of June 30, 2018, GNC had approximately 8,800 locations, of which approximately 6,600 retail locations are in the United States (including approximately 2,400 Rite Aid franchise store-within-a-store locations) and franchise operations in approximately 50 countries.

Forward-Looking Statements Involving Known and Unknown Risks and Uncertainties

This release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's financial condition, results of operations and business that is not historical information. Forward-looking statements can be identified by the use of terminology such as "subject to," "believes," "anticipates," "plans," "expects," "intends," "estimates," "projects," "may," "will," "should," "can," the negatives thereof, variations thereon and similar expressions, or by discussions regarding dividend, share repurchase plan, strategy and outlook. While GNC believes there is a reasonable basis for its expectations and beliefs, they are inherently uncertain. The Company may not realize its expectations and its beliefs may not prove correct. Many factors could affect future performance and cause actual results to differ materially from those matters expressed in or implied by forward-looking statements, including but not limited to unfavorable publicity or consumer perception of the Company's products; costs of compliance and any failure on management's part to comply with new and existing governmental regulations governing our products; limitations of or disruptions in the manufacturing system or losses of manufacturing certifications; disruptions in the distribution network; or failure to successfully execute the Company's growth strategy, including any inability to expand franchise operations or attract new franchisees, any inability to expand company-owned retail operations, any inability to grow the international footprint, any inability to expand the e-commerce businesses, or any inability to successfully integrate businesses that are acquired. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Actual results could differ materially from those described or implied by such forward-looking statements. For a listing of factors that may materially affect such forward-looking statements, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Same Store Sales

Same store sales for company-owned stores include point-of-sale retail sales from all domestic stores which have been operating for twelve full months following the opening period. The Company is an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store and through e-commerce channels which include its wholly-owned website GNC.com and third party websites (the sales from which are included in the GNC.com business unit) where product assortment and price are controlled by the Company, in which purchases are fulfilled by direct shipment to the customer from one of the Company's distribution facilities as well as third party e-commerce vendors. In-store sales are reduced by sales originally consummated online or through mobile devices and subsequently returned in-store. Sales of membership programs, including the new PRO Access loyalty program and former Gold Card program, which is no longer offered in the U.S., as well as the net change in the deferred points liability associated with the myGNC Rewards program, are excluded from same store sales.

Same store sales are calculated on a daily basis for each store and exclude the net sales of a store for any period if the store was not open during the same period of the prior year. When a store's square footage has been changed as a result of reconfiguration or relocation in the same mall or shopping center, the store continues to be treated as a same store. If, during the period presented, a store was closed, relocated to a different mall or shopping center, or converted to a franchise store or a company-owned store, sales from that store up to and including the closing day or the day immediately preceding the relocation or conversion are included as same store sales as long as the store was open during the same period of the prior year. Corporate stores are included in same store sales after the thirteenth month following a relocation or conversion to a company-owned store.

The Company also provides retail comparable same stores sales of its franchisees as well as its Canada business if meaningful to current results. While retail sales of franchisees are not included in the Company's Consolidated Financial Statements, the metric serves as a key performance indicator for its franchisees, which ultimately impacts wholesale sales, royalties and fees received from franchisees. The Company computes same store sales for its franchisees and Canada business consistent with the description of corporate same store sales above. Same store sales for international franchisees and Canada exclude the impact of foreign exchange rate changes relative to the U.S. dollar.

Non-GAAP Measures

Management has included non-GAAP financial measures in this press release because it believes they represent an effective supplemental means by which to measure the Company's operating performance, including adjusted net income, adjusted EPS, adjusted EBITDA, segment operating income, and segment operating income as a percentage of segment revenue, adjusted to exclude gains on refranchising and certain other items as reflected in this release, and free cash flow.  Adjusted EBITDA is defined as net income plus interest expense, net, loss on debt refinancing, income taxes and depreciation and amortization and certain other items as reflected in this release.

