The IPO That Surprised Us All

11/23/2011 9:00 am EST


As is typically the case, the IPO market is in vacation-mode this week for the US Thanksgiving holiday. With no IPOs to preview, took the opportunity to revisit a recent IPO that has caught their attention lately, making post-IPO highs just a few days ago.

Unlike three oil and gas IPOs that were born this year, the strength in this particular stock came as a bit of a surprise. Specifically, the recent IPO that we want to take another look at today is GNC Holdings (GNC), the world’s largest specialty retailer of health and wellness products. 

Back when this company went public in early April this year, it was showing rather pedestrian revenue and same-store sales growth rates, and its massive debt load was crimping its profit potential. However, its first two quarters as a publicly traded company have been quite impressive, highlighted by stronger growth rates driven by a few different catalysts (discussed below), as well as operational efficiencies that have helped it to expand its margins despite rising commodity costs. 

Here is a recent daily chart:

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Due to its strong brand name and global presence, GNC is a company that most people are probably familiar with. With 2,996 company-owned stores in the US and Canada, 919 domestic franchise locations, 2,103 Rite Aid "store-within-a-store" locations, and 1,549 international franchise locations, GNC is the world’s largest specialty retailer of vitamin, mineral, and sports nutrition supplements in the world. In fact, GNC believes it is about 12 times larger than its closest US competitor.

In addition to its stores, the company also sells products through its Web site, which is growing faster than its brick-and-mortar business. 

NEXT: Deep Product Mix, Impressive Partnerships, and More


Its broad and deep product mix, which is focused on high-margin, premium, value-added nutritional products, is sold under its GNC proprietary brands, including Mega Men, Ultra Mega, GNC WELLbeING, Pro Performance, Pro Performance AMP and Longevity Factors, and under nationally recognized third-party brands.

GNC has also launched a number of partnership programs designed to leverage GNC’s brand strength. In 2010, GNC partnered with PepsiCo (PEP) to support its launch of Gatorade G Series Pro and to develop a new brand of fortified coconut water called "Phenom." Also, GNC is working with Petsmart (PETM) to launch an exclusive line of GNC-branded pet supplements.

Part of GNC’s recent success can be attributed to an active pipeline of new product launches over the past couple of years. For instance, this year it extended its line of pocket-sized packs of nutritional supplements called Vitapak by adding the "AMP" line, allowing it to capitalize on cross-selling opportunities with its sports nutrition customer.

Other product starts that have been moving the needle for GNC include expanding its "Pro Performance" brand with the "Beyond Raw" line, and launching an internally developed line of premium vitamins, specifically designed for women, under its WELLbeING name. 

GNC’s stock has recently benefited from a couple positive catalysts including a bullish initiation at Wedbush (Outperform) on November 16 and SAC Capital Advisers disclosing a 4.8% stake in the company on November 10. But, the primary source of its strength has come from back-to-back solid earnings reports.

On April 28, in an 8-K, it reported its first quarterly figures as a public company, reporting that revenue increased by 9% to $465 million, with domestic same store sales up 7.5% (company-owned stores only), and adjusted EBITDA climbing higher by 18% to $69.3 million. There weren’t any analyst estimates at this time.

It was its most recent quarterly report, though, that really stands out, depicting a company that is hitting a new gear in terms of growth.

On October 21, it reported upside third quarter results, with EPS coming in at $0.46, ten cents above consensus, on much-improved revenue growth of 16% to $538 million—also easily ahead of the $513.8 million consensus. Same-store sales growth also picked up, increasing by 10.3% at its domestic company-owned stores. This is far better than the 2.8% rate it achieved in FY09 and the 5.6% in FY10.

The improvement in same-store sales reflects both transaction and average ticket increases. GNC attributes this to the aforementioned successful product launches, but also to its effective "Live Well" marketing campaign. Also boosting its bottom line was an expansion in gross margin, which inched up to 36.2% from 35.0%, driven mostly from retail occupancy leverage.

The fact that it was able to improve its margins despite rising commodity costs suggests the company is finding good operating efficiencies. During the conference call, management stated that it has been reluctant to raise prices while other companies have, so GNC believes it has some flexibility there if input costs continue to escalate. 

NEXT: Even More Bullish Catalysts Ahead


While digging into GNC, it was surprising to see how many potential catalysts the company actually has ahead. Back when we first previewed this IPO, it wasn’t as clear as to where its growth would come from. However, during its earnings conference call, its management discussed in detail what its likely future catalysts are.

One important driver for its growth should come in the form of new store openings. During Q3, GNC opened 28 net new store-within-a-store Rite Aid locations, and for FY11, it expects to exceed its 100 net new domestic store growth guidance, reaching approximately 125 units.

Another avenue for growth should come from its increased focus on international expansion—particularly in China.  Today, GNC is selling products in China in multiple retail channels, through its Web site, and it expects to grow its presence there in Q4, initially focusing on three regions: Shanghai, Shenzhen, and Guangzhou.

Beyond China, the company is looking at growing its presence in Russia, Germany, Brazil, and South Africa. Finally, GNC has been looking for strategic acquisition opportunities to augment its growth. On August 23, it announced its $21 million acquisition of, which addresses the price-competitive segment of the marketplace. GNC expects a supply chain transition to be in place by the end of this year, allowing it to realize margin benefits on transportation and distribution. Overall, is expected to be a $45 million a year business. 

As for analysts’ estimates, the Street is forecasting GNC’s EPS and revenue to grow by 18% and 9%, respectively, in FY12. Looking at its valuation metrics, GNC is currently trading with a forward P/E of approximately 15.5x based on FY12 EPS estimates, a PEG of 0.87x, and P/S of 1.4x.

Considering that it’s a much smaller company, Vitamin Shoppe (VSI) isn’t a perfect comparable, but the businesses do have a lot of overlap in terms of products and customers. VSI is currently trading with a forward P/E of 21.3x, a PEG of 1.6x, and P/S of 1.4x. So, overall, GNC looks to be more attractively valued, especially when considering that GNC is the market leader in this space and probably warrants a premium valuation. 

GNC’s balance sheet has been a sore spot, as it carries a heavy debt after being taken private in a leveraged buyout in 2003, and then being spun out into its IPO. It currently has long-term debt of about $902 million and cash and equivalents of $146.1 million. While lofty, its debt balance has come down from the $1.03 billion level it carried pre-IPO. Editor’s Note: From a technical perspective, the stock looks to be rolling over a bit. Conservative traders may wish to see if it falls back to its 50-day moving average and bounces off of it as support.

By the Staff at

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