GNC Struggles for Breathing Room on Debt

  • Lenders are skeptical of vitamin seller’s turnaround effort
  • Company launched $500 million buyback near stock’s peak

For GNC Holdings Inc., it seemed like a good idea at the time: a $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 $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 $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.

An outside spokeswoman for GNC declined to comment.

GNC shares were up about 2.4 percent at $7.36 at 11:12 a.m.

Retail Woes

GNC’s problems have echoed those of retailers across the U.S. 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 $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 U.S. rose more than 9 percent. But the total value of those sales fell as the company cut prices.

Wary Lenders

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.

Representatives at Apollo didn’t respond to a call and an email requesting comment. A spokeswoman at JPMorgan declined to comment on the loan proposal.

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 $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 $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,” Higgins said. Deutsche Bank increased its free cash flow projection for GNC to about $200 million from $140 million after the company published its projection.

Thirst for Yield

Companies have been racing to reduce their borrowing costs before the Federal Reserve raises interest rates again and to take advantage of a thirst for yield sparked by low rates globally. Banks arranged about $434 billion of leveraged loans in the first quarter, the most for any three-month period going back to at least 1999, data compiled by Bloomberg show.

The frenzy has started to cool amid more modest expectations for the course of the Fed’s hikes, heightening the resolve of investors to push back on terms they deem a bridge too far. Some repricing and refinancing deals have been postponed after failing to get desired terms.

Still, GNC’s loan price has ticked up since hitting a record low on Feb. 16, when the company posted disappointing quarterly results that prompted it to suspend its dividend payments. The debt was quoted at 92 cents on the dollar Friday, based on evaluated prices compiled by Bloomberg, rising steeply since the loan proposal emerged and suggesting there is an appetite for the debt.

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