GNC Holdings (GNC) Q2 Earnings: Will The Stock Disappoint?

GNC Holdings, Inc. (NYSE:GNC) – a specialty retailer of health and nutrition related products – is scheduled to report its second-quarter 2016 financial results on Jul 28, before the opening bell.

Last quarter, the company posted a negative earnings surprise of 8.00%. Moreover, GNC Holdings’ earnings lagged the Zacks Consensus Estimate in three of the past four quarters, with an average miss of 4.89%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

GNC Holdings started off 2016 on a discouraging note, with its strong suite in vitamin products hit by deteriorating sales of Vitapaks. To address this issue, management has been taking proactive efforts by improving inventory planning and production process. However it is mostly unlikely for consequences of these efforts to stem the plunge in the near-term.

Besides, the company has also started focusing extensively on other vitamin products by offering store associates training to prioritise vitamin solutions for its customers, capitalizing on the fact that over 70% of Americans are nutrition deficient through their diets. Moreover, as per management’s earlier directive, new promotions and store incentives must have started rolling out by now.

We expect these initiatives might bring in a moderate improvement in the vitamin business, which will be evident from GNC Holdings’ yet-to-be reported quarter results.

With respect to its newly introduced products, GNC Holdings successfully doubled its revenue in Mar 2016, before it was impacted by the effect of cannibalization. Management holds a similar positive outlook from the outcome of new products in the second quarter as well.

Moreover, management expects the company to record a refranchising pre-tax gain of approximately $20 million in the second quarter. Further, in order to better align its financial reporting structure, beginning in the second quarter, the company will be changing its reportable operating segment from Retail, Franchise and Manufacturing/Wholesale to U.S. & Canada, International and Manufacturing/Wholesale, as per its earlier announced plan.

On the flip side, GNC Holdings’ gross margin is anticipated to repeat a dreary performance in the second quarter as well as it had in the previous quarter, with domestic retail product margin rate expected to stay low.

On the other hand, too many discounts on excess vitamin inventory nearing expiration date has continued the negative trends of the company’s vitamin business, which has been plaguing the company in recent times. Although management has been trying hard to resolve this problem, no near term respite is likely as of now. This means the company will continue to see the declining trends in this business in the second quarter as well.

GNC Holdings previously slashed its bottom-line projection for 2016 on the assumption that these declining sales trend will continue to affect it for the rest of 2016 as well. The company now expects to post adjusted EPS in the range of $2.80–$2.90 for 2016, compared with the previous guided range of $3.15–$3.35 (excluding the net gain from corporate to franchise store conversions). The current Zacks Consensus Estimate for 2016 EPS is stands at $2.87, within the company’s guidance range.

Earnings Whispers

Our proven model does not conclusively show that GNC Holdings is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: GNC Holdings has an earnings ESP of -1.30%.That is because the Most Accurate estimate is pegged at 76 cents while the Zacks Consensus Estimate is pegged higher at 77 cents.

Zacks Rank: GNC Holdings has a Zacks Rank #4 (Sell), which along with a -1.30 % ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other companies you may want to consider as our proven model shows they have the right combination of elements to post an earnings beat this quarter:

Bristol-Myers Squibb Co. (NYSE:BMY) , with an Earnings ESP of +1.49% and a Zacks Rank #1.

GW Pharmaceuticals plc (NASDAQ:GWPH) , with an Earnings ESP of +6.36% and a Zacks Rank #2.

Teligent, Inc. (NASDAQ:TLGT) , with an Earnings ESP of +100% and a Zacks Rank #2.