GNC Holdings, Inc. Reports Second Quarter 2018 Results

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.

SOURCE GNC Holdings, Inc.