GNC Holdings' consolidated revenue decreases 2.7% to $656.3 million in Q3 2014

Oct 30 2014

GNC Holdings, Inc. (NYSE: GNC) (the "Company"), a leading global specialty retailer of health and wellness products, today reported its financial results for the quarter and year-to-date periods ended September 30, 2014.

In addition to presenting the Company's financial results in conformity with U.S. generally accepted accounting principles ("GAAP"), the Company is also presenting results on an "adjusted" basis to exclude the impact of certain non-recurring items in the third quarter of 2014. For more information, see the attached reconciliations of non-GAAP financial measures.

Third Quarter Performance

For the third quarter of 2014, the Company reported consolidated revenue of $656.3 million, a decrease of 2.7% as compared with consolidated revenue of $674.5 million for the third quarter of 2013. Revenue decreased in each of the Company's segments: retail by 1.4%, franchise by 3.1%, and manufacturing/wholesale by 11.4%.

Same store sales as measured on a product only basis decreased 6.9% in domestic company-owned stores (including GNC.com sales) in the third quarter of 2014, as compared with an 8.2% increase in the third quarter of 2013. Including the sales of Gold Cards – which the Company offered to customers for no charge during the Member Pricing launch in May and June 2013 – same store sales decreased 5.8% in domestic company-owned stores (including GNC.com sales) in the third quarter of 2014. In domestic franchise locations, same store sales decreased 4.5% in the third quarter of 2014.

Non-recurring items

The Company's third quarter 2014 results include non-recurring items. On a pre-tax basis, they include: $7.5 million expense associated with changes among the Company's executive leadership team ("Management Realignment"); $4.4 million expense associated with the collectability of receivables ("International Franchise Receivable Reserve"), and $4.3 million income associated with reversal of the contingent purchase price liability from the Company's acquisition of A1 Sports Limited (d/b/a Discount Supplements, "Reversal of Contingent Purchase Price").

For the third quarter of 2014, the Company reported GAAP net income of $64.3 million. Excluding non-recurring items and the related tax impact, adjusted net income for the third quarter of 2014 was $67.6 million, as compared with net income of $73.0 million for the third quarter of 2013. Adjusted diluted earnings per share were $0.75 for the third quarter of 2014, as compared with $0.76 for the third quarter of 2013.

Mike Archbold, Chief Executive Officer noted, "With our strategic review well underway, we have begun to make progress in key areas. This quarter - despite the 6.9 percent decrease in same-store sales - we achieved incremental gross margin dollars in our retail segment as we began to reduce our dependence on extensive promotions. We will continue to test and learn ways to more effectively engage with our customers for profitable growth."

Third Quarter Segment Operating Performance

For the third quarter of 2014, retail segment revenue declined 1.4% to $480.7 million, as compared with $487.3 million for the third quarter of 2013. The decrease was due primarily to negative same store sales, and was partially offset by the addition of 151 net new company owned GNC stores since the end of the third quarter of 2013, Discount Supplements which was acquired in October 2013, and nine The Health Store locations in Ireland acquired in April 2014. Operating income decreased by 3.5%, from $92.6 million to $89.4 million, and was 18.6% of segment revenue for the third quarter of 2014, as compared with 19.0% for the third quarter 2013. Operating income was negatively impacted primarily by higher media advertising spend and expense deleverage associated with negative same store sales, partially offset by the Reversal of Contingent Purchase Price and improved gross margin.

For the third quarter of 2014, franchise segment revenue declined 3.1% to $114.1 million, as compared with $117.8 million for the third quarter of 2013, due to decreased wholesale product sales from international franchise operations. Operating income decreased 3.1%, from $41.6 million to $40.3 million, and was 35.3% of segment revenue for the third quarter of 2014, equal to the third quarter of 2013. Third quarter 2014 operating income includes a $4.4 million International Franchise Receivable Reserve adjustment, and a $4.1 million gain from the conversion of eight company owned stores to franchise stores. Adjusting for these items, the increase in operating income percentage was driven primarily by higher gross margin.

For the third quarter of 2014, manufacturing/wholesale segment revenue, excluding intersegment revenue, declined 11.4% to $61.5 million, as compared with $69.5 million for the third quarter of 2013, due primarily to lower third party contract manufacturing revenue. Operating income decreased 19.4%, from $28.4 million to $22.9 million, and was 37.2% of segment revenue for the third quarter of 2014, as compared with 40.9% for the third quarter of 2013. The decrease in operating income percentage was driven primarily by lower proprietary product sales.

Year-to-Date Performance

For the first nine months of 2014, the Company reported consolidated revenue of $2,006.0 million, a decrease of 0.5% as compared with consolidated revenue of $2,015.2 million for the first nine months of 2013. Revenue increased in the Company's retail segment by 0.8%. Revenue decreased in the Company's franchise and manufacturing/wholesale segments, by 2.4% and 6.6% respectively.

For the first nine months of 2014, the Company reported GAAP net income of $204.1 million, as compared with $217.4 million for the first nine months of 2013. Adjusted for non-recurring items, diluted earnings per share were $2.26 for first nine months of 2014, a 1.8% increase over 2013 results.

For the first nine months of 2014, the Company opened 96 net new domestic company-owned stores, 77 net new international franchise locations, 51 net new domestic franchise locations, 43 net new Rite Aid franchise store-within-a-store locations, 12 net new company-owned stores in Canada and acquired nine The Health Store locations in Ireland. The Company now has 8,881 store locations worldwide.

For the first nine months of 2014, the Company generated net cash from operating activities of $238.0 million, incurred capital expenditures of $55.2 million, repurchased $230.3 million in common stock, paid $43.3 million in cash dividends on our common stock, and used $6.4 million for the acquisition of The Health Store. The Company generated $183.4 million in free cash flow (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions) and at September 30, 2014, the Company's cash balance was $148.2 million.

Capital Structure

The Company's Board of Directors declared a cash dividend of $0.16 per share of its common stock for the fourth quarter of 2014. The dividend will be payable on or about December 26, 2014 to stockholders of record at the close of business on December 12, 2014. The Company currently intends to pay regular quarterly dividends; however, the declaration of such future dividends is subject to the final determination of the Company's Board of Directors.

At the end of the third quarter of 2014, the Company had $460 million remaining on its previously authorized $500 million share repurchase authorization.

At the end of the third quarter of 2014, diluted shares outstanding were approximately 89.9 million.

Current 2014 Outlook

The Company's current outlook for 2014 is based on current expectations and includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

The Company has reaffirmed its outlook for adjusted consolidated earnings per diluted share ("Adjusted EPS") of approximately $2.85 for the full year 2014. This is unchanged from our previous outlook, and excludes non-recurring items.

Key assumptions underlying the full year 2014 Adjusted EPS outlook are as follows:

• Consolidated revenue is expected to be approximately flat for the full year 2014, unchanged from our previous outlook. This is based on:
  • A mid-single decrease in domestic company-owned same store sales – including the impact of GNC.com – for the fourth quarter of 2014, unchanged from our previous outlook.
  • Continued regulatory and macro-economic challenges in our international franchise business.
  • Continued pressure in our manufacturing / wholesale segment.
• Share repurchase activity completed through the third quarter of 2014.

Full year 2014 Adjusted EPS excludes an estimated incremental 3¢ expense in the fourth quarter of 2014 due to lower manufacturing volumes, corresponding with the Company's plans to begin to align inventory levels with business trends.

SOURCE GNC Holdings, Inc.