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GNC Holdings Inc (NYSE:GNC)
Q1 2020 Earnings Call
May 11, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the GNC Holdings, Inc First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Matt Milanovich, Head of Investor Relations. Please go ahead.

Matt Milanovich -- Vice President of Investor Relations and Treasury

Good morning and thank you for joining us for GNC's first quarter 2020 conference call. I am joined by our Chairman and CEO, Ken Martindale and Executive Vice President and CFO, Tricia Tolivar.

I would like to remind everyone that during this conference call, GNC management will make certain forward-looking statements about its outlook that involves risks and uncertainties. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate, or similar expressions. Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of the company's control. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in GNC's filings with the SEC. GNC is making these statements as of May 11, 2020 and assumes no obligation to publicly update or revise any forward-looking statements.

In addition to the GAAP results, GNC will provide certain non-GAAP financial measures. GNC's earnings press release for the first quarter of 2020 can be found under the News Release link on the Investor Relations page of the company's website at www.gnc.com. The tables attached to that earnings press release include reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures. With that, I'll turn it over to Ken.

Ken Martindale -- Chief Executive Officer

Thanks, Matt. Good morning everyone and thank you for joining us today. For our nation and the world, the COVID-19 pandemic has created challenges we couldn't have imagined just a few months ago. As we navigate this uncertain and ever evolving situation, our first concern, as always, is the well-being of our associates and our customers. In this exceptionally difficult time, we are doing everything we can to support our team and take care of our customers who need us now more than ever.

As you know, we have been working to address our capital structure. The companys Tranche B-2 Term Loan, FILO Term Loan and revolving credit facility have a springing maturity and become due on May 16, 2020. As we do not expect to pay down the convertible notes below $50 million prior to that date, the company is in discussions with required lender group's to reach an agreement prior to May 16, 2020 that extends this springing maturity date. In addition, the company continues to explore all options to refinance and restructure its indebtedness, including discussions with various lender group's around the comprehensive capital structure transaction. Such discussions are ongoing and the company is not in a position to provide terms of such a transaction or further details at this time and no assurances can be provided that such discussions will result in a transaction.

Certainly, GNC has been impacted by the unprecedented economic disruption the pandemic has created. We started to feel the true impact of COVID-19 in the month of March when we saw the decline in store traffic begin to increase and started to close stores, trends that accelerated as the month went on. GNC and the wellness products we sell were deemed essential in many of the markets we serve, but in some cases we made business decisions to close certain stores as a result of declines in traffic. We also shuttered stores as shopping malls closed around the country and in a number of areas we were forced by local directives to temporarily close. As stores shut down and stay-at-home orders were issued, some customers migrated to our digital channels. Like many other retailers with a strong e-commerce presence, we experienced rapid growth in our dotcom business with e-commerce sales at 23% in the first quarter, including a 61% increase in March. GNC generated $31 million in adjusted EBITDA during the quarter, down $36 million from the first quarter of last year, and as the pandemic continues to play out, much has changed.

Let me shift to where we are today. At the end of April, we had approximately 1400 or 40% of our corporate and franchise stores closed in the U.S. and Canada and roughly 25% of our international locations were closed. Since that time, we have reopened approximately a 100 domestic, corporate and franchise stores with little change internationally. We currently have nearly 3800 store associates on furlough. We have frozen all open positions in our Pittsburgh office and have over 200 members of our corporate staff on temporary furlough through at least the end of May, which combined, represents over 40% of our corporate workforce. The remaining corporate associates that are currently working are doing so remotely.

With so many stores closed, these changes to staffing were painful but necessary and we are doing everything we can to support our associates that have been impacted by this crisis. Our supply chain is also under pressure. The GNC team is working hard to keep our three distribution centers open and operating and are conscientiously following our strict safety and social distancing procedures, which are built around CDC guidelines. There are challenges. The performance of the third-party transportation network we rely on has been inconsistent and balancing the rapid shift in product demand with tight manufacturer availability has made it challenging to consistently meet customer demand for wellness and immunity products. Clearly, we will continue to see a significant negative impact on our operating performance in the second quarter and we anticipate the earnings pressure to continue to a lesser degree throughout 2020 when we expect sales to begin to recover barring a substantial second COVID wave. And while it is simply too early to tell when and how the economy will recover or how consumers will respond to this new environment, we are taking decisive action to see GNC through this crisis. This work includes managing our liquidity by reducing as much expense from the business as possible, controlling the supply chain effectively, enabling e-commerce growth, managing through store closures, and motivating and engaging our team.

When the crisis began, we immediately moved to cut costs, work that will deliver an additional $40 million in savings this year. This includes one-time reductions in response to the outbreak, as well as some permanent changes to our cost structure. We're also working to preserve liquidity and limit our product expiration liability through aggressive inventory management. The majority of inbound purchases have been canceled, and we are actively rebalancing inventory between distribution centers and across our store network as needed.

To support current supply chain needs and further develop our omni-channel experience, we recently implemented new buy-online ship-from-store capabilities. This work was originally planned for late 2020, but our teams were able to provide an interim solution to this important piece of omni-channel strategy in just a few weeks. As a result, we can access nearly $80 million of inventory located in our closed stores to meet some of the significant increase in e-commerce demand for immunity products. Our new order management system, which came online in January, gives us the tools to deliver a true omni-channel experience, putting us in a strong position to quickly build additional capabilities and engagement tools like ship-from-store. Expanding our digital business and omni-channel capabilities is a pillar of our strategy and the consumers' recent rapid shift to e-commerce has taught us a great deal. This challenging environment is requiring us to be fast, nimble and develop new operational functionality for the future.

