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GNC: Fitness guru’s view

July 10, 2017

We have connections with a source we consider reliable, with extensive experience in the fitness industry.

Our source confirms many of the observations and trends observed elsewhere with the One New GNC program.

We continue to believe that GNC is undervalued, although upcoming results will provide further detail.

A quirk of fate brought us into contact several years ago with a fitness guru and thought leader who recently branched out from corporate/private personal training, fitness blogging, and product endorsements/promotions to take contributor roles with mass-market fitness magazines. We consider our source to be a reliable indicator and observer of trends in the fitness and health space, not least because she introduced us to Lululemon Athletica (NASDAQ:LULU) in 2009, when the company’s shares were trading in the single digits. Unfortunately, our infinite wisdom didn’t include seeing the potential for yoga clothing to go mainstream and we missed that specific opportunity, but her credibility as an observer of trends in the fitness sector was established from our perspective. However, we caution that the views expressed in this article are limited to our source in combination with our own observations at retail locations in the Intermountain West, so each reader should take these observations in combination with their own assessments.

We began looking into GNC Holdings (NYSE:GNC) in August 2016 and reached out to our source at the time for her assessment of the company and its competitor The Vitamin Shoppe (NYSE:VSI). The assessment of GNC was decidedly negative on both a relative and absolute basis, with the source nothing that she preferred Vitamin Shoppe over GNC, stating that from a “customer standpoint, GNC to me is more ‘old school'” than newer competitors. She’d been an affiliate of Vitamin Shoppe in the past and “really enjoyed seeing what they’ve [Vitamin Shoppe] done on social media [and] how they’re teaming up with bloggers and influencers, etc.” Her impression was that while GNC was likely making similar efforts, she nonetheless associated the company with being “behind,” in addition to having higher prices.

Personally, she’d also been shifting her purchases online – a trend she saw generally within the industry which was clearly accelerating – but did still occasionally purchase from GNC stores despite “the prices not being great” and “[having] to spend some extra money” while timing buying to coincide with sales. The choice of GNC was related to a recent geographic relocation that had taken her to an area where a Vitamin Shoppe store was not readily accessible, but the attraction of in-store purchases remained, since she didn’t have to “wait for the online order” and sometimes preferred the convenience of having a product immediately despite the higher cost.

The biggest criticism of GNC, though, revolved around the relative lack (or ineffectiveness) of social media engagement by the company and the resulting sense, especially among the growing cohort of fitness enthusiasts, that it was not only behind the times but stuck in a model that catered to an older clientele.

We found the social media criticism enlightening, but at the same time came away with a sense that although the retail model is shifting to a greater online presence and competition is growing, the company’s fundamental issues (outside of debt leverage) were addressable and that a complementary store model would remain necessary (and desirable) even with the shift to online sales.

We were therefore intrigued when the One New GNC initiative was introduced and addressed essentially all of these earlier concerns: rectifying the pricing model, acknowledging and proactively addressing the online channel, and introducing a greater focus on customer engagement and communication that clearly broke with the company’s prior model.

We decided to reach out to our source again recently, now that the One New GNC initiative has been in the marketplace for a few months, to get her thoughts on the initiative personally and from a broader fitness industry perspective. In particular, we were interested in any changes in perception and marketing impact to see whether her observations would align or conflict with anecdotal evidence from channel checks of our own and by others that the initiative is driving ongoing in-store momentum for the company.

The outcome of our discussion was a marked contrast from the perspective we received last year. “It’s about time” was her initial reaction to the new program rollout, adding that the idea of having to pay for a membership to join the previous customer loyalty program was a key factor for her and many other potential customers. The new free program allows for a greater opportunity to “test” the membership. “It made sense to sign up for the free membership. I had no idea what to expect, but figured why not? I’ve [since] found myself shopping there probably once a month.” The introduction of the free rewards program alone has driven a degree of trialing that gets people into the stores – the first step in Robert Moran’s objective of getting people into the stores, which allows the company to then focus on selling the products. In addition, the company has apparently been actively leveraging the engagement opportunity with new members to drive traffic. “I receive emails saying I have a $5 voucher, or I’ll even receive a snail mail postcard for $10 off a $50 purchase or something,” reported our source, appearing to confirm that the company has adopted a much more aggressive communications strategy and is following through on its stated commitment to better engage members and prospective customers.

We also asked about the changes to product pricing, and the response was similarly positive. “The prices are [much] more comparable to what I find online, and I like knowing my purchase is accumulating points,” an interesting comment from an avowed user of frequently mentioned competitor Bodybuilding.com. In addition, despite occasionally higher prices versus online competitors, the opportunity to have a product in hand immediately creates a certain premium value for certain classes of customers and purchases over the competing online channel. Nonetheless, it will continue to take time for the initiative to change broader perceptions in the marketplace.

However, the observations from both a personal and broader industry standpoint were consistent with our own observations and those of others generally on the apparent performance of the company and the traction the One New GNC initiative has apparently had in the marketplace. We remain confident that positive trends are taking root at GNC despite the challenges in the traditional retail environment. The company’s new rewards program is drawing new or infrequent customers into the store more often, which was exactly the company’s objective. The updated pricing, although sometimes still higher, as some commentators have observed, has certainly narrowed the gap in online versus in-store purchase decisions. We also believe that traditional retail, though challenged by online channels, will remain a necessary component for many shoppers and retains long-term value after the adjustment of sales which will inevitably shift online (whether or not captured by GNC) is absorbed into the industry.

However, we also remain aware that trends can rapidly shift as initial enthusiasm wanes, which will require keeping a close eye on ongoing performance both of the pilot stores as well as the business as a whole. It also remains to be seen whether GNC can execute on selling additional products to customers coming into the stores now that the traffic trends appear to be improving. Finally, we remain skeptical that the company can achieve its stated cash flow objectives, especially in a manner that generates sustainable ongoing cash flows rather than relying on short-term benefits related to inventory or receivables reductions. The counterbalance to these concerns, at least for the moment, is that while these types of data points and channel checks are inherently individual and local, the totality of these reports across geographic regions and viewpoints is consistently positive.

We continue to view GNC as undervalued and maintain an effective long position.

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