GNC revenue declines as company revamps pricing, product mix and corporate culture

13-Feb-2015 - Last updated on 13-Feb-2015 at 16:45 GMT

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GNC Holdings reported declining sales in the fourth quarter and for its full 2014 fiscal year. CEO Michael Archbold attributed the declines to changes in pricing, revamping of stores’ product mix and lower manufacturing volume in an effort to match inventory to market conditions.

GNC had a tumultuous year. In the first quarter, severe winter weather in many of the company’s core markets negatively impacted results. Then in August longtime CEO Joe Fortunato abruptly left and was replaced by Archbold, who had experience at competitor The Vitamin Shoppe. Fortunato led an overhaul of the company’s member card discount strategy in 2013 and while the shift showed initial promise, the sales momentum generated by that change seemed to fizzle out as 2014 progressed. Archbold made changing the company’s culture a priority after he took over the reins. The new culture will be "both customer-focused and fact-based," he said.

New prices, products

Archbold said GNC is now focused on rationalizing its pricing structure. “We said we would continue to be more disciplined and scale back on promotions. In the fourth quarter of 2014, our core retail business generated more than a 100 basis point increase in product margin,” Archbold told analysts in an earnings call transcripted on the site seekingalpha.com.

The company has also experimented with showing fewer prices on shelf tags. The previous practice had been to show as many as five prices progressively discounted; the company will now seek to restrict itself to three, Archbold said.

Archbold said the fourth quarter also saw the beginning of a revamp of the product mix within the company's stores. “We said that we would reset our stores with an enhanced focus on plant and nature-based proteins, women's business, as well as functional foods. We completed these resets on time. And in November, we began the process of reading the customers' response to these changes. The added products and emphasis of these areas is driving measured improvement at the category level, as we expected. Interestingly, we're also seeing improvement in the diet and letter vitamin categories, which we moved to be adjacent to the women's category,” Archbold said.

Shift in customer base

Archbold said the new product mix is aimed at matching the offerings to the kinds of consumers the company is reaching now. “We're known today primarily as a performance brand. And while many of our sports customers do cross-shop into other categories, the research has informed us that we have the opportunity to expand share of wallet with these performance customers and to broaden our reach with wellness customers,” he said.

Archbold said the plan for 2015 is based on “meaningful, long-term connections with our customers built on deep expertise in health, wellness and performance, delivering a customized plan to meet our customers' unique goals through our associate interactions. We do all this through a best-in-class shopping experience based on customer-driven decision making and rigorous quality standards.”

Despite the recent headwinds, Archbold said the future for the company is bright, noting that 70% of Americans use supplements, and he said 70% of those consider themselves heavy users. Consumers tend to use more supplements as they age, too, which he cited as another “tailwind” for the industry. Based on these facts and the anticipated impacts of pricing and product mix changes, the company released guidance of low single digit revenue growth for 2015.

Earning details

The earnings report reveals a company that appears to have been stuck in neutral for much of the the past quarter and year. For the fourth quarter, GNC reported consolidated revenue of $607.2 million, a decrease of 0.7% as compared with consolidated revenue of $611.5 million for the fourth quarter of 2013. Same store sales declined 3% for company-owned stores, but revenue in the retail sector overall was up slightly as a result of the more disciplined pricing. Wholesale and manufacturing revenue decline 13.3% as a result of the aforementioned inventory resets.

For the full year GNC reported consolidated revenue of $2.61 billion, a decrease of 0.5% as compared with consolidated revenue of $2.63 billion for the full year 2013. Revenue increased in the retail segment by 0.6%. Revenue decreased in the franchise and manufacturing/wholesale segments, by 0.9% and 8.3% respectively.

NYAG action

In the earnings call, Archbold also addressed directly the actions of New York Attorney General Eric Schneiderman, even though it fell outside of the fiscal year in question.

“Given that the original inquiry was done in a very public manner, we filed our response to the AG, refuting all those claims with full and robust responses to every question raised in his letter, including original test results for the specific lots mentioned. And we even retested each and every one of those lots, citing again -- proving again that every one of them met the quality, purity and potency that is showed on the label. The results have validated that all of our products continue to be pure, safe and fully compliant with all regulations,” Archbold said.

“Having responded expeditiously to the AG's request and given our shared goals, we hope he now responds expeditiously to review the information we've provided him, reverse this decision, and allow us to make these products available to our customers in New York state,” he said.