'New' GNC Tag Sticks With Turnaround Results Still In 'Early Days'

Acting CEO Robert Moran says' GNC's investment in two loyalty programs, store redesigns in pilot locations, opening an Amazon online storefront and training store clerks to help customers pick products is in "still early days … but it looks like we are headed in the right direction."

[GNC Holdings Inc.]'s "One New GNC" promotions flag likely will wave through 2017 before the nutritional, health and wellness product manufacturer and retailer determines whether the initiative turns around its business.

During GNIC's fiscal 2017 second-quarter earnings briefing on July 27, acting CEO Robert Moran said the firm's investment in launching two loyalty programs, implementing simpler pricing, opening an Amazon online storefront and training store clerks in using mobile computers to help customers pick products are starting "to pay off."

"It is still early days, and we have work to do, but it looks like we are headed in the right direction," Moran said.

Deutsch Bank Market Research analyst Shane Higgins agreed with the firm's assessment of its progress. "While 2Q results indicate that the ‘One New GNC’ strategy is gaining some momentum, we still see a lot of uncertainty around how sales and margins will look once GNC cycles the roll-out," Higgins said in a same-day note to clients.

The biggest sign of momentum is in email addresses GNC has for all members of its myGNC free and Pro Access fee-based loyalty programs that are the centerpieces of One New GNC. The 7.8m myGMC members, signed on since the program launched in late 2016, are 80% of the firm's enrollment goal for the program and Pro Access has nearly 325,000 members since starting in March.

GNC is the exclusive distributor of Performix Iridium and other products, recently made available in square containers, and will use the firm's formulation technology in its own products.

GNC has email addresses for every one of those customers, which is three times as many customer e-mail addresses it had to start the year and is the most important element of One New GNC marketing RS109198

Increased digital contact with loyalty program customers has helped bring myGNC members into stores six times a month on average, two more visits than averaged by participants in GNC Gold, the firm's previous rewards program, and spur Pro Access members visited twice as often and bought twice as many products during the April-June period than during the first quarter.

Still, Pro Access enrollment "is trending a bit below our expectations," Moran said. GNC implemented a bonus offering that gives those members "instant gratification" and the firm is "seeing improvement from this incentive with limited margin impact," he said.

Upward Signs Amid Down Numbers

Those One New GNC numbers aren't generating bigger numbers in the firm's earnings report yet, though. Total adjusted net income was down 48% to $27.8m, 41 cents diluted earnings per share, down from 79 cents in the year-ago quarter.

GNC's US and Canada revenues decreased 4.8% to $543.4m with e-commerce sales steady at around 9.5% from the year-ago quarter. The revenue decrease primarily came in a $15.1m loss from discontinuing the Gold Card program in domestic corporate and franchise stores and introducting the new loyalty programs.

International revenues increased 1.3%, to $43.6m as sales in China increased $3.6m but international franchisees' revenues dropped $3.1million. International franchisees' slump primarily came from a decrease in retail same store sales of 1.9% and $4m in sales recognized in the prior-year quarter associated with the timing of shipments.

Revenues in GNC's manufacturing and wholesale segment, excluding intersegment sales, decreased 8.9% to $53.9m as third-party contract manufacturing sales were down 3% to $32.7m and sales to wholesale partners dropped 16.6% to $21.2m.

Moran says the manufacturing/wholesale segment numbers aren't a sign of that business's direction. More wholesale customers are interested in GNC's Beyond Raw, Vitapak, Amp and Total Lean brands and the firm's recent agreement to be the exclusive US distributor of Performix LLC's Iridium and other products also allows GNC to use the Denver firm's formulationtechnology in its own products.

Further, private label business "is an important opportunity" for the manufacturing/wholesale segment, the CEO said. "While we still have work to do, we've increased private label penetration 3 percentage points since March," he said.

Improving private label revenues marks a turnaround for GNC, which like other major nutritionals product manufacturer has struggled to turn profits from private label and contract manufacturing. (Also see "Private Label: A Riddle Wrapped In A Mystery Inside An Enigma For Major Supplement Manufacturers" - Pink Sheet, 18 May, 2015.) GNC competitor Nature's Bounty Co.'s private equity owners made it more attractive for sale by exiting contract manufacturing in 2016. (Also see "KKR Steers Nature's Bounty With Carlyle In Back Seat After Seven-Year Ride" - HBW Insight, 24 Jul, 2017.)

Another sign pointing toward One New GNC paying off is higher transactions growth in stores that were pilot locations for rolling out simpler pricing in addition to myGNC, said Chief Financial Officer Tricia Tolivar. The faster growth in those locations is "largely because the stores themselves and their customers had the opportunity to be on the [myGNC] program for a longer period of time," Tolivar said. (Also see "GNC Making Overnight Image Change In Progress Toward Turnaround" - HBW Insight, 15 Dec, 2016.)