If there's one industry in retail that seems immune to the weakness the sector is seeing, it's the nutritional-supplement and personal-care industry, which is dominated by players such as GNC Holdings (NYSE:GNC), Vitamin Shoppe (NYSE:VSI), and Nu Skin (NYSE:NUS). The industry has flourished on the back of growing obesity and an increase in health awareness.
Business Insights projects that the vitamins and minerals market (excluding dietary supplements such as herbal pills, probiotics, etc.) will register a compound annual growth rate, or CAGR, of 4.5%, and will grow to nearly $30 billion in 2015 . In addition, it expects the probiotic ingredients, supplements, and food market to grow at a CAGR of 6.2% until 2018 . With the backdrop of these projections, let's take a look at GNC and what it has in store for investors.
Not an impressive performance
GNC's first-quarter results did not impress investors. Management blamed the weakness upon the bad winter weather in January and February, which negatively affected comparable-store sales, or comps.
Moreover, the phase-out of pre-workout supplements after an FDA warning and the unprecedented negative press against vitamins and fish oil-based products also contributed to its woes. Despite these headwinds, first-quarter consolidated revenue increased 1.9% year-over-year to $677.3 million . Earnings per share also increased 2.7% year-over-year.
Looking beyond the short-term pains
Looking forward, GNC might face short-term pains. For example, it continues to face challenges in the South Korean market. Turkey, Venezuela, Mexico, and Australia are examples of other countries where it is facing regulatory and geopolitical-related market pressure. However, GNC is confident about its long-term growth story as a result of the strategic moves that it is making.
For example, the member pricing program has been the right strategic change. GNC is also expanding upon the successful Vitapaks franchise, offered as part of GenetixHD brands. It also launched GNC Puredge, a full line of sports-nutrition products based on whole food-based performance. In order to drive new customers into its fold, GNC launched the Beat Average marketing campaign. This will air on programs that include ESPN's broadcast of the NFL draft, the World Cup, and Online Sports Center.
This year, GNC acquired The Health Stores, a nine-store chain based in Dublin, Ireland. This complements its entry into Europe last year via DiscountSupplements.com, and thus expands its foundation for establishing a meaningful presence in Europe.
As GNC tries to navigate its short-term issues through a series of reformulations, new products, the e-commerce channel, and market promotions, its long-term growth story looks intact. However, its comps are expected to be flat or to increase in the low single-digits for the remainder of the current fiscal year.
A look at peers
Vitamin Shoppe, a smaller player than GNC, reported 10% year-over-year revenue growth in its first quarter of fiscal 2014. This was driven by positive comps, new store growth, robust e-commerce performance, and the contribution from Super Supplements. For the 34th consecutive quarter, it reported positive retail comps.
In order to keep the momentum going, Vitamin Shoppe is adding a Fitness Tech line of products, which will start with tests of small electronic devices such as activity trackers, heart rate monitors, and fitness-specific watches. The company is also investing in the online, mobile, and social media channels in order to operate its stores and e-commerce site as an interconnected business. It also plans to open 60 new stores during the current fiscal year to further drive growth.
Nu Skin, which operates in the personal-care segment, boasts a streak of spectacular performances. Its success story has been weaved around its robust performance in China, where it registered whopping 248% year-over-year growth during the fourth quarter of fiscal 2013.
However, its dream run in China, where it has had business operations for more than a decade, has received a temporary setback. Nu Skin came under the scrutiny of the Chinese regulatory authorities for allegedly operating a pyramid scheme, which is illegal in the country. However, it recently got away with a lower-than-expected penalty of $540,000. As a result, it has resumed its business in China as usual and expects global revenue growth of 20% to 24% in the first quarter, reiterating its prior view .
Although GNC might suffer short-term pains, its expansion and marketing moves indicate that the company is well-positioned for long-term growth. Given the opportunity in the nutritional-supplement and personal-care industry, GNC should be able to sustain its performance over the long run. As such, investors should take a closer look at this stock, which is trading close to its 52-week low.
Neeta Seth 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.
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