GNC Holdings, Inc. (NYSE: GNC) (the "Company"), a leading global specialty health, wellness and performance retailer, today reported its financial results for the quarter ended March 31, 2015.
First Quarter Performance
For the first quarter of 2015, the Company reported consolidated revenue of $670.2 million, a decrease of 0.6% as compared with consolidated revenue of $674.5 million for the first quarter of 2014. Revenue increased in the Company's franchise segment by 7.5%. Revenue decreased in the Company's retail and manufacturing/wholesale segments by 1.1% and 10.4%, respectively.
Same store sales decreased 4.1% in domestic company-owned stores (including GNC.com sales) in the first quarter of 2015. In domestic franchise locations, same store sales decreased 1.5% in the first quarter of 2015.
Operating Results
For the first quarter of 2015, the Company reported net income of $63.3 million, a decrease of 9.5% as compared with net income of $69.9 million for the first quarter of 2014. Diluted earnings per share were $0.72 for the first quarter of 2015, a decrease of 4.0% as compared with diluted earnings per share of $0.75 for the first quarter of 2014.
Mike Archbold, Chief Executive Officer noted, "While we are disappointed in the decline of our domestic same store sales, we have identified appropriate sales recapture initiatives to address and reverse this trend. Additionally, our continued efforts to improve gross margin sets the stage for better flow-through on sales for the remainder of the year. Notwithstanding, while we remain confident in and committed to executing our strategic plan, given recent volatility in our business we believe it is prudent to widen the range of our 2015 earnings outlook."
Segment Operating Performance
For the first quarter of 2015, retail segment revenue decreased 1.1% to $503.5 million, as compared with $509.0 million for the first quarter of 2014. The decrease was due primarily to negative same store sales, and was partially offset by the addition of 138 net new company owned stores since the end of the first quarter of 2014, including The Health Store locations in Ireland acquired in April 2014. Operating income decreased by 2.5%, from $94.7 million to $92.4 million, and was 18.3% of segment revenue for the first quarter of 2015, as compared with 18.6% for first quarter of 2014. First quarter 2015 segment operating income includes a $2.8 million expense associated with the correction of an immaterial error related to a payroll accrual. Excluding this correction, segment operating income increased by 0.4% and was 18.9% of segment revenue for the first quarter of 2015. Improved product gross margin and lower advertising spend were partially offset by expense deleverage associated with negative same store sales.
For the first quarter of 2015, franchise segment revenue increased 7.5% to $111.3 million, as compared with $103.5 million for the first quarter of 2014, due primarily to increased wholesale product sales from domestic franchise operations. Operating income increased 0.3%, from $39.6 million to $39.7 million, and was 35.7% of segment revenue for the first quarter of 2015, as compared with 38.2% in the first quarter of 2014. First quarter 2015 operating income includes a $0.3 million gain from the conversion of two company-owned stores to franchise stores, as compared with the conversion of six stores, resulting in a $2.3 million gain, in the first quarter of 2014. Excluding these conversions and the impact of a decrease in the previously established allowance for bad debt expense associated with our international franchisees, the decrease in operating income percentage was driven primarily by third-party wholesale product sales representing a higher portion of total revenue.
For the first quarter of 2015, manufacturing/wholesale segment revenue, excluding intersegment revenue, declined 10.4% to $55.5 million, as compared with $61.9 million for the first quarter of 2014, due to lower third party contract manufacturing revenue. Operating income decreased 10.2%, from $23.5 million to $21.1 million, and was 38.0% of segment revenue for the first quarter of 2015, consistent with the first quarter of 2014.
Unusual Items
The Company's first quarter 2015 selling, general & administrative expenses include the following pre-tax items ("Unusual Items"): (i) $1.8 million expense associated with the net effect of an increase in a legal accrual and a decrease in the previously established allowance for bad debt expense associated with our international franchisees, and (ii) $2.8 million expense associated with the correction of an immaterial error related to a payroll accrual. The combined effect of these Unusual Items resulted in a $0.03 reduction of diluted earnings per share.
Operating Metrics
For the first quarter of 2015, the Company opened 13 net new domestic company-owned stores, eight net new Rite Aid franchise store-within-a-store locations, six net new company-owned stores in Canada, one net new domestic franchise location, one new company-owned store in China, and opened 18 and closed 37 international franchise locations (including one country that is undergoing a franchise partner transition). The Company now has 8,986 store locations worldwide.
For the first quarter of 2015, the Company generated net cash from operating activities of $116.9 million, incurred capital expenditures of $7.5 million, repurchased $60.8 million in common stock, and paid $15.8 million in cash dividends on its common stock. The Company generated $109.7 million in free cash flow (which it defines as cash provided by operating activities less cash used in investing activities excluding acquisitions) and at March 31, 2015, the Company's cash balance was $166.9 million.
Capital Structure
The Company repurchased 1.4 million shares of its common stock at an average price of $44.68 in the first quarter of 2015. At the end of the first quarter of 2015, the Company had $344.4 million remaining on its previously authorized $500 million share repurchase authorization.
At the end of the first quarter of 2015, diluted shares outstanding were approximately 87.3 million.
The Company's Board of Directors declared a cash dividend of $0.18 per share of its common stock for the second quarter of 2015. The dividend will be payable on or about June 26, 2015 to stockholders of record at the close of business on June 12, 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 current 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.
Following is the Company's current outlook for the full year 2015, which is being updated from the previous outlook provided on February 12, 2015: consolidated earnings per diluted share ("EPS") of approximately $3.00 - $3.15 for the full year 2015. The Company's EPS outlook excludes the Unusual Items identified in this release.
Key assumptions underlying the full year 2015 EPS outlook are as follows:
- A low single digit increase in consolidated revenue for the full year 2015. This is based on the following expectations:
- Domestic company-owned same store sales to range from a low-single digit decline to flat for the second quarter of 2015, and for a low-single digit increase for the remainder of 2015. All same store sales expectations include the impact of GNC.com.
- Modest revenue growth internationally
- Manufacturing / wholesale segment revenue generally in-line with 2014 levels
- Retail product gross margin improvements
- Share repurchases of approximately 5-6% of shares outstanding as of the beginning of 2015
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