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Supplement market headwinds beset GNC as earnings decline in Q2

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By Hank Schultz

30-Jul-2014

The past year has been a tough one for the sales of dietary supplements, and retailing giant GNC is not immune to those trends.  In the company’s second quarter 2014 earnings GNC reported declines in both overall revenue and net income year-over-year.

 

In a conference call, CEO Joe Fortunato said the company struggled to overcome headwinds that have blown through the entire sector. Fortunato cited the poor winter weather and negative publicity for supplements as contributing factors. In the past the company has outperformed the sector, but that string was bound to end, Fortunato said.

 

“In 2014, the broader market for supplements has softened, creating a pause in the growth cycle for what has been a very resilient sector in the past. With industry-wide nutritional supplement growth, rates neared double digits for multiple years. Some levels of moderation is inevitable, especially for GNC as we delivered more than a 26% same-store sales increase, cumulatively from 2011 to 2013, well above industry growth rates,” he told analysts during the called, which is recorded in a transcript on the site SeekingAlpha.com .

DMAA hangover

One factor that contributed to GNC’s soft results is a continued hangover from DMAA, Fortunato said.  Products containing the controversial ingredient were pulled from the market by FDA in 2012.  GNC, as a matter of corporate policy, never agreed with FDA’s assessment that DMAA was unsafe, and continued to sell out its inventory of DMAA-containing products.  That standoff with FDA ended when FDA seized more than 1,500 cases of DMAA products from a GNC warehouse in New Jersey in June, 2013.  

Sales of preworkout products containing DMAA helped drive other traffic in the stores, and GNC has struggled to find a replacement, Fortunato said.

“The last stage of DMAA sales, which peaked in 2012, drove incremental traffic and sales last year prior to final sell-through in Q3 2013. And while we continue to be a leader in the pre-workout space, the replacement products do not fully overcome the combined effect of also selling DMAA products last year,” he said.

Fortunato outlined a strategy to recover the company’s lost momentum. This included more transparent pricing, so that customers better understand the ‘out-the-door’ value (the price after membership promotions, coupons and other promotional activity) that the company delivers. Reforming the company’s price structure has been a theme of earnings conference calls in the past.  Fortunato also said the company will place an even greater emphasis on bring new products to market, but internally and for those sourced from vendors.

Earnings details

GNC’s revenue in the quarter decreased 0.2% to $675.2 million. Retail segment revenue increased 0.6%, but franchise and manufacturing/wholesale segments. Q2 2014 net income was $69.9 million, a 2.5% decrease from the prior year. But GNC managed to recover some of those disappointing numbers with better margins, positng diluted earnings per share of $0.77, a 5.5% increase over 2013 results.

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