GNC Product Relabeling Part Of $9.3 Mil. "Impaired Assets" Expense

General Nutrition Companies reported a one-time "impaired assets" charge of $9.3 mil. in the fourth quarter ended Feb. 6 related to product relabeling, the closing of the company's Seattle-based Amphora chain of "aromatherapy" stores and the shutdown of two GNC stores in New Zealand.

The charge contributed to a 54.5% decrease in fourth quarter net earnings to $14.8 mil. Net earnings adjusted for the impaired assets and a related tax benefit were $20.8 mil. for the quarter, down 40%.

During the period, the company's cost of sales increased 34% to $308 mil., and SG&A expenses rose 30.5% to $109 mil. Sales for the quarter, which accounts for 17 weeks versus last year's 16-week fourth quarter, climbed 21.4% to $457.5 mil. However, sales in U.S. stores open at least one year decreased 5.3% in company-owned locations and slipped .6% in franchise locations.

Relabeling of GNC products with the required elements of FDA's 1997 final rules on dietary supplement labeling, which go into effect March 23, accounted for $3.4 mil. of the expense. After March 21, GNC will ship only products bearing the new label. The regs were published Sept. 23, 1997 ("The Tan Sheet" Sept. 29, 1997, pp. 1-7).

Closing the unprofitable nine-store Amphora chain represents $3.3 mil. of the write-off. The company also is writing off $2.6 mil. in store fixtures from the closing of two New Zealand GNC outlets, which it said were difficult to supply, as well as miscellaneous obsolete store fixtures from U.K. locations. The retailer incurred an additional $276,000 in "non-cash compensation expense."

GNC recorded sales of $1.42 bil. for the fiscal year, an 18.8% increase over the previous year. Earnings were down 12% to $91 mil.

The decision to close Amphora is among several significant changes GNC implemented during the last fiscal year. In September, the retailer instituted certain price reductions to be more competitive with mass market and discount stores and increase store traffic ("The Tan Sheet" Aug. 10, 1998, p. 9). In January, the company announced its agreement with Rite Aid to install GNC "stores" in 1,500 of the drug chain's outlets in the next three years ('The Tan Sheet" Jan. 11, p. 10).

Many dietary supplement makers are experiencing price pressure from mass market retail sales and competition from the launch of herbal products by OTC drug companies through well-known vitamin brands, including Bayer's One-A-Day, Whitehall-Robins' Centrum, or new brands, such as Warner-Lambert's Quanterra.

Twinlab sales for the fiscal year ended Dec. 31 increased 45% to $333.4 mil., and the company's net income gained 14.7% to $29.7 mil. For the fourth quarter, sales were $90.9 mil., while net income was $8.6 mil.

Twinlab disclosed Feb. 24 that "certain revenues" for the first, second and third quarters of the year were "incorrectly stated" in the firm's quarterly reports. The adjustments do not affect full-year sales, the company maintains.

As adjusted, first quarter sales are reduced from $78.5 mil. to $74.7 mil. For the second quarter, sales are restated as $83.3 mil., down from $84.3 mil. Third quarter sales are revised to $84.4 mil. from $90.6 mil. Net income for each quarter also is lower than previously reported, Twinlab said.

Looking ahead to the first quarter, Twinlab expects "sales will trail somewhat the adjusted first quarter of 1998" and that net income will be "significantly below" last year. The decline is "primarily attributable to an expected significant decline in sales of herbal products in the mass market, as last year's first quarter benefited from substantial sales of St. John's wort and other herbal products" and to "lower sales in the health and natural food store channel."

Certain class action lawsuits filed in December on behalf of Twinlab shareholders have been expanded to include the period through Feb. 24. The suits initially alleged the company engaged in "channel stuffing" during the year to cover a sales decline.

Herbalife net sales for the year increased 11% to $866.6 mil. on a 10% gain in total retail sales. The firm's profitability "continued to be impacted by the considerable slowdown in Russia," but "sales momentum across Asia, Europe and the U.S. gives us confidence in Herbalife's long-term outlook," the company said. Net sales for the quarter were up 6% to $233.9 mil. Earnings decreased 11% for the year to $48.5 mil. and were down 23.4% for the quarter to $11.3 mil.