Every dog has its day. Even struggling nutritional supplement retailer GNC Holdings Inc (NYSE:GNC). GNC stock has been killed recently as operations have stumbled against the backdrop of a hugely levered balance sheet, making GNC look more like a ticking time bomb than a sustainable business. GNC stock has tumbled from $60 in 2013 to under $5.
But it is bouncing after the company reported much better than expected preliminary fourth quarter numbers. GNC stock is roaring 45% higher.
Is the rally legit?
Far from it. A strong fourth quarter against the backdrop of a burgeoning retail environment was to be expected. Don’t read too much into it. GNC still finds itself on the wrong sides of a secular shift in health consumption. Meanwhile, the massive debt load hasn’t gone anywhere, neither have the bankruptcy concerns.
The free cash flow guide was simply maintained, not hiked, despite the robust fourth quarter sales numbers.
This is a dead cat bounce. Nothing more.
The GNC Stock Rally Doesn’t Add Up
Fourth quarter sales numbers were pretty good. Comparable sales in domestic company-owned stores rose 5.7%. That compares favorably to a 1.3% rise in the third quarter and represents sequential sales growth acceleration. That is always a good sign for a rebounding business.
But despite the robust top-line momentum, the free cash flow guide didn’t get hiked. It stayed at $200 million. The earnings guide also called for $0.24 to $0.25 in earnings per share in the fourth quarter, marginally above the $0.23 consensus estimate.
A maintained free cash flow guide and slightly above-consensus earnings guide doesn’t add up to a 45% rally.
Investors could be excited about the fact that GNC paid down the remainder of its Revolving Credit Facility in the fourth quarter. But again, this was expected. Management said on the third quarter earnings call that they were going to pay down the remainder of the revolver in the fourth quarter.
A maintained free cash flow guide, a slightly above-consensus earnings guide, and confirmation that the revolver had been paid down in the fourth quarter (as was expected) still doesn’t add up to a 45% rally.
Also consider the fact that retail sales everywhere boomed over the past several months, that this isn’t a GNC-specific thing. I don’t expect GNC’s sales momentum to continue. Everyone just shopped more during November and December 2017, and that created a tide that lifted all retailers. But that tide is now over. And some boats will sink.
Considering GNC is still getting squeezed out by cheaper, bigger, easier access players like Wal-Mart Stores Inc (NYSE:WMT) and Amazon.com, Inc.(NASDAQ:AMZN), I think GNC will be on the boats that will sink. Numbers will get worse from here.
Moreover, the company’s going debt concern hasn’t gone anywhere. There is still $1.3 billion in debt on the balance sheet, and that debt begins to fall due this year. GNC 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% last year.
If there is no interest in this burgeoning loan market, there likely won’t be any interest ever.
In sum, an expected sales bump, a maintained free cash flow guide, a slightly above-consensus earnings guide, expected confirmation of the revolver being paid down, and enduring default concerns doesn’t add up to a 45% rally.
Bottom Line on GNC Stock
I maintain that this is still a ticking time bomb. Even without the debt load, it is easy to see why GNC doesn’t need to exist in tomorrow’s vitamin world. Consumers can get a majority of their products for cheaper at big box retailers and online through various sources.
Throw in the debt load, and GNC stock is a must-avoid. Today’s rally is nothing more than a dead cat bounce back to where the stock was just a month ago.
Don’t chase this rally. Fade it.
As of this writing, Luke Lango was long AMZN.