Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

There may be hope for GNC yet.

Shares of the struggling vitamin retailer plunged by nearly 30 percent last week after it posted its seventh comparable-sales drop in the past nine quarters. The continued weakness prompted me to ask why there's been little apparent effort to right the company despite the involvement of several activist investors:

"Where are the calls for CEOs to step down? Where are the PowerPoint presentations with strongly-worded suggestions for boosting sales? These so-called activists see to be just sitting on their hands as they watch a sinking ship submerge."

Ditto for GNC executives, who seemed to offer little to boost confidence in their plans to turn around the flagging supplement business. 

Not So Nutritious
Year-over-year change in GNC sales at established, company-owned U.S. stores
Source: Bloomberg

I may have spoken too soon. GNC's board chairman on Monday said the company was in the process of exploring "strategic alternatives," including the sale of the company. Shares rose 6 percent, as investors cheered the thought of someone finally taking action. 

In a note to investors Monday, JPMorgan analyst Christopher Horvers revisited one old idea, that GNC should buy competitor Vitamin Shoppe. In the past, proponents of a deal have argued the merged companies could command a bigger share of the market and enjoy manufacturing benefits that come with a larger footprint. In other words, two weak companies could join forces and emerge stronger. 

Bitter Pill
Shares in GNC and Vitamin Shoppe are down 41% and 33%, respectively, in the past year
Source: Bloomberg

GNC is in worse shape financially now than when the idea was first floated years ago. But Horvers said there was still room for GNC to take on more debt, which it could use to make a purchase on its own, or with help from private equity. At the end of 2015, GNC had 3.6 times debt to earnings before interest, tax, depreciation, amortization and rent costs. That's high, but still lower than the 4.8 times GNC had in 2009 as a privately held, leveraged company. The company would be able to take on another $650 million in debt before reaching its 2009 level, Horvers said. He also compared GNC to retailer Petsmart, which was taken private at even higher debt levels. 

A GNC-Vitamin Shoppe tie-up is possible. But it's getting increasingly harder to justify, as GNC's sales slow and the company loses even more clout with customers, vendors, and franchisees. (Remember, this is a company that had to vastly discount vitamins piled up on its shelves to sell them before they expired.)

Plus, it's not like either company has an A+ management team capable of figuring out how to turn two struggling retailers into one, big successful company. Both have CEOs that took over less than two years ago, and neither has done much to improve their struggling businesses. And both retailers face structural problems that wouldn't go away if they merged: regulatory concerns that have led supplements to fall out of favor with consumers, as well as growing competition from online retailers such as Amazon and Vitacost. 

A better option would be a private equity takeout, which could salvage GNC's still-powerful brand value while overhauling the company at a quicker pace than if it were to stay public -- that is, if a buyer could get what it believes is the right price. A private equity investor could swiftly put in new management and close unproductive locations in the company's massive store base of 3,600 owned locations and 5,500 franchise locations. A better strategy for online sales, where many of GNC's customers are heading, would be necessary. 

Either way, it's about time for GNC to swallow some much-needed medicine and consider strategic alternatives. But it's going to have to get more creative than just a Vitamin Shoppe merger to save itself. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net