A First Glimpse

A deeper look into how GNC is really doing these days.

By Adam Ismail

In March, for the first time in four years, industry insiders were treated to a look inside the profitability of one of the most powerful companies in the nutrition industry, General Nutrition Centers (GNC). When GNC was owned by Royal Numico, very little information was released and it usually only dealt with the top line revenues. However, its new owner, Apollo Management, has taken a different tact. Apollo is known for buying companies that could use a little help, then exiting its investment after it has managed a turnaround. The exit strategy is the key part. For a company the size of GNC, really the only company that might be able to absorb them would be a company like NBTY. Let’s not forget, though, that NBTY did not win the auction to acquire GNC from Numico in the first place, and buyout firms like Apollo will demand a much higher price for the company once they have turned it around. So, with an industry acquisition essentially out of the question, that leaves a private equity transaction or public offering as options. If a public offering is the route Apollo wants to take, it makes sense to give out a little more information to the potential investors.

One big question is how Apollo plans to turn the company around. The company hinted that it was going to release 50 new products this year, but made careful note that it would not launch products, which did not have science behind them. That said, the company is also planning to spend $1.5 million on research and clinical trials, a slight increase over last year. However, GNC’s product pipeline is only one way Apollo plans to boost profitability at the company. Because buyout firms typically issue massive amounts of debt to fund their transactions, the debt holders need certain assurances from companies like Apollo on how they plan to cut costs. So, it also made plans to close 117 of the company’s most unprofitable stores by the end of April and shifted its advertising budget to a new agency, which will hopefully get a better return for its buck.

The key thing to watch will be GNC’s earnings before interest, taxes, depreciation and amortization (EBITDA). It is a key measure of how much cash the company’s operations are generating—the more it improves, the more the company is worth. GNC has been working to improve its results for over a year now, long before the Apollo buyout, and in general, the results are starting to show. Sales at the company only grew 0.3% in all of 2003, but its fourth quarter results showed significant improvement with over a 14% jump in revenues. Profitability was a similar story, with its full year EBITDA actually falling, but in the fourth quarter it managed to turn in $33.4 million, compared to just $9.5 million in the same quarter last year.

It identified three key problems in 2002 that affected it throughout 2003: increased competition, lower margins and a new pricing strategy. So when it began its turnaround effort it tried to focus on ways to combat these problems by introducing higher margin products, cutting its advertising expenditures and boosting same store sales.

So where does Apollo take it now? While the improved results were felt throughout the company, the impact was strongest in the company-owned stores, fuelling speculation that GNC may try to acquire many of its franchised stores and turn them around as well. The majority of the boost in earnings was attributed to higher margins in company stores, which are under a more direct control by GNC corporate headquarters. A number of other key players have gone up for sale in the industry, but GNC was rumored to be mulling over a bid on Phillips Health, the mail order supplement company with a price tag around $250 million. We will have to wait and see if that is in the master plan Apollo has for making “megabucks” on GNC.NW