Discounting to clear unexpected multivitamin inventory bulge hurts GNC's Q1 results

By Hank Schultz contact

- Last updated on GMT

GNC had to heavily discount many of its Vitapak condition specific multivitamin products because many of them were nearing their expiration dates.  GNC photo
GNC had to heavily discount many of its Vitapak condition specific multivitamin products because many of them were nearing their expiration dates. GNC photo

Related tags: Supply chain management

Supplement retailing giant GNC has suffered through a disappointing quarter that CEO Michael Archbold chalked up mostly to inventory problems.

Yesterday Archbold spoke with analysts in a call detailing performance in the company’s first quarter of its 2016 fiscal year. The news was disappointing: GNC recorded revenue of $669 million, a decline of 1.8% year-over-year. Same store sales in company owned stores were down 2.6% and were down 5.6% at franchise locations, which is the direction the company is increasingly going. The company also downgraded its financial performance expectations for the remainder of its fiscal year. Stock traders reacted sharply, sending the stock price down as much as 29% in trading immediately after yesterday morning’s earnings call. The stock has rebounded slightly in early morning trading on Friday, sitting at about $25, for a two-day drop of about 25% at press time.

Inventory bulge

While GNC has been under pressure in the public eye for more than a year because of the actions of New York Attorney General Eric Schneiderman, the core of the current problem is an inventory issue, Archbold said. The company produced too many of its Vitapak condition specific multivitamin products and many of these products were nearing the end of their shelf lives and had to be heavily discounted. Archbold said GNC discovered this looming inventory bulge late in the game because of what he characterized as inadequate internal controls.

Archbold also said that the Vitapak line has in general been under-performing, and that corporate marketing initiatives are not delivering well enough. He also said that the issue with franchise sales results revolves around franchisees being reluctant to quickly adopt certain corporate initiatives that would require additional investments in new inventory. 

Archbold said fixing the inventory issue has been an opportunity for GNC to revisit its entire product assortment.

“While we do monitor expiring inventory on a regular basis, due to systems limitations, we were surprised by the level and extent of aged and aging inventory. As a result, we've implemented new tools to more precisely track inventory at the store level, but that's only part of the answer. We're also optimizing our assortment, introducing new promotions and marketing and reallocating products,” ​Archbold told analysts.  His comments were posted in transcript form on the site seekingalpha.com​.

Archbold said a plan is in place to improve the relationship with franchisees, which will include the company Sun Holdings, which under an agreement inked in March will buy and operate 84 franchise locations in Texas.

“These initiatives, particularly the expanded assortment, require an investment by the franchisees, so we understand some hesitancy. But we're working with our franchisees to highlight the proven impact of these new initiatives and increase the pace at which they make the investment behind these projects,” ​he said.

Among those projects is the continued transformation of the company’s Gold Card program. Under previous CEO Joe Fortunato, who was ousted in August 2014, the card program has evolved into a discounting program that could quickly move the overall sales number. Archbold said the goal is to move the card back to more of a reward program for consistently loyal customers.

Industry coalition

Mike Archbold GNC
Mike Archbold, CEO of GNC, spoke with NutraIngredients-USA about the company's leading role in an industry coalition to improve supply chain management. To watch that interview, please click HERE.

To further distance the company from the shadow of the NYAG affair, Archbold highlighted for analysts what he characterized as the company’s leading position in an industry coalition to improve the image of its supply chain management. Among these are new raw material handing procedures and a commitment to develop an industry-supported new product database.

“GNC has already adopted new botanical raw material, good agricultural and collection practices, as well as good manufacturing practices, and we've shared these guidelines with our vendors to adopt this year. We anticipate broad industry adoption later this year,” ​Archbold said.

Health & Natural Show appearance

Guru Ramanathan, PhD, chief innovation officer for GNC, will be among the panelists who will speak on May 7 on the subject of Transparency in Dietary Supplements at the upcoming Healthy & Natural Show​ put on by William Reed Business Media.  The show, which will run from May 5 to May 7, will take place at Chicago’s Navy Pier. For more information, click here​.

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