GNC a 'strong company' despite stock price slip

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When a company’s shares drop from $61 to somewhere in the high $30s over six months, one might expect an upcoming annual stockholders’ meeting to attract restive attendees.

But GNC’s yearly meeting May 22 at Downtown’s Omni William Penn could hardly have been more serene, with attendance largely limited to directors in town for the board meeting to follow. A couple of votes passed without dissent, and the meeting adjourned.

They should have rented the room by the minute, joked CEO, President and Chairman Joe Fortunato afterward.

To describe the drop in the Pittsburgh health and wellness retailer’s stock since December as “troubling” would mean ignoring GNC’s recent history, or even its history before 2011, when the company launched what turned out to be the year’s most successful initial public offering — better even than those by LinkedIn and Groupon.

First quarter net income may have dropped from $72.6 million a year earlier to $69.9 million this year, but anyone wondering about GNC’s own long-term health and wellness should consider another statistic: In 2005, when Mr. Fortunato was named president and CEO, the company’s earnings before interest, depreciation and amortization were $113 million. Last year, those earnings hit $526 million.

“Joe has been fantastic for this company,” said New York analyst Gary Balter with Credit Suisse on Thursday. “If anyone wanted to map when things started to rock for them, all you have to do is go back to a year or two after he took over.”

What happened in December and the first two months of this year — and sent the share price plummeting — can be traced to a number of contributing factors, Mr. Fortunato said.

For starters, December is usually slow for the retailer as people focus more on office parties and family gatherings than an exercise regimen. Then, the New Year’s resolutions that typically send people to the gym or bring them into stores were trounced by a harsh winter that hurt retailers across the board. The harsh winter hurt other retailers, too, and at one point GNC had to close operations in South Carolina for a few days when weather prevented workers from getting to its manufacturing plant.

During a conference call May 6 to report the first quarter results, Mr. Fortunato also cited “an unusually significant amount of negative media,” including articles in the December Annals of Internal Medicine that questioned whether vitamins and supplements offered any real benefit.

Looking back now at that $60 barrier that GNC broke in November, Mr. Balter said GNC stock may have “gotten a little ahead of itself.” The company pulled back on its 2014 guidance after the first quarter and triggered talk among some analysts of “short-term weakness” and “disappointing sales growth.”

But, at Thursday’s closing price of $37.41, the stock is still listing for more than double its initial public offering. One analyst this week even projected GNC’s price target would hit at $50, raising speculation that concerns about the recent disappointing performance is misplaced.

Credit Suisse currently is neutral on GNC stock, as Mr. Balter says the sports nutrition market seems to have cooled. Still, he said GNC “is such a strong company over a long period. I have a high degree of confidence in [Mr. Fortunato].”

Mr. Fortunato was named president and CEO in November 2005 and took on the board chairmanship in 2012.

In an interview at GNC’s Sixth Avenue headquarters this week, the 61-year-old Mount Washington native said he may be giving up one of those roles — most likely the presidency — in the next one or two years, perhaps the first tangible signal of a succession plan setting in motion over the next three to five years.

“I’m here as long as I love what I’m doing,” he said. “I still see so much opportunity for the company.”

There is little sign he is slowing down. In the past three weeks, Mr. Fortunato’s business travels have taken him west to Los Angeles and east to the United Kingdom. He’s already making plans for the upcoming annual franchisee convention in Las Vegas. 

GNC is still growing, too. It has 576 employees at its corporate headquarters and 15,995 companywide. With 6,500 domestic stores, including the Rite Aid stores-within-a-store, and more than 8,500 worldwide, Mr. Fortunato said it is adding 200 stores domestically each year and 200 more collectively in more than 50 other nations.

The company recently opened its first store in Russia. Mr. Fortunato said they’re looking at entering new markets in Europe and Scandinavia.

He also has his sights on expanding GNC’s customer base domestically, specifically attracting more women, and targeting customers who want organic and natural products.

GNC emphasizes that it sells only premium products, which is one way the company seeks to differentiate the brand in a market where vitamins are sold by drug stores, grocery stores and mass merchants. While people may find fish oil cheaper somewhere else, Mr. Fortunato said, a careful reading of the ingredients often shows they have a fraction of the active ingredients. “You have to take four of theirs to match one of ours,” he said.

The retailer recently launched a new marketing campaign with the tagline, “Beat Average,” and the company is taking a more targeted approach, mailing four- to eight-page pamphlets to customers based on their purchasing history instead of 24-page catch-all catalogs.

Looking ahead, he said, there will be more emphasis on social media and digital marketing, tools that can reach customers 24 hours a day. “If you don’t do that, you’re going to find yourself way behind the times,” he said.

And after a season of lower-than-expected results, Mr. Fortunato is recalibrating, ready to set his sights on the next potential sales growth opportunity.

Steve or 412-263-1963.

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