GNC An Exercise In Patience As Turnaround Will Take Time

Baird expects the fundamentals of GNC Holdings Inc GNC to remain pressure as the vitamins and sports nutrition products reports its fourth quarter results on February 16.

Analyst Peter Benedict, who has a Neutral rating on shares, anticipates EPS of $0.34, below consensus estimate of $0.36, amid lower visibility given the company's strategic overhaul.

GNC unveiled a brand re-launch in late December. Key elements of the "One New GNC" include a lower, single-tier pricing model and a free loyalty program.

“While changes to pricing/loyalty are necessary steps to restoring GNC's competitive positioning longer term, changing consumer price perception/shopping behavior will likely take time,” Benedict wrote in a note.

Further, management itself signaled that top-line pressure had continued into fourth quarter, and the business had to cycle an all-store BOGO in December. As such, the analyst sees further deterioration in company-owned comps to down 10 percent versus the Street at down 9.5 percent.

Accordingly, Benedict expect comps to remain soft in 2017 at down 4 percent.

On the margin front, the analyst projects further pressure in 2017 from price reductions and lower membership fee income. Benedict models EBIT margins to decline of about 200bps in 2017 to about 10.5 percent.

But, a dividend yield of about 9.4 percent and about 30 percent free cash flow yield offers some downside protection to the shares, which fell about 60 percent since the third quarter report. Still, fundamental visibility remains low.

“While shares appear inexpensive, fundamental visibility remains low as changes around pricing/loyalty layer into the business and share continues to shift into non-specialty channels,” Benedict added.

The analyst has a price target of $12.