If you have ever had a teenager in your house who's tried to bulk up via chemicals -- or slim down, for that matter -- then you have run into the most ubiquitous vitamin-and-supplement store on the planet. I'm talking about GNC (GNC).
If you have ever thought to yourself, when you saw the bills for those tubs of powder and dark plastic bottles full of extra-large pills, that this stuff costs a fortune -- and must be a really good business -- you were right. It is.
GNC is the dominant global retailer of health-and-wellness specialty products, including vitamins, minerals, herbal supplements and sports-nutrition offerings. The company has a vertically integrated business model in which it purchases raw materials, formulates and manufactures a lot of the products and then sells them through its company-owned and franchised stores.
The company dates back to 1935, when founder David Shakarian opened a small health-food store in Pittsburg, Pa. It saw immediate success, and six years later he had grown to a chain of seven stores. It wasn't until 1960s that he officially adopted the name General Nutrition Center, later shortened to GNC, and was able to expand outside of the city of Pittsburgh.
Shakarian continued to run the chain through 1984, and since then the firm has changed ownership several times. At one point, it was owned by Dutch baby-food and nutrition company Numic, and during another period it was investment firm Apollo Global Management (APO). Ontario Teachers' Pension Plan and Ares Management were the latest buyers in 2007, before the company was taken public last year.
In fact, this is GNC's second stint as a public company, as it only went private again when Numic bought it in 1999.
The chain currently has more than 7,700 locations in 56 countries, including 2,100 Rite Aid (RAD) store-within-a-store franchises. In addition to the retail stores, it has two manufacturing facilities in South Carolina and three distribution centers in South Carolina, Pennsylvania and Arizona.
The firm dominates its peer group, with more than 11x GNC stores vs. direct competitors Vitamin Shoppe (VSI) and Vitamin World. GNC's typical customer differs widely from that of the average U.S. supplement consumer: Its demographic skews much younger, with more than 40% of them under the age of 35, and more are engaged in fitness routines. For instance, my son, who rowed crew in high school, lived on its protein powder.
According to Nutrition Journal, the sports segment is the fastest-growing category in the supplement industry, and that fact hasn't been lost on the management team. GNC estimates it controls only one-quarter of the $3.5 billion sports-nutrition market, thus creating room for tremendous expansion.
The company has focused on establishing more proprietary products in this category that reache not just dedicated weightlifters and bodybuilders, but routine and occasional exercisers, active high school and college students, as well as high-performance athletes. Proprietary products already represent 57% of total company-owned sales, and that number is expected to grow even larger.
Another huge benefit enjoyed by GNC comes in the form of its Gold Card Program, which has nearly 5 million active members. For $15 annually, customers who sign up receive 20% off purchases during the first seven days of each month. They also receive mailings and emails about exclusive offers and new products. In turn, GNC registers 45% of monthly sales during that seven-day period each month, and each year Gold Card members account for more than 50% of company-owned retail sales.
GNC's first year as a public company in more than a decade saw total revenues grow by 14%, while same-store sales growth climbed 10%. Last year, the company added 131 stores in the U.S. and another 154 international franchised locations.
As a result of the result of the company changing hands numerous times over the past couple of decades, it's been left with a debt load of about $900 million, even after the proceeds from the public offering reduced it by nearly $250 million. Despite this, shares are up more than 30% for 2012, and have risen 127% since going public. Nonetheless, they only trade at still 15.6x next year's earnings estimates.
GNC is a well-oiled machine that dominates its niche, and its stock is not expensive. Consider bulking up on the shares later in the summer if the broad market hits the skids.
