Right now, there seem to be two schools of thought on General Nutrition Centers, the health and wellness retailer. CNBC's Jim "Mad Money" Cramer came out this week with a strong "buy" signal on GNC (NYSE: GNC). "The stock is down big and I think business is about to turn," said Cramer. "I’m a buyer."
But last Monday, Credit Suisse stepped in and slashed its call on GNC from "outperform" to "neutral." Retail analyst Gary Balter cited "low visibility" on the company's same-store sales for the reminder of 2014. Calling the stock "sluggish", he downgraded GNC's target price to $51 per share.
I'm with Cramer, but more on that in a minute. According to the company's web site, GNC Holdings, Inc. operates as a specialty retailer of health and wellness products. The firm operates through three segments: retail, franchise, and manufacturing/wholesale. Its products include vitamins, minerals and herbal supplements, sports nutrition products, diet products, and other wellness products, and offers its own line of health and nutrition products, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, and Beyond Raw. GNC has 8,500 locations operating in the United States and internationally.
GNC's stock currently trades at $45 per share, but its share price has declined by $7 in the past two months, mostly on profit concerns. So why do I see GNC as a buy? I just don't see profits as a problem with GNC. Revenues are strong, earnings per share is healthy, net income is rising, and franchise owners are clamoring to get their name on another GNC store.
Revenues were up 8.6% in the last quarter (at $613 million), on a year-to-year comparison basis, and that figure clocks in well ahead of the industry average of 7.3%. Earnings per share is also well up on a year-to-year basis, with earnings at $2.72 prior to $2.29. The company estimates e! arnings to rise to $3.23 in 2014.
In the fourth quarter, same store sales rose 5.0% in U.S.-based company-owned stores (including website sales.) That's GNC's 34th consecutive quarter of positive same store sales growth. Touching on what Credit Suisse views as a weak point, domestic franchise locations, same-store sales increased 3.3%.
Overseas, GNC has solidified its presence in the potentially lucrative Russian market, with a new deal with Rusvit, whose chief executive officer, Alex Kovaler, also engineered the entry of big brands like Wendy's, Nathan's, and RC Cola into the country. Those are all good reasons why GNC's own CEO, Joe Fortunato, sees clear skies ahead for his company.
"Despite the challenging retail environment, our business performed well, generating solid top and bottom line growth in the quarter," Fortunato said after the Q4 earnings were released. "This culminated in a strong year where we delivered a 22.3% increase in adjusted earnings per share and returned more than $350 million to shareholders, all the while making significant investments in the business which allows us to maintain growth momentum and to capitalize on our industry growth, optimize our customer base, and position the company for new growth opportunities.”
Looking ahead, GNC sees consolidated earnings per diluted share of about $3.18-$3.24 for the full year 2014, a 12-14% increase over 2013 adjusted EPS of $2.85. The firm also calls for a high single digit increase in consolidated revenue for 2014, with a flat January and February (which has been acknowledged by Wall Street with a declining stock price,) before picking up steam, revenue-wise, in the spring months, with rising revenues for the remainder of 2014.
The company is also bullish on opening new store locations – 200, in all, will be newly opened in the U.S. this year, with 225 more opening overseas.
There's also some good news on the marketing front for GNC. Franchise Direct just named ! GNC as th! e top health and beauty franchise in the world, and it's ranked 7th overall on the top 100 global franchises list. I don't tend to go overboard on public relations pitches, or "best of" lists, but anytime you're mentioned by franchising experts in the same breath as McDonalds, Wyndham Hotels and Dunkin Donuts, you're doing something right.
My takeaway on GNC? I view the "February slide" on GNC's stock as an aberration – a sign of weak store sales growth in a harsh winter across most of the U.S., when most people didn't want to leave their couches and fireplaces, let alone go out and buy wellness products.
This is a undervalued stock, and could easily shoot to $55 per share. So don't be a dumbbell and get physical with GNC's stock – it could be just the medicine your portfolio is looking for in 2014.
Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.
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