GNC Holdings (GNC) Down 16.8% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for GNC Holdings, Inc. (NYSE:GNC) . Shares have lost about 16.8% in the past month, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

GNC Holdings reported third-quarter 2017 adjusted earnings per share (EPS) of 32 cents, reflecting a massive 45.8% year-over-year deterioration. Adjusted EPS also missed the Zacks Consensus Estimate by a penny. Per management, the hurricanes Harvey, Irma and Maria have dented the adjusted EPS figure to the tune of 2 cents.

The year-over-year decline can be attributed to a dull revenue performance in the reported quarter, primarily because of underperformance by the U.S. & Canada and manufacturing/wholesale segments.

Including one-time items, the company reported earnings of 31 cents per share, down 34% year over year.

Revenues

Revenues during the reported quarter dropped 2.9% year over year to $609.5 million. The figure also missed the Zacks Consensus Estimate of $616 million.

The lower sales at the U.S. & Canada and manufacturing/wholesale segments can be cited as the major reason for the disappointing numbers.

Same-store sales increased 1.3% in domestic company-owned stores (including GNC.com sales) in the third quarter of 2017. In domestic franchise locations, same-store sales declined 1.7%.

Segments in Details

GNC Holdings reports operations under three segments: U.S. & Canada (including company-owned stores in the United States, Puerto Rico and Canada, franchise stores in the United States and e-commerce); International (including franchise locations in approximately 50 countries, The Health Store and China operations); and Manufacturing/Wholesale (comprising manufactured products sold to other segments, third-party contract manufacturing and sales to wholesale partners).

During the reported quarter, GNC Holdings’ revenues from the U.S. & Canada segment dropped 3.5% to $507.1 million, primarily owing to a $12-million decrease due to the discontinuation of the Gold Card program in the United States and the introduction of the company's new loyalty programs. In domestic franchise locations as well, revenues declined nearly $7.5 million, partially offset by a 1.3% increase in retail same-store sales. However, GNC.com sales were up 41.9% in the third quarter.

Revenues at the international segment increased 19.3% to $49.1 million. Revenues from international franchisees rose $2.8 million. Revenues from the China business increased $4.8 million in the reported quarter.

Revenues at the manufacturing/wholesale segment (excluding intersegment revenues) decreased 13.1% to $53.3 million. Within this segment, third-party contract manufacturing sales fell 14.9% to $31.2 million owing to lower demand related to reduced sales for some customers. Sales to wholesale partners decreased 10.5% year over year from $24.7 million to $22.1 million in the quarter. However, Intersegment sales increased to $58 million in the quarterfrom the year-ago $53 million on the company's increased focus on proprietary products.

Margin

Gross profit deteriorated 8.6% in the reported quarter to $196.8 million. Consequently, gross margin contracted 200 basis points (bps) to 32.3%.

Selling, general and administrative expenses rose 1.7% to $150.9 million. Accordingly, adjusted operating margin deteriorated 320 bps to 7.5%.

Financial Position

GNC Holdings exited the third quarter with cash and cash equivalents of $40.1 million, down from $51.9 million at the end of second-quarter 2017. Long-term debt was $1.38 billion at the end of the quarter, compared with $1.51 billion at the end of second-quarter 2017. Year to date, the net cash flow from operating activities was $149.6 million, compared with $169.7 million a year ago.

Further, the company generated year-to-date free cash flow of $124.8 million as compared with $162.8 million in the year-ago quarter.

‘One New GNC’ Plan Update

Earlier, management had announced plans to revamp its existing business model, dubbed as the ‘One New GNC'. The company has been seeing transformational changes during the third quarter of 2017 as well. Transaction growth was up 12.4% in the third quarter. As of Oct 25, 9.6 million consumers had joined the company's loyalty programs, including approximately 585,000 customers enrolled in the PRO Access membership.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend for fresh estimates. There has been one revision lower for the current quarter. While looking back an additional 30 days, we can see even more downward momentum. There have been three moves down in the last two months. In the past month, the consensus estimate has shifted lower by 26.7% due to these changes.

VGM Scores

Currently, GNC Holdings' stock has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.