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GNC struggles for breathing room on debt as retail loses muscle

[NEW YORK] For GNC Holdings Inc, it seemed like a good idea at the time: a US$500 million share repurchase plan, when borrowing money was cheap and the supplement business was booming.

That buyback, kicked off in November 2013, turned out to be mistimed. Within weeks, shares of the purveyor of vitamins and testosterone-boosters hit an all-time peak. Pressure from rivals including online retailers like Amazon.com punished the company's bottom line in the years to come. Same-store sales plummeted.

Now, GNC wants more time to pay off the US$1.35 billion in debt it ramped up when it bought back its stock - and investors are skeptical.

GNC has proposed extending its loan, now at US$1.13 billion, by three years, offering to pay an extra 200 basis points for investors to stay on the hook until 2022. The company is trying to boost sales by simplifying pricing and offering a free membership option to keep shoppers coming back to its stores. It says the revamp will generate the cash to meet its debt obligations.

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An outside spokeswoman for GNC declined to comment.

GNC's problems have echoed those of retailers across the US as consumers increasingly shop online. This year, chains are closing stores and going bankrupt at a record pace, according to analyses by Credit Suisse Group AG and S&P Global Market Intelligence.

"The business deteriorated a lot last year - it faced competition not only from online, but from other big retailers such as Whole Foods and Sprouts," Shane Higgins, an analyst at Deutsche Bank AG, said by phone.

At a GNC outlet in Boston down the block from struggling shoe-seller Payless Inc late last month, traffic was light. Some customers consulted their phones as they compared various tubs of protein shake powder or glanced briefly at a carton of so-called premium testosterone booster, which retails for US$169.99 for 120 capsules.

A salesman at the store mused that the new strategy made sense, but had also made some of GNC's former paying members angry now that a membership was being offered for free.

  So far, the new approach has had mixed results. For the first three months of this year, the number of same-store transactions in the US rose more than 9 per cent. But the total value of those sales fell as the company cut prices.

The turnaround effort hasn't kept lenders from seeking a steeper premium to extend the loan's maturity. Investors remain wary of GNC's challenges since it took out the loan and amid the struggles of the wider retail sector.  During a conference call last month with the company's agent bank JPMorgan Chase & Co, investors made their dissatisfaction clear. Apollo Global Management LLC suggested that compensation in the 750 basis-point range and additional protections would get them to the table, according to two people familiar with the matter who asked not to be identified because the call was private.

Some investors worry about GNC's ability to meet tougher terms. GNC's 2017 cash-flow projections of more than $250 million are "sufficient to meet our needs and don't give us any concern with our existing agreement," Chief Financial Officer Tricia Tolivar said on an April earnings call. But that forecast hasn't fully assuaged anxiety that GNC can get a handle on its debt, as its free-cash flow for the first quarter was just over US$33 million.

"There is concern about how they're going to refinance the debt," Deutsche Bank's Higgins said. "If it prices even 500 basis points higher, that's US$50 million of extra interest cost before tax. People are looking at this and seeing a lot of reasons to be concerned about the name." GNC's "implied free cash flow guidance for the remainder of the year looks aggressive," Mr Higgins said. Deutsche Bank increased its free cash flow projection for GNC to about US$200 million from US$140 million after the company published its projection.

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