GNC On The Line: Retailer Faces “Probation” Period To Shape Up Financials

Royal Numico is giving subsidiary GNC a 12- to 18-month probationary period to ramp up its financial performance, President & CEO Jan Bennink told analysts in London Nov. 8.

If the retailer fails to improve its margins and growth, it likely will meet the same fate as fellow subsidiary Rexall Sundown, which Numico intends to divest.

Bennink set two benchmarks to measure GNC's progress. The first is "4% like-for-like growth within" the retail chain, while the second is "to pick up five percentage points in terms of mix from" GNC branded products and third-party products.

"If they make big progress and it is two [or] three-and-a-half [percentage points], I won't be the bastard who says, 'You didn't do it,'" the CEO said. However, he said the retail chain will have to show a positive trend and demonstrate that it "can perform to the high growth, high margin" that historically has been its trademark.

Numico has set out several initiatives for the supplement retailer to achieve this growth, led by price reductions across GNC's premium-priced lines.

"I think when you go into a GNC store and you find your vitamin C at the price which is about double the price you find it either in a mass merchandiser or even at [its] nearest competitor, I think there's something wrong," Bennink said in ¹ supporting materials released simultaneously with the Dutch conglomerate's ² Q3 earnings release.

Bennink suggested a 17% price reduction target storewide, although some products would be discounted more than others.

The second part of the two-tiered pricing plan involves a "reasonable price premium" on specialty product offers, the exec explained. The reasonable price premium may come into play when "you really have something good," because then "the margins and the price premium can be very high."

Other areas of focus include a product mix plan intended to better capitalize on the company's own branded, higher-margin items. Numico wants to "recapture 55% of sales with GNC branded products," aiming to surpass the current level of 43%, Bennink said. The goal is in-line with one announced in March (³ (Also see "Royal Numico Brands To Dominate GNC Product Offerings" - Pink Sheet, 18 Mar, 2002.), p. 3).

"This shift from third suppliers to [our] own brands will be one of our major objectives and will be one of the indicators that I will look at. It will be like-for-like growth as well as mix in our own stores," the CEO added.

GNC also will focus on becoming an innovator, rather than a follower, in the sports, diet and joint care categories. "Those are the areas where the growth is. Those are the areas where [GNC] can make a difference," Bennink maintained, pointing to the successful relaunch of the Pro Performance sports supplement line this year, which led to a 36% sales increase for the brand.

Revamping GNC store layouts as part of the company's $20 mil. redesign initiative has been more problematic than anticipated, Bennink noted. The new design includes different areas for men, women and teenagers, as well as specialized sections for products such as Scan Diet and ephedra-free offerings (⁴ (Also see "Rexall Names Sales VP; GNC Remodeling Stores With Ephedra-Free Sections" - Pink Sheet, 3 Jun, 2002.), p. 3).

Approximately 80% of the stores have been retrofitted. While the transition was expected to take 24 hours per store, "it normally took two to three days for a store," Bennink said. "We've lost some sales and that's also why the Q3 results are not completely in line with what we had expected."

"GNC had a bad quarter," Chief Financial Officer Pim Oomens said bluntly. Net sales declined 7.8% to $326.7 mil. ($1=€1.02), while total store sales decreased 7%.

Bennink attributed two percentage points of the GNC loss to the store reset, while the other five percentage points were the result of adverse publicity regarding ephedra.

Numico's Rexall Sundown division experienced a rougher third quarter and continued a pattern of recent sales declines. Third quarter revenue fell 24.6% to approximately $99.1 mil., while nine-month sales were down 22.5% to roughly $355.2 mil.

Royal Numico will divest the struggling Rexall division rather than attempt to "fix" the business, Bennink said. The divestiture is expected to be completed in 2003.

In response to an analyst's question about whether liquidating Rexall might be more financially beneficial than selling the business, Bennink said: "We're going to sell the company and we're not going to liquidate the company, but...there are ways to have a tax advantage if you do it properly."

Numico additionally announced plans to "dissolve" its relationship with the Unicity direct marketing subsidiary, adding it is "in discussion with Unicity management to explore various strategic alternatives." The firm also said it will exit the vitamin, mineral and supplement market in Europe.

In explaining the rationale behind the business disposals, Bennink said Numico is altering its strategic direction to focus on three core businesses: Infant Nutrition, Clinical Nutrition and GNC.

"I think the management focus has to be on making sure that the assets which are performing continue to perform," Bennink said. "I don't think the company, as it is at the moment, can fix all the businesses at the same time."

Numico would do its shareholders "a disfavor by trying to fix everything," the exec maintained. "We just have to cut our losses and make sure that we run with the ones we know are going to be winners."

Numico's decision comes a little over two years after its July 2000 acquisition of Boca Raton, Fla.-based Rexall in a deal valued at $1.89 bil.

That deal, which came a year after Numico acquired GNC, was viewed as a transaction that would make Numico a powerhouse in the U.S. dietary supplement industry.

However, the Rexall business has been a drag on the company's operations. Numico's consolidated net sales were down 12.6% to $910.6 mil. for the third quarter due to lower U.S. results, and the company announced it was taking a $1.36 bil. writedown in the period related to impairment of the its nutritional supplement activities in the U.S.

Royal Numico may experience difficulty in finding financially viable and interested suitors for the Rexall business.

Vertically integrated NBTY, whose retail operations have proven to be stiff competition for Numico's GNC stores, would appear to be the most likely U.S.-based dietary supplement maker to make a bid for Rexall. NBTY recently announced plans to more actively pursue acquisitions.