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 December 31, 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. For more information, see the attached reconciliations of non-GAAP financial measures.
Fourth Quarter Performance
For the fourth quarter of 2014, the Company reported consolidated revenue of $607.2 million, a decrease of 0.7% as compared with consolidated revenue of $611.5 million for the fourth quarter of 2013. Revenue increased in the Company's retail and franchise segments by 0.1% and 4.1%, respectively. Revenue decreased in the Company's manufacturing/wholesale segment by 13.3%.
Same store sales decreased 3.0% in domestic company-owned stores (including GNC.com sales) in the fourth quarter of 2014. In domestic franchise locations, same store sales decreased 2.6% in the fourth quarter of 2014.
Non-recurring Items
As previously disclosed, the Company's fourth quarter 2014 results include non-recurring items. On a pre-tax basis, they principally include $3.5 million expense in cost of sales associated with lower manufacturing volumes, corresponding with the Company's previously announced plans to begin to align inventory levels with business trends ("Lower Manufacturing Volume Impact"). For additional information, please see the attached reconciliations of non-GAAP financial measures.
Operating Results
For the fourth quarter of 2014, the Company reported GAAP net income of $51.8 million. Excluding non-recurring items and the related tax impact, adjusted net income for the fourth quarter of 2014 was $53.9 million, as compared with adjusted net income of $59.8 million for the fourth quarter of 2013. Adjusted diluted earnings per share were $0.61 for the fourth quarter of 2014, as compared with $0.63 for the fourth quarter of 2013.
In the fourth quarter of 2014, the Company's effective tax rate was 32.6%, which includes $3.0 million of net discrete tax benefits related primarily to the reduction of valuation allowances and certain state tax positions.
Mike Archbold, Chief Executive Officer noted, "The continuing improvement in retail gross margin (driven by reduced and more targeted promotional activity) is evidence our customer-focused approach is producing results. We are very pleased with the cultural transformation, which has led to the development of a number of strategic initiatives designed to fuel future growth and create shareholder value."
Segment Operating Performance
For the fourth quarter of 2014, retail segment revenue increased 0.1% to $444.0 million, as compared with $443.5 million for the fourth quarter of 2013. The increase was due primarily to growth in our e-commerce businesses and the addition of 155 net new company owned stores since the end of the fourth quarter of 2013, including The Health Store locations in Ireland acquired in April 2014. These gains were largely offset by negative same store sales. Operating income decreased by 0.4%, from $69.4 million to $69.1 million, and was 15.6% of segment revenue for the fourth quarter of 2014, consistent with the fourth quarter of 2013. Improved product margin and lower advertising spend were offset by expense deleverage associated with negative same store sales. Retail segment results were also negatively affected by lower than expected revenue and operating margin from Discount Supplements.
For the fourth quarter of 2014, franchise segment revenue increased 4.1% to $105.1 million, as compared with $100.9 million for the fourth quarter of 2013, due primarily to increased wholesale product sales from domestic franchise operations. Operating income decreased 2.6%, from $38.7 million to $37.7 million, and was 35.8% of segment revenue for the fourth quarter of 2014, as compared with 38.3% in the fourth quarter of 2013. Fourth quarter 2014 operating income includes a $0.3 million gain from the conversion of three company-owned stores to franchise stores, as compared with five stores resulting in a $1.7 million gain in the fourth quarter of 2013. Excluding these items, operating income increased $0.5 million, and was 35.6% of segment revenue for the fourth quarter of 2014, as compared with 36.6% in the fourth quarter of 2013. The decrease in operating income percentage was driven primarily by wholesale product sales representing a higher portion of total revenue.