The shift in consumer behavior has also given us an opportunity to take another look at our store optimization plan that we've been executing for the past 18 months. We are actively assessing our current network and while we have not yet completed our work, we expect that there likely will be a significant increase in the number of planned store closures from the previously announced targets. Our work to reposition the GNC brand during the past year is even more relevant today as we navigate the challenges that COVID-19 presents. And the current crisis has crystallized our focus and accelerated our timelines. We expect recent changes in consumer behavior to last beyond the pandemic, and while we certainly wouldn't have chosen this particular path, our ability to deliver effective health and wellness solutions to people striving to live well is what GNC is all about.

Our team has had a difficult two months and we know there are more tough days ahead. Among the millions of people in the United States and Canada who've been furloughed or lost their jobs during the crisis are members of the GNC team and our hearts go out to them. We clearly understand the gravity of the current challenges we are facing, but we also know that our company and our people are very resilient. Our team is highly focused on leading GNC through this current crisis and the work we are doing now should better prepare us for the new realities we are facing. With that, I'll turn it over to Tricia.

Tricia Tolivar -- Executive Vice President and Chief Financial Officer

Thanks, Ken and good morning everyone. Primarily as a result of the COVID-19 pandemic, quarterly adjusted EBITDA was $31 million, down $36 million from the first quarter of last year. First quarter 2020 consolidated revenue was $473 million compared with $565 million in the first quarter of the prior year, with a large portion of the decrease coming in March as stores closed and traffic significantly declined in response to the outbreak of the virus.

First quarter same-store sales, including e-commerce, decreased 10.1%. Excluding the impact of the COVID-19 pandemic, first quarter same-store sales, including e-commerce, decreased 4.4%. While same-store sales in our domestic retail business were down 13.8% during the quarter, e-commerce sales increased by 23% compared with the first quarter of last year.

Revenue from our International segment was down $7.4 million in the first quarter of 2020, compared to the first quarter of last year, primarily due to lower sales in Asian markets as a result of the COVID-19 pandemic. Some countries in which we have a substantial presence are still under temporary lockdown. Given uncertainty in many international markets and the potential slow global economic recovery from COVID-19, we, for the foreseeable future, are primarily focused on driving e-commerce alongside our franchise partners.

Manufacturing and wholesale revenues, excluding inter-segment sales, decreased approximately $20 million in the first quarter of 2020 compared to the first quarter of last year, primarily due to the transfer of the Nutra manufacturing business to the Manufacturing JV with International Vitamin Corporation in the first quarter of 2019.

First quarter adjusted gross profit was 33.8% of sales compared with 36% in the prior year. The decrease was primarily due to deleverage in occupancy expense associated with lower sales. At 28.5% of sales, first quarter adjusted SG&A was at 240 basis points from last year, primarily driven by deleverage in salaries and benefits associated with the decrease in sales. As Ken mentioned, the cost control initiatives have been put in place to drive an approximate $40 million reduction in expense this year. In addition to planned significant decrease in marketing expense in the second quarter of 2020, we realized savings from actions, including corporate furloughs, elimination of non-essential IT spending, and elimination of merit increases for our corporate team.

Due to the current and future potential impact of COVID-19, we have recorded charges to the carrying amount of inventory, accounts receivable, goodwill, indefinite-lived intangibles, our equity method investments, and other long-lived assets during the quarter. These charges were recorded as an add-back to adjusted EBITDA.

We ended the quarter with $137 million in cash, which includes $30 million in borrowings under our revolving credit facility. First quarter free cash flow decreased $16 million in the quarter, mainly due to a decrease in operating income and unfavorable changes in working capital. In April, we drew another $30 million on our revolving credit facility, and as of today, we have $127 million in cash on hand.

In terms of our capital structure, we're exploring several options to refinance and restructure debt. While we continue to work through alternatives to address these maturities, we cannot make any assurances regarding the likelihood, certainty or exact timing of any alternatives. Additionally, substantial doubt exists regarding our ability to reduce the amount of outstanding under the convertible notes to less than $50 million by May 16, 2020, a requirement to avoid the springing maturity of the B-2 Term Loan, the FILO and the revolving credit facility. Failure to complete a refinancing or other out-of-court restructuring, obtain an extension of the springing maturity or to reach an agreement with required lender group's under the credit agreements prior to May 16, 2020 with respect to the springing maturity or to otherwise reach an agreement with the company's stakeholders on the terms of an out-of-court restructuring would have a material adverse effect on the company's liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement, which is expected to be renegotiated restructuring plan.

We are currently in discussion with the lenders to move the springing maturity and believe the parties will see, it is in everyone's best interest to do so. This will, by no means, be an easy year for GNC, regardless of our past as we continue to optimize our store footprint, reduce costs and reopen our temporarily closed stores. We expect adjusted EBITDA performance to improve in the back half of 2020. This does assume the impact of COVID-19 continues to lessen over time rather than a return to lockdown across the globe.

Although we have historically taken questions at the end of each call, these are unusual times presenting many unknowns and as such, we will not be taking questions on this call today. Please feel free to reach out to myself, Matt Milanovich or John Mills from ICR for follow-up. Thank you and please stay safe.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 22 minutes

Call participants:

Matt Milanovich -- Vice President of Investor Relations and Treasury

Ken Martindale -- Chief Executive Officer

Tricia Tolivar -- Executive Vice President and Chief Financial Officer

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