GNC Holdings: Value in Vitamins

05/22/2017 2:50 am EST

Focus: HEALTHCARE

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

GNC Holdings (GNC) is the leading retailer of health and wellness products. GNC’s offerings include vitamins, minerals and herbal supplements, sports nutrition and diet aids, notes Roy Ward, editor of Cabot Benjamin Graham Value Investor.

GNC sells its products through company-owned and franchise stores, e-commerce and corporate partnerships. As of March 31, 2017, GNC had 3,499 retail stores in the U.S. and Canada, 1,164 U.S. franchise locations, 2,371 Rite Aid franchise store-within-a-store locations and 1,949 international stores.

GNC also distributes through Sam’s Club and PetSmart. The company has a total of 8,983 store locations worldwide, a decrease of 36 stores from six months ago.

GNC plans to increase the proportion of stores operated by franchisees by opening new franchise stores and converting 200 company-owned stores to franchise-owned stores in 2017.

The company is also interested in creating higher industry standards for quality and compliance throughout the dietary supplement industry.

Weak sales and earnings have caused GNC’s stock price to plummet from a high of 61 at the end of 2013 to the current 7.32. Increased competition and scrutiny related to product safety and efficacy continue to beleaguer the company.

Sales and earnings will continue to fall during the first half of 2017 but management’s efforts should produce positive growth in the latter half of 2017.

GNC management’s turnaround program includes a new loyalty program, an increased e-commerce presence and higher marketing expenditures. First-quarter sales dipped 4%, EPS plunged 49% and same-store sales slipped 3.9%.

On the brighter side, management said it added five million users to its newly launched My GNC Rewards program, which helped to generate 9% more transactions per store. Management’s decision to lower prices across the board pushed average transaction amounts down 12%.

GNC Holdings’ shares are dirt cheap. At 4.2 times current EPS and 3.1 times cash flow, the stock is the most undervalued stock in my 1,000-stock database.

Buying the stock now will be akin to catching a falling knife, but if management can show slight improvements, GNC’s stock price should surge. President Trump’s tax plan could provide a significant boost to earnings if implemented.

GNC’s income tax rate is a hefty 35%. I expect GNC to rise 59% to my Min Sell Price of 11.66 within two to three years. Buy at 7.75 or below.

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