Shares of supplement and vitamin retailer GNC are lifting higher this morning to the tune of 21% after the company reported 1Q17 results that were ahead of expectations. The better-than-expected performance is certainly a welcomed development for GNC shareholders as shares have been pummeled since late 2015. Year over year, the stock is down a staggering 78%. The primary culprit has been weak quarterly reports, marred by top and bottom line misses and declining revenue. For instance, last quarter the company badly missed EPS expectations by $0.29 ($0.07 vs. $0.36) and revenue fell about 8% from a year ago. That followed a $0.12/share miss in Q3 and a similar 8% dive in revenue.
So, suffice it to say, the bar was very low for GNC heading into this print and sentiment was decisively on the bearish side. Therefore, the upside results have caught many off-guard, resulting in a combination of some short covering, and, the belief from longs that the worst is behind GNC with the stock already bottoming out.
As for the 1Q17 results, GNC reported EPS of $0.37, beating consensus estimates by $0.02, with revenue down 3.6% to $644.8 million, easily ahead of the $623 million expectation. This was GNC's first top and bottom line beat in at least eight quarters. Same store sales were down (3.9)% for the quarter, extending its streak to five consecutive quarters of negative same store sales. On the positive side, though, there was some sequential improvement. In 4Q16, same store sales came in at (11.3)%. The catalyst to the improved performance here was that transactions grew 9.3% in the quarter. Offsetting this was a (12.1%) drop in average transaction amount driven by lower sales in protein, vitamins, and weight management categories.
The lower sales in some of these higher priced categories caused gross margin to dip to 33.0% from 35.2% in the year ago quarter. With the decline in both revenue and gross margin, GNC's operating income fell by 43% year/year. It does continue to generate solid cash flow, however, with cash from operating activities coming in at $46.1 million and free cash flow of $33.4 million.
Going forward, a key to its turnaround will be whether it can capitalize on its new customer loyalty program, myGNC. It ended Q1 with 5 million customers signed up to the rewards program, with about 78K of those being PRO Access members. As the year goes on, the company plans to leverage CRM information to more effectively reach out to these customers to drive higher consumer frequency and spending.
Wrapping up, GNC's results won't be described as spectacular. Revenue, same store sales, gross margin each saw year/year declines. That said, the fact that it did outperform expectations suggests that perhaps the worst is finally in the rearview mirror and that business is at least stabilizing. The question now is whether GNC can build off of this quarter and shown a resumption in growth.
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