Over 24.5% Yield-to-Maturity with GNC Holdings, Bonds Mature August 2020

  • Q2 international segment sales increased 11% year-over-year.
  • E-commerce sales increased by 8.3%
  • The company’s myGNC and ProRewards customer loyalty programs grew 14% and 8.8% respectively over Q1 levels.
  • Q2 interest coverage was a healthy 1.8x.

This week’s bond focus takes a third look at a global specialty retailer of health and wellness products. Durig Capital’s last review of GNC discussed the Harbin China deal. While that deal is currently awaiting regulatory approval, GNC has since reported its second quarter results. The company continues to report successes in several areas.


  • Q2 international segment sales increased 11% year-over-year.

  • E-commerce sales increased by 8.3%

  • The company’s myGNC and ProRewards customer loyalty programs grew 14% and 8.8% respectively over Q1 levels.

  • Q2 interest coverage was a healthy 1.8x.

GNC also continues to make progress on increasing its level of proprietary products in its sales mix. In Q2, that level grew to 50%, from 43% a year earlier. These products generate a higher margin for the company. Durig Capital already has a position in these 2020 bonds within its FX2 Portfolio, but given the company’s continued performance, these GNC’s 2020 bonds have been marked for additional weighting to Durig Capital’s
FX2 Managed Income Portfolio, the most recent performance of which is shown below.


GNC Releases Second Quarter 2018 Results

GNC recently released its results for the three months ending June 30, 2018. Some of the highlights of the company’s second quarter and year-to-date results include the following:


  • Revenues in the company’s international segment increased 11.0%, or $4.8 million in Q2 versus Q2 2017. This increase was mainly due to an increase in China e-commerce sales as well as an increase in sales to international franchisees.

  • E-commerce sales grew in Q2, representing 8.3% of U.S. and Canada revenue. This compares to 5.5% in the prior year quarter, driven by growth in both the GNC.com and Amazon Marketplace platforms.

  • For the six months ending June 30, 2018, GNC registered free cash flow of $58.2 million, an increase of 7.4% or $4.0 million when compared with the first six months of 2017.

  • In Q2, GNC’s private label sales grew to 50% of the company’s sales, up from 43% in the Q2 2017.

  • Consolidated operating income increased to $48.9 million, an increase of 8.2%, or $7.5 million over the previous years’ quarter.

In addition to these second quarter wins, GNC also showed success in some of its key business initiatives.


Updates on Key Business Initiatives


International Sales continues to become a larger part of GNC’s revenues and should continue to grow. The company’s earlier proposed joint venture with Harbin Pharmaceuticals in China is awaiting regulatory approval. This deal should accelerate GNC’s expansion into China. In addition to GNC’s China growth, the company also unveiled a plan earlier this year to expand its presence in India through its partnership with Guardian Healthcare, an India-based pharmacy chain. GNC intends to sell its products in approximately 4,000 new retail outlets across India by 2020. For 2018, the company anticipates 1,000 outlets will add GNC products to their product offerings.


GNC also has proprietary products are exceeding expectations. Earlier this year, the company launched its weight-loss product, Slimvance. This product continues to attract new customers and remains on-track to exceed first year sales projections. In addition to Slimvance, the company also recently re-launched its Amp sports performance brand and is seeing year-over-year growth in this brand for the first time in three years. Finally, GNC will introduce its Earth Genius line in September. This proprietary line of herbal and botanical supplements will not contain any GMOs or artificial colors or sweeteners. This line will address the fast-growing $7 billion herb and botanicals market.


Finally, GNC’s loyalty programs continue to attract new customers. Membership in the company’s loyalty programs grew more than 14% in second quarter compared to the first quarter, now numbering more than 14.6 million in the myGNC Rewards program. GNC’s premier loyalty program, called PRO Access, grew at 8.8% as compared to first quarter. PRO Access members shop more often and spend four times as much on products throughout the year.


About the Issuer


In 1935, David Shakarian opened a small health food store in Pittsburgh, PA. Even though health food was considered to be a passing fad back then, people welcomed Shakarian’s store. In the 60’s, as people began to accept natural foods and better nutrition, Shakarian met the demand by opening more stores in additional states. It was at this point when he changed the name to General Nutrition Centers, and began producing his own vitamin and mineral supplements.