Management believes that these measures are useful to investors as they enable the Company and its investors to evaluate and compare the Company's results from operations in a more meaningful and consistent manner by excluding specific items which are not reflective of ongoing operating results and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

However, these measures are not measurements of the Company's performance under GAAP and should not be considered as alternatives to earnings per share, net income or any other performance measures derived in accordance with GAAP, or as an alternative to GAAP cash flow from operating activities, or as a measure of the Company's profitability or liquidity.  For more information, see the attached reconciliations of non-GAAP financial measures.

 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)



Three months ended June 30,


Six months ended June 30,


2018


2017


2018


2017


(unaudited)

Revenue

$

617,944



$

650,238



$

1,225,477



$

1,305,186


Cost of sales, including warehousing,
distribution and occupancy

410,209



430,455



810,868



865,541


Gross profit

207,735



219,783



414,609



439,645


Selling, general, and administrative

158,531



159,540



319,261



325,567


Long-lived asset impairments



19,356





19,356


Other loss (income), net

320



(486)



75



(1,619)


Operating income

48,884



41,373



95,273



96,341


Interest expense, net

32,943



16,067



54,716



31,961


Loss on debt refinancing





16,740




Income before income taxes

15,941



25,306



23,817



64,380


Income tax expense

2,600



8,662



4,286



22,992


Net income

$

13,341



$

16,644



$

19,531



$

41,388


Earnings per share:








Basic

$

0.16



$

0.24



$

0.23



$

0.61


Diluted

$

0.16



$

0.24



$

0.23



$

0.61


Weighted average common shares
outstanding:








Basic

83,332



68,287



83,282



68,267


Diluted

83,409



68,362



83,389



68,331


 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation of Net Income and Diluted EPS to Adjusted Net Income and Adjusted EPS

(in thousands, except per share data)



Three months ended June 30,


Six months ended June 30,


2018


2017


2018


2017


Net
Income


Diluted
EPS


Net
Income


Diluted
EPS


Net
Income


Diluted
EPS


Net
Income


Diluted
EPS


(unaudited)

Reported

$

13,341



$

0.16



$

16,644



$

0.24



$

19,531



$

0.23



$

41,388



$

0.61


Gains on refranchising

(208)









(208)





(124)




Retention (1)

2,231



0.02







3,039



0.03






Loss on debt refinancing









16,740



0.20






Joint venture start-up costs (2)

632



0.01







632



0.01






Legal charge (3)













2,097



0.03


Long-lived asset impairments (4)





19,356



0.28







19,356



0.28


Tax effect of items above

943



0.01



(7,176)



(0.10)



(2,711)



(0.03)



(7,892)



(0.12)


Adjusted

$

16,939



$

0.20



$

28,824



$

0.42



$

37,023



$

0.44



$

54,825



$

0.80


















Weighted average diluted common
shares outstanding

83,409





68,362





83,389





68,331




 

 

Reconciliation of Net Income to Adjusted EBITDA

(in thousands)



Three months ended June 30,


Six months ended June 30,


2018


2017


2018


2017


(unaudited)

Net Income

$

13,341



$

16,644



$

19,531



$

41,388


Income tax expense

2,600



8,662



4,286



22,992


Interest expense, net

32,943



16,067



54,716



31,961


Loss on debt refinancing





16,740




Depreciation and amortization (5)

12,001



14,115



24,106



30,854


Retention (1)

2,231





3,039




Joint venture start-up costs (2)

632





632




Legal charge (3)







2,097


Long-lived asset impairments (4)



19,356





19,356


Gains on refranchising

(208)





(208)



(124)


Adjusted EBITDA

$

63,540



$

74,844



$

122,842



$

148,524



(1) Relates to incentive program to retain senior executives and certain other key personnel below the executive level who are critical to the execution and success of the Company's strategy.  The total amount awarded was approximately $10 million, which vests in four installments of 25% each over the next two years.  Vesting dates are on the earlier of February 2019 or the closing of the Harbin transaction, February 2019, August 2019 and February 2020.


