GNC reports ‘self-inflicted’ & ‘disappointing’ Q1

By Stephen DANIELLS

- Last updated on GMT

GNC reports ‘self-inflicted’ & ‘disappointing’ Q1

Related tags: Revenue, Marketing, Income, Gnc

Lower consumer engagement and an inadequate assessment of the impact of prior-year promotions, but not the NY AG’s probe, are responsible for a ‘disappointing’ Q1, said GNC’s CEO Mike Archbold.

The supplement giant reported $670.2 million in consolidated revenue for the first quarter, down 0.6% from $674.5 million for the same period in 2014. The company’s retailer’s manufacturing/wholesale segment decreased 10.4% to $55.5 million, while same-store sales dropped 4.1% in domestic company-owned stores and franchise stores decreased 1.5%.

Speaking with analysts during the Q1 earnings call, Archbold said: “Some may choose to note the timing of the decrease in sales trends in our business coincided with the negative media associated with the New York Attorney General's actions. Others may comment that our Q1 monthly trends also aligned with results reported by Nielsen. I'm here to tell you that there are a number of things that we did that contributed to the soft business in sales.

“We are responsible for those things which contributed to the sales decline. More importantly, we're accountable for the results.”

Promotion and marketing

Archbold told analysts that, while the company continues to pull back on promotions, it did not “adequately assess”​ the impact of last year’s promotions, which grew the top line, but not profitability.

The company also did not deploy a “full slate of marketing”​ because it is undergoing an review of the effectiveness of its marketing spend. “This caused us to talk to our customers less, a lot less,”​ he said. “In fact, we communicated with our customers nearly 33% less via direct mail and e-mail during the first quarter of 2015 as compared with the same period of 2014.

“To be clear, this was a mistake. Although, our targeted Misys Direct Marketing effectively addressed our most loyal customers, we significantly reduced our reach, and that applies to all customers. This came to light as we completed our extensive assessment of our marketing effectiveness for the last few years.

“The good news is our commitment is to restore marketing spend to levels consistent with prior years and to increase effectiveness.”

‘We should embrace, not fear, novel testing methods’

Prior to opening up to questions from the analysts, Archbold provided context around the agreement GNC reached with the NY AG in March.

As outlined in the open letter I published earlier this month​, our objective included establishing ultimate clarity to what we already knew and what the New York Attorney General has now confirmed, that our products are pure, safe and fully compliant with all applicable regulatory requirements,” ​he said.

“Another important aspect of the agreement is that consumers can take great confidence in purchasing supplements like those produced by GNC, which are manufactured in strict adherence to federal current good manufacturing practices. Going beyond those requirements, as we agreed to do in this settlement, is in the best interest of our customers and will increase confidence in our industry.

“All of this supports our belief that as an industry, we should embrace, not fear, novel testing methods that provide additional opportunities to build consumer trust. We are proud of the trust we have earned from our customers and remain unwavering in our commitment to maintaining that trust every day.”

Financials

For Q1 2015, GNC reported net income of $63.3 million, a decrease of 9.5% as compared with net income of $69.9 million for the first quarter of 2014. 

The company’s stock opened almost 10% lower on the news yesterday morning (April 30) at $41.05 per share. They are trading today (May 1) at almost $44. 

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