While the S&P 500 has partied its way to 20% gains in 2017, certain stocks haven’t done so well. One of those stocks is GNC Holdings Inc (NYSE:GNC), the vitamin and supplement company which has found itself on the wrong-side of some major secular shifts. GNC stock now is just an accident waiting to happen.
While operations have deteriorated (trailing twelve month operating cash flow has fallen from nearly $400 million to about $200 million in 2 years), the company’s massive debt load has remained little changed at $1.4 billion.
With GNC stock, then, what investors are looking at is a company with declining revenues, declining earnings, declining cash flows, and a still huge debt load.
That is a recipe for disaster.
Now, consider that the company’s debt begins to fall due in less than nine months, and that the company has failed multiple times to refinance that debt. That opens up a whole new can of worms for GNC.
Indeed, it turns this stock into a ticking time bomb. Until GNC gets its huge debt load refinanced (and there are no plausible sings that it will), this stock is counting the days to its eventual apocalypse.
The GNC Business Model Is Quickly Losing Relevance
All debt concerns aside, GNC still isn’t a pretty story.
There was a place and time when GNC was sitting on top of the world. Everyone wanted to be fit. Gym-goers were willing to drink any powder and take any supplement to be fit.
But that era is over.
Now, consumers aren’t willing to drink any powder or take any supplement. They’re much pickier. As studies have shown the dark underbelly of many of these supplements and the number of supplement-related illnesses has grown, consumers have shifted away from taking supplements and towards consuming organic, healthy foods.
That doesn’t mean the whole supplement industry is headed for the graveyard. But it does mean competitors are starting to rub elbows. And when competitors start to rub elbows in this retail environment, the bigger player wins.
Unfortunately, GNC isn’t the bigger player. And indeed, they are getting squeezed out. While GNC revenues are in decline, Wal-Mart Stores Inc (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN) are seeing their vitamin revenues surge.
Granted, GNC sells products through Walmart and Amazon. But the days of GNC being a go-to marketplace for a burgeoning vitamin industry are over.
It just isn’t a pretty environment for vitamin and supplement retailers.
Leverage Makes GNC Stock A Ticking Time Bomb
GNC’s problems, though, don’t end with an ugly operational environment which threatens the longevity of the business.
The company is also looking at $1.4 billion in long-term debt which starts to fall due in less than 9 months.
GNC only has $40 million in cash on the balance sheet. Free cash flow is expected to be just $200 million this year. All in all, it is easy to see why investors are concerned about a default.
Moreover, the vitamin retailer has tried time and time again to refinance its debt, but there just isn’t any interest, even in a loan market that saw U.S. leveraged-loan issuances rise 48% this year. If there is no interest in this burgeoning loan market, there likely won’t be any interest ever.
Overall, it easy to see why so many people are calling GNC a ticking time bomb.
Bottom Line on GNC Stock
The sell-off in GNC stock may seem dramatic. It has, after all, gone from $60 in 2013 to $5 today.
But a huge debt load and deteriorating operations still weigh on this stock.
The stock isn’t undervalued here. The most likely scenario is that it keeps grinding lower until the debt is refinanced (if ever).
As of this writing, Luke Lango was long AMZN.