For a few short months in early 2017, it looked like a beleaguered GNC Holdings Inc (NYSE:GNC) might finally start moving in the right direction again. Though the second quarter’s year-over-year results were down, earnings were better than expected and GNC stock rallied more than 50% from its April low to its July high. The move carried it back above some key technical hurdles as well.
That gain — and any hope accompanying it — has been wiped away, though, and for good reason. GNC stock has been cut in half from that July peak and, as it turns out, the second quarter earnings beat may have just been a stroke of luck.
There was no repeat performance for the third quarter.
But the forward-looking price-earnings ratio of 4.9 and a (small) handful of bullish GNC news headlines make this name an interesting speculative play, right? In a word, no. This is one of those cases where a stock is cheap for a reason. In this particular case, the reason is the once-iconic health supplement retailer simply can’t compete in the modern market.
The Game Has Changed for Good
It would be easy to chalk up the 90% meltdown of GNC stock from its late-2013 high to Amazon.com, Inc. (NASDAQ:AMZN) and that company’s new and better approach to retailing. Just for the record, though, it wasn’t only Amazon. It was the internet as a whole, which leveled the playing field for all suppliers by turning vitamins and supplements into a commodity, and eliminating geographical barriers.
Regardless of who the primary beneficiary of that paradigm shift is, though, it’s clearly not GNC.
Thing is, the paradigm shift is still unfurling. Last year, online sales of vitamins, minerals and supplements in the United States grew 20%, to $2.4 billion. Brick-and-mortar sales of the same were only up 3%, hitting GNC where it hurt the most.
And it’s a surprising name on this front that’s creating the strongest new headwind for GNC — not Amazon.com, but Wal-Mart Stores Inc (NYSE:WMT). Amazon still accounts for 4.5% of the category’s online sales, versus a more modest 1.6% currently enjoyed by Wal-Mart. The latter was late getting to the proverbial party, though, so garnering such exposure so quickly is still of significant concern to an already-struggling GNC.
As Kurt Jetta, president and founder of TABS Analytics, put it, “This is really a breakout year for Walmart’s online sales of VMS which have helped propel the online sales for the VMS category to a 10-year high of 17% of all sales.”
Much of that growth came at GNC’s expense, with Wal-Mart better able to leverage its size and name than the smaller GNC chain can.
As evidence of the disruption the industry is facing as Amazon and Wal-Mart expand their footprint into the fragmented market, one only has to look at what Vitamin Shoppe Inc (NYSE:VSI) CEO Colin Watts said of his company’s disappointing third quarter report:
“It’s the sports nutrition customer, it’s the sports nutrition basket that’s really defining the decline. In some cases, those are casual customers. In all cases or in the vast majority of cases, those customers are characterized by a much higher degree of price sensitivity than our average customer. They really shop prices — in part, because many times the things that they are going after are very expensive. Whey protein purchases and others is a very expensive thing. And, so, they are looking for the best prices they can find.”
While the explanation was specifically in reference to sports nutrition customers, it’s a microcosm of what’s happening outside the sports nutrition market, and what’s happening to others retailers besides Vitamin Shoppe.
It’s more or less the same thing that Amazon and Wal-Mart did to every other small-footprint shop that didn’t actually offer consumers something they couldn’t get somewhere else at a better price. Retailers just can’t make enough money selling goods that are increasingly commoditized. And without any meaningful degree of scale, there’s not a thing GNC can do about the onslaught — especially now that Wal-Mart is stepping up its game.
Bottom Line on GNC Stock
There’s nothing more fun to watch than a David and Goliath story within the business world, with most onlookers quietly (or not so quietly) cheering for the David. Most investors innately know, however, that the Goliath is going to win the war, even if it doesn’t win every battle. If nothing else, the typical corporate Goliath has deeper pockets and, therefore, more staying power.
That’s a polite way of saying that, while GNC will forever be remembered as the name that turned something of a cottage industry into a sizeable chain of stores, the name — along with its brick-and-mortar approach — just isn’t what used to be.
This is especially true now that it has to fend off Wal-Mart and Amazon, plus countless other smaller online venues.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.