For the fourth quarter of 2014, manufacturing/wholesale segment revenue, excluding intersegment revenue, declined 13.3% to $58.1 million, as compared with $67.1 million for the fourth quarter of 2013, due primarily to lower third party contract manufacturing revenue, and lower wholesale partner sales. Operating income decreased 26.1%, from $27.8 million to $20.6 million, and was 35.4% of segment revenue for the fourth quarter of 2014, as compared with 41.5% for the fourth quarter of 2013. Fourth quarter 2014 includes $3.5 million expense associated with lower manufacturing volumes, corresponding with the Company's previously announced plans to begin to align inventory levels with business trends. Adjusting for this item, fourth quarter 2014 operating income percentage was in-line with the fourth quarter of 2013.
Full Year Performance
For the full year 2014, the Company reported consolidated revenue of $2,613.2 million, a decrease of 0.5% as compared with consolidated revenue of $2,626.8 million for the full year 2013. Revenue increased in the Company's retail segment by 0.6%. Revenue decreased in the Company's franchise and manufacturing/wholesale segments, by 0.9% and 8.3% respectively.
For the full year 2014, the Company reported GAAP net income of $255.9 million, as compared with $265.0 million for the full year 2013. Adjusted for non-recurring items, diluted earnings per share were $2.87 for the full year 2014, a 0.7% increase over 2013 results.
For the full year 2014, the Company opened 129 net new domestic company-owned stores, 114 net new international franchise locations, 58 net new domestic franchise locations, 54 net new Rite Aid franchise store-within-a-store locations, 16 net new company-owned stores in Canada, two new company-owned stores in China, and acquired nine and opened one The Health Store locations in Ireland. The Company now has 8,976 store locations worldwide.
For the full year 2014, the Company generated net cash from operating activities of $303.8 million, incurred capital expenditures of $70.5 million, repurchased $284.0 million in common stock, paid $57.5 million in cash dividends on our common stock, and used $6.4 million for the acquisition of The Health Store. The Company generated $234.7 million in free cash flow (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions) and at December 31, 2014, the Company's cash balance was $133.8 million.
Capital Structure
The Company repurchased 1.3 million shares of its common stock in the fourth quarter of 2014, for $53 million. At the end of the fourth quarter of 2014, the Company had $407 million remaining on its previously authorized $500 million share repurchase authorization.
At the end of the fourth quarter of 2014, diluted shares outstanding were approximately 88.6 million.
The Company's Board of Directors declared a cash dividend of $0.18 per share of its common stock for the first quarter of 2015. The dividend will be payable on or about March 27, 2015 to stockholders of record at the close of business on March 13, 2015. 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.
Current 2015 Outlook
The Company's initial outlook for 2015 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.
Below is the Company's initial outlook for the full year 2015:
- Consolidated earnings per diluted share ("EPS") of approximately $3.10 - $3.15.
- A mid single digit increase in consolidated revenue. This is based on achieving a low single digit increase in domestic company-owned same store sales, including the impact of GNC.com.
- Contributions from initiatives associated with our brand evolution, product introductions and effective marketing are expected to build throughout 2015. Consequently, the Company expects the same store sales increase in domestic company-owned stores – including the impact of GNC.com – and year over year consolidated EPS growth to be lowest in the first quarter of 2015.
- Depreciation & amortization of approximately $60 million, combined.
- Tax rate of approximately 36%.
- Share repurchases of approximately 5-6% of shares outstanding.
- Capital expenditures of approximately $50 million.
- New store expectations: approximately 125 total net new domestic (including both company owned and franchised stores) and retail segment locations, approximately 150 net new international franchise locations, and approximately 30 net new GNC-Rite Aid store-within-a-store locations.
Mike Archbold, Chief Executive Officer added, "I am very excited about 2015. We will be focused on a number of important initiatives, including our brand evolution, product introductions, effective marketing and customer focused decision making throughout the organization, which is the result of our cultural transformation. In 2015 we expect to see retail product margin improvements, improved marketing effectiveness, measured growth internationally, and working capital improvement. We will also make the necessary investments – in people, training and systems – to support our brand, our initiatives and fuel our growth."
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