GNC: A Case of Mr. Market vs. Analysts

Heading into earnings, GNC looks like a strong investment prospect. But, in the face of investor pessimism, is the company really as attractive as it looks?

Feb 8, 2014 at 10:00AM

On Feb. 10, 2014, GNC Holdings (NYSE:GNC) is due to report earnings for the fourth quarter of its 2013 fiscal year. With shares currently trading 19% off their 52-week high, it's safe to assume that shareholders are slightly pessimistic about the company's prospects. Heading into earnings, is it possible that the nutritional supplement retailer could surprise investors and send shares soaring? Or is shareholder sentiment an accurate indicator of the company's future course?

Mr. Market sees good times ahead for GNC
Despite a downturn in GNC's share price, analysts remain optimistic about the upcoming quarter. For the quarter, Mr. Market believes the company will report revenue of $633 million. If this forecast comes to fruition, it will represent a 12% rise in sales from the $565.02 million that management reported in the fourth quarter of 2012.

In terms of profitability, Mr. Market's expectations are even higher. For the quarter, GNC is expected to report earnings per share of $0.65. In the event that the company is capable of matching analyst estimates, it will outperform the $0.50 it reported in the same quarter a year earlier by 30%. On a full-year basis, matching analyst estimates would bring the company's earnings for 2013 to $2.87, up 25% from 2012's $2.29.

How has GNC performed in the past?
Over the past three years, GNC has experienced tremendous growth. Between 2010 and 2012, the company's revenue rose 33% from $1.8 billion to $2.4 billion. According to the company's most recent annual report, the primary driver behind revenue growth was a significant increase in its comparable store sales. Throughout 2012 alone, the business saw its comparable store sales rise 11.5% in its Retail segment and 15% in its Franchise segment.

Over this timeframe, GNC's jump in sales helped contribute to its bottom line. Between 2010 and 2012, the retailer's earnings per share rose a jaw-dropping 169% from $0.85 to $2.29. In addition to benefiting from higher revenue, the company significantly reduced its costs relative to sales, especially its cost of goods sold and selling, general and administrative expenses. While GNC spent a hefty 61.7% of revenue on its cost of goods sold in 2012, this is down from the 64.8% it reported in 2012. Similarly, its selling, general, and administrative expenses declined from 23.6% of sales to 20.7%.

How does this stack up against other companies that compete with GNC, like Vitamin Shoppe (NYSE:VSI)? With a market cap of $1.3 billion, Vitamin Shoppe is much lower than GNC's $4.7 billion market cap. Given this piece of data alone, it might be reasonable to suspect that the company's growth prospects would be greater. This doesn't appear to be the case, however. Over the past three years, Vitamin Shoppe's revenue has risen 27% from $751.5 million to $950.9 million.

In addition to benefiting from an increase in its number of locations in operation and higher online sales, the business saw a rise in its comparable store sales. In 2012 alone, Vitamin Shoppe's Retail segment booked a rise in comparable store sales of 8.2%.

Just as with GNC, Vitamin Shoppe's jump in revenue helped its bottom line. Between 2010 and 2012, the company's earnings per share rose 96% from $1.03 to $2.02. The disparity between its revenue growth and net income growth was attributable to a reduction in the company's cost of goods sold and selling, general and administrative expenses. Over this timeframe, Vitamin Shoppe's cost of goods sold fell from 66.8% of sales to 65%, while its selling, general and administrative expenses declined from 25.3% of sales to 24.6%.

Foolish takeaway
Despite an apparent lack of enthusiasm from GNC's shareholders, analysts believe the company's results will be strong for the quarter and the year. Because of the significant discount the company is now trading at, combined with optimistic analyst estimates and strong historical performance, now might be a good time to consider an investment in GNC. This is especially true when you consider that the company, which is trading at 17 times 2013's estimated earnings, can be purchased at a discount to Vitamin Shoppe's 19 times earnings. As always Foolish investors should do their own research before making any investment decisions. 

The Motley Fool's Top Stock for 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information