About 20 years ago, if you had capital and good marketing, you could make a fortune selling nutritional supplements. Soon everyone caught on and realized this was a great business, and competition exploded. GNC Holdings Inc (NYSE:GNC) was an early mover and built a brand which has served it very well, until the past few years when its stock has fallen 90%.
The reason supplements are a good business is because they do not require FDA regulation. Think about it. Just grab a bunch of herbs and thistles, make some claims about how some ancient culture said they healed symptoms of this or that, and sell it.
Okay, I’m half-joking. That’s only some of the sellers out there. The truth is that there is very little data to support the benefits of supplements. Yet, that hasn’t stopped millions of consumers from doing anything they can to get or stay healthy, even if it means taking a placebo or snake oil.
But I’m here not to bury GNC stock, but to praise it for creating a multibillion dollar business. It just happens to have fallen on some hard times amid all the competition. The GNC news is not good.
GNC stock has a 10-K that makes it all too apparent:
“We compete with both publicly and privately owned companies, which are highly fragmented…We also compete with other specialty retailers, supermarkets, drugstores, mass merchants, multi-level marketing organizations, mail-order companies, other internet sites and a variety of other smaller participants. In the United States, many of our competitors have national brands that are heavily advertised and are manufactured by large pharmaceutical and food companies and other retailers.”
Even big pharma has gotten into the game because they can sidestep the FDA approval process.
What GNC stock has is a brand that consumers trust, and consequently amid commoditized competition, it has achieved a measure of success selling:
“Health, wellness and performance products, including protein, performance supplements, weight management supplements, vitamins, herbs and greens, wellness supplements, health and beauty, food and drink and other general merchandise.”
GNC’s heyday was between 2007 and 2012, when revenues doubled, gross profit soared 130% and net income went from a mere $18 million to $240 million — even as SG&A expenses rose from $100 million to $500 million.
Yet since then, all those same metrics have effectively stalled from 2013 onward. Now that’s okay up to a point.
GNC stock was cash-flowing rather nicely, with $309 million in free cash flow (FCF) in FY15. However, 2016 rang in tougher times. Revenue fell from $2.68 billion to $2.54 billion, dragging all the other metrics down with it. TTM revenues are a little bit worse. TTM net income is down to about $100 million after falling from $250 million in FY14. FCF is down to $136 million.
What I see is an enterprise that is really struggling among the competition. Were the free cash flow booming, then I’d say it’s an opportunity for a private equity buyout. Yet I don’t see any PE firms lining up here at $5-5.50 per share.
GNC stock looks like a classic value trap to me, even trading at 3.8x. Now, should we see a sustained turnaround, picking up shares might make sense. I just don’t see a catalyst.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.