(2) Relates to legal and other start-up costs incurred in connection with the formation of a commercial joint venture in China with Harbin Pharmaceutical Group.


(3) Relates to the outcome of litigation the Company pursued relating to a potential breach under its UK license agreement.


(4) Relates to pre-tax non-cash impairment of goodwill and other long-lived assets associated with its Lucky Vitamin e-commerce business.


(5) The decrease in the current year compared with the prior year was primarily due to the prior year quarter accelerated depreciation associated with the re-platforming of the GNC.com website from a third-party to a cloud-based solution, as well as long-lived asset impairments recorded within the U.S. and Canada segment for certain of our underperforming stores in the third and fourth quarter of 2017.

 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

U.S. Company-Owned Same Store Sales (including GNC.com)



2018


2017


Q1
3/31


Q2
6/30


Q1
3/31


Q2
6/30

Contribution to same store sales:








Domestic retail same store sales

(1.2)

%


(4.2)

%


(3.6)

%


(0.5)

%

GNC.com contribution to same store sales

1.7

%


3.8

%


(0.3)

%


(0.4)

%

Total same store sales

0.5

%


(0.4)

%


(3.9)

%


(0.9)

%

 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)



June 30,


December 31,


2018


2017


(unaudited)

Current assets:




Cash and cash equivalents

$

43,353



$

64,001


Receivables, net

124,178



126,650


Inventory

493,653



485,732


Prepaid and other current assets

73,033



66,648


Total current assets

734,217



743,031


Long-term assets:




Goodwill

140,883



141,029


Brand name

324,400



324,400


Other intangible assets, net

96,200



99,715


Property, plant and equipment, net

173,664



186,562


Other long-term assets

29,710



25,026


Total long-term assets

764,857



776,732


Total assets

$

1,499,074



$

1,519,763


Current liabilities:




Accounts payable

$

159,272



$

153,018


Current debt

205,617




Deferred revenue and other current liabilities

119,096



114,081


Total current liabilities

483,985



267,099


Long-term liabilities:




Long-term debt

1,046,069



1,297,023


Deferred income taxes

50,279



56,060


Other long-term liabilities

84,799



85,502


Total long-term liabilities

1,181,147



1,438,585


Total liabilities

1,665,132



1,705,684


Stockholders' deficit:




Common stock

130



130


Additional paid-in capital

1,004,563



1,001,315


Retained earnings

563,387



543,814


Treasury stock, at cost

(1,725,349)



(1,725,349)


Accumulated other comprehensive loss

(8,789)



(5,831)


Total stockholders' deficit

(166,058)



(185,921)


Total liabilities and stockholders' deficit

$

1,499,074



$

1,519,763


 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)



Six months ended June 30,


2018


2017


(unaudited)

Net income

$

19,531



$

41,388


Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation and amortization expense

24,106



30,854


Amortization of debt costs

9,025



6,602


Stock-based compensation

3,474



2,709


Long-lived asset impairments



19,356


Gains on refranchising

(208)



(124)


Loss on debt refinancing

16,740




Third-party fees associated with refinancing

(16,322)




Changes in assets and liabilities:




Decrease in receivables

2,112



13,227


(Increase) decrease in inventory

(9,201)



15,039


Increase in prepaid and other current assets

(3,175)



(1,917)


Increase (decrease) in accounts payable

6,751



(38,607)


Decrease in deferred revenue and accrued liabilities

(1,017)



(16,086)


Other operating activities

(2,674)



409


Net cash provided by operating activities

49,142



72,850






Cash flows from investing activities:




Capital expenditures

(8,333)



(20,397)


Refranchising proceeds

1,175



2,160


Store acquisition costs

(118)



(432)


Net cash used in investing activities

(7,276)



(18,669)






Cash flows from financing activities:




Borrowings under revolving credit facility

104,000



151,000


Payments on revolving credit facility

(104,000)



