After Hitting Rock Bottom, Is GNC a Gem?

Source: GNC

After seeing its shares tumble 5.5% on Jun. 13, investors who own pieces of GNC Holdings might be asking themselves if the company is still a good long-term play. However, with shares of the nutritional supplement retailer trading 43% below their 52-week high of $60.98, now might be the greatest time to jump into the fray and buy up the company's stock. This is especially true when you consider that its competitor, Vitamin Shoppe , is trading at such a lofty valuation, even in light of a management shakeup that has left some shareholders scratching their heads.

A CFO means a lot, apparently!
The breaking news that sent GNC's stock down was that its CFO, Michael Nuzzo, had tendered his resignation with the company. Typically, when a CFO resigns, this could signal financial problems at the business in question, but in the case of GNC this is unlikely.

While Nuzzo is resigning in order to work for an unnamed private equity-funded consumer products company, the fact that he's sticking around until at least July 18 suggests that his move came in response to a career opportunity instead of concerns over the validity of GNC's business. If his resignation had been effective immediately, that could signal that something more sinister is at play, but this hasn't been shown to be the case.

Source: GNC

Mr. Market might also be concerned about if the retailer can continue to grow without Nuzzo's presence. Given the fact that GNC's market cap declined by $186 million in response to the news, this is the most likely explanation. However, given the company's strong performance in recent years, it's probable that management will be able to continue on without Nuzzo's oversight.

GNC has been on a tear
The past five years have been particularly good for GNC and its shareholders. Between 2009 and 2013, the company saw its sales climb 54% from $1.7 billion to $2.6 billion. This was due, in part, to the 24% jump in store count the business experienced, with its number of locations in operation rising from 6,917 in 2009 to 8,593 by the end of its 2013 fiscal year, but comparable-store sales growth also played a role in the company's success.

GNC Revenue (Annual) Chart

GNC Revenue (Annual) data by YCharts

Even better was GNC's profitability during this period. While its revenue grew at a pretty nice clip, its net income soared 281% from $69.5 million to $265 million. Some of this improvement came from the retailer's revenue growth, but declining costs also played a big part, particularly in its cost of goods sold and selling, general, and administrative expenses. During this five-year period, GNC saw its cost of goods sold fall from 65.4% of sales to 62.2%, while its selling, general, and administrative expenses declined from 24% of sales to 19.8%.

Vitamin Shoppe has done even better!
In recent years, GNC has demonstrated the ability to grow rapidly. However, its performance has paled in comparison to that of Vitamin Shoppe, one of the company's main competitors. Between 2009 and 2013, Vitamin Shoppe saw its revenue soar 61% from $674.5 million to $1.1 billion. Just like GNC, Vitamin Shoppe saw some improvement in its comparable-store sales, but the biggest contributor to the retailer's growth appears to have been its rise in store count, which jumped 50% from 438 locations to 659.

VSI Revenue (Annual) Chart

VSI Revenue (Annual) data by YCharts

From a profitability perspective, Vitamin Shoppe's numbers outpaced those of GNC even further. During the five-year time-frame covered, Vitamin Shoppe saw its net income skyrocket 424% from $12.7 million to $66.5 million. This resulted, in part, from its rising revenue, but the company's reduced cost structure also helped.

Over this period, management was able to reduce the retailer's cost of goods sold and selling, general, and administrative expenses from 67.8% of sales and 26% of sales to 65.3% and 24.6%, respectively. Also at play was the company's decision to lower its debt, which has resulted in the company's interest expense falling from 2.8% of sales to nearly 0%.

Foolish takeaway
Based on the data provided, it's clear that Mr. Market isn't terribly enthusiastic about Nuzzo's decision to leave. To some extent, this might stem from the fear that something is amiss at the corporation, but the more likely explanation is that investors are worried about GNC's ability to continue its positive trend. While this makes sense, it seems like Mr. Market has overreacted to the news, especially in light of Vitamin Shoppe's stronger returns when pitted against its peer.

The only downside to a stake in Vitamin Shoppe over GNC is that it comes at a pretty hefty cost. Using profit forecasts for each company's current fiscal year, GNC is trading at just 11.4 times earnings. In contrast, Vitamin Shoppe is trading at a much higher, but not necessarily overvalued, 18.3 times earnings. This creates something of a conundrum for the Foolish investor. While Vitamin Shoppe's superior returns point to a company that may have more growth potential, the fact that investors can buy GNC, which is also growing at a nice rate, at a substantial discount might make it the better prospect.

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The article After Hitting Rock Bottom, Is GNC a Gem? originally appeared on

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