GNC Holdings Inc (NYSE:GNC) has had a great year so far. After losing nearly half of its value in 2017, GNC stock has made a major comeback during the first few weeks of 2018, pushing its share price up more than 20% higher since January 1. The uptick isn’t unfounded either, GNC appears to have found a way out of its precarious, and some would say dire, financial situation.
Just a month-and-a-half ago, I wrote that GNC had limited options for the future. At that time, the firm looked like it was heading for bankruptcy unless it could find a suitor willing to take on its massive debt pile. In 2017, GNC hired Goldman Sachs to help it find a way to move forward and to the market’s surprise, Goldman Sachs did just that.
On Tuesday, GNC announced that it had brokered a deal with Harbin Pharmaceutical in which the Chinese pharmaceutical company will invest $300 million into GNC’s business and become the largest GNC shareholder. Not only that, but Harbin — whose pharmaceutical business goes by the name Hayao — will be forming a joint venture with GNC to begin the company’s products in Asia.
GNC stock spiked 18% on the news before settling to about 6% above its Monday price.
What Does This Mean for GNC Stock?
This is a huge deal for GNC stock and loyal shareholders who have been watching the company deteriorate for years. Intervention from an outside investor is pretty much the only way that GNC could’ve continued to operate, so the Hayao deal was a savior for the company.
The synergies between Hayao and GNC should help the company boost its cashflow, since the two will share the burden of manufacturing, selling and distributing GNC products. Hayao is also a powerhouse in China’s vitamin and supplement market. So it should give GNC a strong inroad to one of the largest markets in the world.
A Shrinking Market
This deal will help alleviate some of the pressure that GNC has been feeling from the ever-shrinking U.S. supplement market. People are turning toward organic foods rather than manufactured supplements. In the U.S., GNC competes with big-box stores and online retailers that were selling similar products at a lower price and a more convenient location.
In China things are not as difficult, however. The Chinese market has been good to GNC — the company has long been one of the top vitamin and supplement retailers in the nation’s online marketplaces. So GNC will appear on shelves in a country that is already one of its best customers.
What About GNC’s Debt?
GNC stock wasn’t only struggling because investors were worried about the firm’s popularity. The company also has a worrying amount of debt to pay off. GNC’s long-term debt comes in at a staggering $1.30 billion. And a huge chunk of that pile was coming due in March 2019. It appears, however, that GNC management has that issue under control as well.
At the same time as announcing the deal with Hayao, GNC told investors that that firm was working with creditors to extend the maturity of the debt by two years. At the same time, GNC will also cancel its current Revolving Credit Facility, open a new ABL revolver worth $100 million and issue a $275 million ABL Term Loan.
While that doesn’t eliminate the worrying amount of debt the company owes by any means, it does buy the firm some time.
The Bottom Line for GNC Stock
Reworking its loans was essential for GNC and although the agreement isn’t final yet, it looks likely to go through. Now that the firm has an inroad in China and a strong partner with experience in the market, pushing back the debt repayments could be enough to save the company and give it some room to improve.
With these two new developments on the table, GNC looks to be on a path to repaying its debt and operating as a profitable specialty retailer over the course of the next few years. Much of that prediction depends on GNC being able to successfully grow in China. But so far things are looking up for the supplement retailer.
There’s a chance that the Hayao deal won’t go through or GNC’s loans don’t get pushed back. But if you’re willing to take that on, GNC stock might be a moneymaker as it turns itself from rags to riches.
Right now GNC stock is priced as a nearly worthless retailer, but with these new options on the table, the firm might be ripe for a comeback.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.