GNC Holdings, Inc., still headquartered in Pittsburgh, PA, is now a leading global specialty retailer of health and wellness products, including vitamins, minerals, and herbal supplement products, sports nutrition products and diet products. The company’s shares trades on the New York Stock Exchange under the symbol “GNC.”


The Company – which is dedicated to helping consumers Live Well – has a diversified, multi-channel business model and derives revenue from product sales through company-owned retail stores, domestic and international franchise activities, third party contract manufacturing, e-commerce and corporate partnerships. GNC’s broad and deep product mix, which is focused on premium, value-added nutritional products, is sold under GNC proprietary brands.


The Health Supplement Industry


The global dietary supplements market is being driven by increasing awareness on the part of the consumer, who is seeking preventative healthcare. In addition, it is also being driven by the growth of the aging population. According to a Zion Market Research report, the global dietary supplements market, valued at USD $132.8 billion in 2016, is expected to reach USD $220.3 billion in 2022 and is anticipated to grow at a compound annual growth rate of 8.8% between 2017 and 2022. In 2016, Asia Pacific made up the largest market for dietary supplements, accounting for more than 31% of the total volume of the dietary supplements market. This trend is anticipated to continue into the coming years. The second largest market was North America, with 28% of the total market. Most of the growth in the North American market is projected to come from products that are related to weight loss and weight maintenance.


Liquidity and Interest Coverage


Interest coverage is of paramount importance to bondholders as it indicates a company’s ability to service its existing debt. For the three months ending June 30, 2018, GNC had operating income (without the effect of non-cash depreciation and amortization charge) of $60.9 million and interest expense of $33.0 million, for an interest coverage ratio of 1.8x.|


GNC’s liquidity as of the end of Q2 stood at $43.4 million, with no outstanding borrowings on the company’s revolving credit facility.




The risk for bondholders is whether GNC can continue to differentiate its brand offerings from other players in the space, as well as continuing to successfully grow its business in both its e-commerce and international segments. The company’s loyalty programs continue to grow, increasing customer spend and customer loyalty. E-commerce is advancing nicely thanks to the company’s presence not only via its own website but also its presence on Amazon Marketplace. Also, the deal with Harbin Pharmaceuticals has the potential to be a game changer for the company in the international nutritional supplements market. Given these positive developments, the over 24.5% yield-to-maturity on GNC’s 2020 bonds does appear to outweigh the risks identified.


If the Harbin deal is ultimately not completed, and the associated influx of capital to GNC is not fulfilled, this could present a significant obstacle for GNC to improve its balance sheet and address upcoming debt maturities. Harbin appears to be ready to move forward, however, regulatory approval for these types of deals can take time resulting in costly delays.


These bonds have a convertibility feature that allows bondholders to convert to common stock. Considering the recent stock price, the convertible feature on these bonds may not result in the possibility for increased returns. However, at present the yield-to-maturity is still very competitive.


In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.


Summary and Conclusion


With 170 million people, or 76% of the U.S population already taking dietary supplements, there is a significant opportunity for GNC to capture more of this market.  The company is making significant progress in both its e-commerce segment as well as in its international sales. The deal with Harbin Pharmaceuticals should provide additional opportunity for international expansion. The mix of the company’s proprietary products is increasing, helping to boost margins, and its customer loyalty programs continue to grow, bringing more and more dedicated customers. In consideration of these developments, GNC’s 2020 bonds, with a current yield-to-maturity of over 24.5%, are ideal for additional weighting in Durig Capital’s  FX2 Managed Income Portfolio, the most recent performance of which is shown above.


Issuer: GNC Holdings

Ticker: NYSE:GNC

Price: $7.25 (as of 5/8/2017)

Conversion Price: $66.06/share

Coupon: 1.5%

Maturity: 08/15/2020

Pays: Semi-Annually

Price:  ~65.95

Yield to Maturity: ~24.75%


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Disclosure: Durig Capital and certain clients may hold positions in GNC’s August 2020 bonds.


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