CEO Archbold leaves GNC amid falling revenue, same-store sales declines

By Hank Schultz contact

- Last updated on GMT

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GNC ousted Mike Archbold as CEO early today as a result of the company’s continued poor financial performance. In its second quarter 2016 results, released this morning, the company reported year over year revenue decreases and same-store sales declines.

Robert F. Moran replaced Archbold as CEO immediately prior to this morning’s earnings call with analysts. Moran, former CEO and board chairman at Petsmart, took some questions on the call, while others were fielded by CFO Trish Tolivar, herself fairly new at the company, having been appointed in March of 2015.

“With 120 minutes under my belt in the CEO role, I can say that this was because of the board’s dissatisfaction with overall financial performance. Negative comps over several quarters is not where we want to be. We need new customers and we need more share of wallet in our loyal customers,”​ Moran said.

GNC reported consolidated revenue of $673.2 million, a decrease of 2.4% as compared with consolidated revenue of $689.6 million for the second quarter of 2015.  Revenue in the US & Canada segment decreased by 2.0%, revenue in the International segment decreased 2.5%. In same store sales, company-owned stores were off 3.7% year-over-year, while franchised stores saw declines of 6.7%.

Getting off the crack

Much of the earnings call focused on pricing strategy. GNC reported a number of quarters of positive financial performance under former CEO Joe Fortunato, with a strategy of rapid new product introductions, periodic promotions and incentives tied to the company’s Gold Card loyalty program. Those programs can be seductive as a way to drive sales, but can also start to replace a customer’s loyalty to the basic product mix and price structure. In other words, even when loyal customers like a certain product, they can become accustomed to waiting until it goes on sale. When sales began to stagnate under Fortunato, he responded by doubling down and increasing the discounts that Gold Card members could achieve. Unwinding that strategy was one of the things Archbold was hired to do when he took over from Fortunato in August of 2014.  It was a transition he wasn’t able to achieve fast enough.

“BOGOs [buy one get one offers] have become like crack cocaine. You have to build value for the customer and I don’t think BOGOs month in and month out are a way to do that,”​ Moran said.

Long term franchise plan

GNC has a mix of company-owned and franchise locations. The company operates stores in strip malls, storefronts in shopping malls, downtown locations and sells products on military bases and has store-within-store outlets in RiteAid pharmacies. Despite the negative results for franchise locations, the company remains committed to its strategy of converting company-owned locations into franchise outlets.  One reason why franchise outlets performed so poorly is that in a declining sales environment it becomes hard for franchisees to raise sufficient capital to fully participate in new product launches and other corporate initiatives, Tolivar said. Still, the opportunity continues to attract investors; Tolivar said GNC closed in the second quarter on a deal to sell 84 locations to a single franchisee and is negotiations to sell an additional 200 outlets.

Tolivar said mall outlets generated about 35% of the company’s retail sales, but represent only 30% of overall stores.  But the overall trend there is declining, as the retail landscape shifts and shopping mall traffic declines across the board.  As part of the company’s strategic review, Tolivar said that some of the worst performing mall locations will be shuttered when leases come up for renew. Another part of that ongoing strategic review is to look at a possible sale of the entire company, something that neither Moran nor Tolivar was willing to comment on.

Islands of good news

Within the overall torrent of bad news, Tolivar said there are some islands of good news that point to a nascent resurgence.  Newly introduced products (she didn’t specify which ones) are performing well, an effort to revamp the company’s relationship with Gold Card members has shown promise and the brand is still strong in global markets.

“We have 6.1 million Gold Card customers. They are coming more often and spending more so our direct marketing to them is having an effect. We still believe there are opportunities in international and we continue to invest there,”​ Tolivar said.

GNC is a huge business with many moving parts and a complicated supply chain. Managing all that successfully in a rapidly changing retail environment, with a fixed commitment to some retail formats such as traditional shopping malls that may be close to having outlived their usefulness, will make for a steep hill for new CEO Moran to climb as he seeks to reverse recent trends. As dietary supplement industry consultant and former Nutrition Business Journal​ editor Marc Brush put it, “If you were to build GNC up from scratch starting today, would you build it the way it is now?”

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