GNC Shares Soar 50% After Bullish Outlook, But Analysts Have Reservations

GNC gave an upbeat profit outlook, sending shares soaring.

GNC Holdings Inc. shares soared an eye-popping 51.6% in Thursday trading after the company gave a premarket profit outlook that exceeds expectations. But Deutsche Bank analysts warn that there could be trouble ahead for the health and performance-products chain.

“GNC continues to face structural challenges, including greater competitive pressure within the vitamin/supplement category from both bricks-and-mortar and online players,” wrote Shane Higgins.

GNC GNC, -9.13% expects fourth-quarter adjusted earnings per share in the range of 24 cents to 25 cents, up from 7 cents last year. Same-store sales for domestic company-owned stores, including the website, are expected to be up 5.7%.

The $80 billion fitness industry sees huge growth in this demographic
GNC announced in December that it had hired Goldman Sachs to explore business alternatives. GNC said Thursday that providing preliminary fourth-quarter financial results is part of the process.

“Our business is no longer as reliant on promotions and discounts as a means of driving traffic, which we believe is very important as we continue to position GNC for the long term,” said Kenneth Martindale, GNC’s chief executive, on the company’s October 2017 earnings call, according to a FactSet transcript. He went on to say that the company’s e-commerce business is growing, along with the GNC store on Inc. AMZN, +0.10% .

In 2018, the company will continue to focus on e-commerce, as well as other areas of the business, Martindale said in the Thursday release.

“We continue to expect GNC to generate positive free cash flow in fiscal 2018, but are concerned that creditors may be reluctant to extend credit, or may impose onerous terms on any refinancing, which could significantly squeeze GNC’s cash flow and flexibility,” wrote Deutsche Bank’s Higgins.

Deutsche Bank rates GNC shares hold with a $4 price target.

GNC’s outstanding junk bonds, the 1.500% notes that mature in August 2020, were trading at 60.30 cents on the dollar Thursday to yield 22.786%, according to trading platform MarketAxess.

GNC stock is down 52.8% for the past year while the S&P 50 index SPX, +0.44% is up 23.2% for the period.

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