GNC revenues stall as company weans itself from promotion-heavy culture

CEO Michael Archbold told analysts on a earnings conference call that part of the revenue decline in the same-store retail segment, where revenue was off 0.4% year-over-year, had to do with discontinuing the overly heavy reliance on promotions that characterized the regime of previous CEO Joe Fortunato.

In discussing results a year earlier, in early August 2014, Fortunato mentioned the word “promotions” 23 times and detailed how the company was offering discounted gold cards, the company’s loyalty program. Archbold, who took over the reins at GNC a year ago after Fortunato was fired days after that second quarter earnings call, said the company was seeking to wean itself off of a promotional culture that might generate traffic, but did little to improve profitability.

Archbold said the company believed it necessary to retrench and put revenue- and traffic-generating schemes on a more rational basis, and said the process should be largely complete as the third quarter progresses by which time its impact in terms of earnings should be neutral.  Promotions will still figure into GNC's marketing plans but future programs will be "targeted,"​ according to management.

“In an industry that is growing and we are comping negative it is fair to say that in the short run we have ceded market share but we have done it with purpose. We've done it to stop doing things that were not productive, even not profitable, and we have talked about that at length in terms of the reduction in the levels of non-profitable promotions. So we have continued to improve our retail gross product margin rate. That is really important to us and as we normalize against those types of trends we believe we can again then gain market share. But we need to reset,”​ Archbold said in the call that was posted in transcript form on the site seekingalpha.com​.

Archbold also said manufacturing revenue, which was off 5.6% year-over-year, was impacted by lower sales to major customers such as RiteAid, Drugstore.com, PetSmart, and Sam's Club. There was also a shift in the market toward more sports nutrition and diet products, categories that are not principally manufactured by GNC and hence carry relatively lower profit margins.

Franchise strategy going forward​

Like a number of other retailers in the health food and vitamin channel, GNC had adhered to a take-no-prisoners approach to opening new stores as rapidly as possible.  Archbold signaled in this call a new strategy toward focusing more on helping franchisees open new locations. Revenue in the franchise segment was up by 7.5% year-over-year, and Archbold said it only made sense to allow this dynamic segment more room to grow.

“Beginning this quarter we expect to increase the proportion of new stores that are franchised locations, as this approach results in the highest expected returns, hence creating value. We have also identified criteria for existing company owned stores that should create more value as a franchise location. Our plan is to begin the process of transitioning these company owned stores to franchised locations in select markets. The majority of our new stores will in fact be franchises,”​ Archbold said.

Archbold said the company plans to allow existing franchisees to add locations and to bring in new franchisees. Chief financial officer Tricia Tolivar did say, however, that the company no longer expects to hit the 150 new international franchise locations in 2015 that was previously announced. In addition to weaning the company off of unprofitable promotions, GNC has embarked on a program of closing underperforming stores, both company owned and franchise locations. 

“Our strategy to optimize current operations by emphasizing those position for efficient profitable growth, our evaluation has resulted in the transition and in some instances the termination of certain locations and partners,”​ said Tolivar.

Earnings details​

For the second quarter of 2015, GNC reported consolidated revenue of $678.5 million, an increase of 0.5% as compared with consolidated revenue of $675.2 million for the second 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 0.3% and 5.6%, respectively.

For the second quarter of 2015, the Company reported net income of $67.4 million, a decrease of 3.6% as compared with net income of $69.9 million for the second quarter of 2014.  Diluted earnings per share were $0.79 for the second quarter of 2015, an increase of 2.6% as compared with diluted earnings per share of $0.77 for the second quarter of 2014.