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GNC's Earnings and Outlook Disappoint Once Again, Shares Fall Sharply

GNC (NYSE: GNC  ) , the world's leading specialty retailer of health and wellness products, released its first-quarter report on May 6, 2014 and its stock reacted by plummeting. Let's break down the results and the company's guidance for the rest of the year and then take a glance at one of its largest competitors, Vitamin Shoppe (NYSE: VSI  ) , to decide if this is an opportunity to buy on the dip or a warning sign to stay away.

Source: GNC's Facebook

The disappointing results
GNC released its first-quarter report on May 6 and the results narrowly missed analysts' expectations on both the top and bottom lines; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.75 $0.76
Revenue $677.28 million $700.31 million

Source: Estimize 

GNC's earnings per share increased 2.7% and revenue increased 1.9% year-over-year, as same-store sales at domestic company-owned locations increased just 0.7%. Gross profit decreased 0.1% to $255.99 million and the gross margin took a significant hit, contracting 70 basis points to 37.8%.

Source: GNC

GNC blamed "severe weather patterns" in January and February and "an unusually significant amount of negative media" surrounding the dietary and pre-workout categories as the primary reasons for its weak financial performance. I am not a fan of the increasing number of companies using weather as an excuse for poor quarterly performances, especially one like GNC, which also operates an e-commerce site and offers very low shipping costs.

Expansion may have been the only bright spot in the report, as 85 new stores opened during the quarter to bring GNC's total store count to 8,678. Of the 85 new stores, 33 are company-owned stores in the United States, 27 are international franchise locations, 14 are domestic franchise locations, eight are Rite Aid franchise store-within-a-store locations, and three are company-owned stores in Canada.

Overall, it was an abysmal quarter for GNC and its stock reacted accordingly by plummeting 13.52% in the trading session that followed; this does not even give off the slightest glimmer of being a buying opportunity, but before we write off the company completely, let's take a look at its outlook for the rest of the year...

What will the remainder of the year hold?
If the earnings results were not disappointing enough, GNC went on to lower its full-year outlook; here's what the company now expects to accomplish:

Source: GNC Investor Presentation

  • Earnings per share in the range of $3.05-$3.10, which represents growth of 7%-9% from fiscal 2013
  • Mid single-digit revenue growth
  • Flat-to-low single-digit increase in same-store sales at domestic company-owned locations
  • Modest expansion of the gross margin

This outlook is very weak and is down from the company's previous expectations, which called for earnings per share in the range of $3.18-$3.24, revenue growth in the high single-digits, and mid single-digit same-store sales growth. Also, it is worth noting that GNC is well off of the pace it needs to be on to achieve the expansion plans for 2014 that it announced in February; here's GNC's expansion to-date in comparison with the full-year plan:

Region First-Quarter Full-Year Plan
Domestic Retail Locations 47 200
International Locations 30 200-225
GNC-Rite Aid Locations 8 45
Total 85 445-470

Source: GNC

With the earnings results and full-year outlook in hand, I must reiterate that GNC had an abysmal quarter and investors should avoid its stock indefinitely. This was the third consecutive quarter in which GNC fell short of analysts' estimates, and even though the stock now sits more than 35% below its 52-week high, I do not think the risk to reward is great enough for an investment today. 

Vitamin Shoppe is heating up
On the morning following GNC's earnings release, Vitamin Shoppe, one of GNC's largest competitors in North America, announced first-quarter results of its own; here's an overview:

Metric Reported Expected
Earnings Per Share $0.70 $0.68
Revenue $307.84 million $302.52 million

Source: Estimize

Excluding acquisition-related expenses, Vitamin Shoppe's earnings per share decreased 2.8% and revenue increased 10.3% year-over-year, driven by comparable-store sales increasing 3.6% with the inclusion of e-commerce.

Source: Vitamin Shoppe's Instagram

Gross profit rose 7.7% to $109.47 million and the gross margin took a slight hit, contracting 80 basis points to 35.6%; the company attributed the decrease in its margin to its opening of a new distribution center, as well as a higher penetration of e-commerce sales. The new distribution center will allow the company to more efficiently ship items to its stores and customers, so investors should shrug off its short-term impact on profitability.

Also, Vitamin Shoppe opened nine new stores during the quarter, bringing its total store count to 667. The company plans to open 60 new locations in 2014, so it is a little off-pace, but its $87.8 million in cash and zero debt will allow it to accelerate expansion in the next three quarters. 

Overall, it was a fantastic quarter for Vitamin Shoppe and its outlook on the year calls for continued growth and success. In a comparison of the two companies, Vitamin Shoppe is clearly the better investment option today, so Foolish investors should take a closer look at it and strongly consider buying in right now.

The Foolish bottom line
GNC has just released hideous first-quarter results and its stock has reacted by falling more than 13%. Even with this sharp decline, I think there is more risk to the downside, as the company also provided weak guidance for the rest of 2014. Foolish investors should avoid investments in GNC indefinitely and instead look to Vitamin Shoppe, as it has set itself apart as the best investment option in the industry.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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