(147,000)


Payments on Tranche B-1 Term Loan

(2,275)



(40,853)


Payments on Tranche B-2 Term Loan

(21,400)




Original Issuance Discount and revolving credit facility fees

(35,235)




Deferred fees associated with pending equity transaction

(3,014)




Minimum tax withholding requirements

(226)



(247)


Net cash used in financing activities

(62,150)



(37,100)






Effect of exchange rate changes on cash and cash equivalents

(364)



454


Net (decrease) increase in cash and cash equivalents

(20,648)



17,535


Beginning balance, cash and cash equivalents

64,001



34,464


Ending balance, cash and cash equivalents

$

43,353



$

51,999



 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow

(in thousands)



Six months ended June 30,


2018


2017


(unaudited)





Net cash provided by operating activities

$

49,142



$

72,850


Capital expenditures

(8,333)



(20,397)


Refranchising proceeds

1,175



2,160


Store acquisition costs

(118)



(432)


Third-party fees associated with refinancing

16,322




       Free cash flow

$

58,188



$

54,181






 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Segment Financial Data

(in thousands)



Three months ended June 30,


Six months ended June 30,


2018


2017


2018


2017


(unaudited)

Revenue:








U.S. and Canada

$

517,317



$

527,814



$

1,029,731



$

1,064,435


International

48,635



43,813



88,700



83,564


Manufacturing / Wholesale:








Intersegment revenues

65,238



56,000



129,901



117,298


Third-party

51,992



55,997



107,046



111,831


Subtotal Manufacturing / Wholesale

117,230



111,997



236,947



229,129


Total reportable segment revenues

683,182



683,624



1,355,378



1,377,128


Other



22,614





45,356


Elimination of intersegment revenues

(65,238)



(56,000)



(129,901)



(117,298)


Total revenue

$

617,944



$

650,238



$

1,225,477



$

1,305,186


Operating income:








U.S. and Canada

$

45,603



$

52,490



$

89,093



$

102,980


International

15,692



15,787



30,156



30,656


Manufacturing / Wholesale

15,889



18,637



30,853



35,904


Total reportable segment operating
income

77,184



86,914



150,102



169,540


Corporate costs

(28,300)



(26,207)



(54,779)



(54,281)


Other



(19,334)



(50)



(18,918)


Unallocated corporate costs and other

(28,300)



(45,541)



(54,829)



(73,199)


Total operating income

$

48,884



$

41,373



$

95,273



$

96,341


 

 

GNC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Store Count Activity



Six months ended June 30,


2018


2017

U.S. & Canada




Company-owned(a):




Beginning of period balance

3,423



3,513


Store openings

11



36


Acquired franchise stores(b)

12



33


Franchise conversions(c)

(3)



(1)


Store closings

(115)



(75)


End of period balance

3,328



3,506


Domestic Franchise:




Beginning of period balance

1,099



1,178


Store openings

9



13


Acquired franchise stores(b)

(12)



(33)


Franchise conversions(c)

3



1


Store closings

(27)



(21)


End of period balance

1,072



1,138


International(d):




Beginning of period balance

2,015



1,973


Store openings

36



45


Store closings

(43)



(72)


End of period balance

2,008



1,946


Store-within-a-store (Rite Aid):




Beginning of period balance

2,418



2,358


Store openings

21



26


Store closings

(78)



(6)


End of period balance

2,361



2,378


Total Stores

8,769



8,968






(a) Includes Canada.


(b) Stores that were acquired from franchisees and subsequently converted into company-owned stores.


(c) Company-owned store locations sold to franchisees.


(d) Includes franchise locations in approximately 50 countries (including distribution centers where sales are made) and company-owned stores located in Ireland and China.

 

 

Cision View original content:http://www.prnewswire.com/news-releases/gnc-holdings-inc-reports-second-quarter-2018-results-300686735.html

SOURCE GNC Holdings, Inc.

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