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GNC works smarter to pump up profits

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Jasmine Goldband | Tribune-Review
GNC Holdings Inc. CEO Michael Archbold poses for a portrait in a downtown Pittsburgh GNC store on Friday, Nov. 7, 2014.
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Jasmine Goldband | Tribune-Review
GNC Holdings Inc. CEO Michael Archbold poses for a portrait in the downtown Pittsburgh GNC headquarters on Friday, Nov. 7, 2014.

Michael Archbold walked up to displays packed with vegan nutrition shakes, gluten-free energy bars, soy protein powders, superfood supplements such as acai berries and chia seeds and other health food store staples that in recent months made their way onto shelves in GNC stores across the country.

Archbold, named CEO of the vitamin and supplement retailer in an August management shake-up, pointed to the products as one of several changes he has made at the company in the past several months. It’s part of a strategy to boost revenue and profit by broadening the chain’s customer base, along with changing advertising, cleaning up pricing and cutting production to match sales volume.

“We’re seeing more and more customers who are interested in those naturals,” said Archbold, a retail veteran with experience at GNC rival Vitamin Shoppe.

But Archbold, who spoke to the Tribune-Review inside a GNC store below the company’s Downtown headquarters on Sixth Avenue, insists he won’t be instituting a radical makeover of GNC.

“It’s really important that you don’t move away from existing loyal customers,” he said.

He said cost-cutting and layoffs aren’t in his formula for improving GNC’s performance.

“The key to improving this business is not through cutting,” he said. “It’s through growth.”

New products Archbold pointed out took up several cases strategically placed near the entrance of the store, which otherwise was stocked with the giant tubs of whey protein powder and “Total Lean” diet drinks popular with serious athletes and bodybuilders.

Archbold acknowledges he’s walking a fine line with the strategy. He said he’s trying to make GNC’s 8,700 retail locations less intimidating and more inviting to shoppers interested in health and wellness, without alienating the core fitness customer.

S&P Capital IQ analyst Efraim Levy agreed with Archbold’s strategy.

“Adding more wellness customers is good for profits,” Levy said. “It sounds like a good start, but we need more time to see how successful he is.”

Archbold started at the company during the quarter ended Sept. 30, in which GNC reported net income of $64.3 million, or 71 cents a share, down 12 percent from the same period last year.

The drop was blamed on a 3 percent decline in revenue. At stores open at least a year — a key measure of a retailer’s health because it doesn’t count the impact of building stores — sales dropped 7 percent.

Some observers appear to like what they see so far.

Sterne Agee analyst Charles Grom said he’s “optimistic about the path forward for GNC, with the team expressing ample confidence in a budding strategy to steer the business back on the road to a healthy recovery,” according to a research note.

GNC’s stock, which dropped 43 percent from the start of the year until former CEO Joe Fortunato was replaced Aug. 5, has rebounded more than 30 percent since Archbold took over.

The CEO, who most recently was chief executive of women’s clothing retailer Talbots Inc., is working to simplify GNC’s pricing strategy, which Fortunato had acknowledged was confusing and wasn’t working just before his ouster.

In the Sixth Avenue store, Archbold explained that too often in the past GNC would put entire categories of products — or even everything in the store — on sale, which cut deeply into profit margins. Now, the company is promoting products with discounts “in a more focused way” that Archbold said drives traffic into stores without sacrificing profitability.

“I’m trying to make sure we bring financial discipline to all decisions we make,” he said.

He eliminated an advertising campaign begun this year, called “Beat Average,” because it wasn’t reaching new customers or increasing sales. A campaign is in development and expected to start next year, he said.

Production at the company’s plant in South Carolina was cut to decrease inventory, which was building up as sales sagged.

About a half-dozen of the company’s top executives have left since Archbold’s arrival. He said he is instilling a new culture that emphasizes performance and improvement.

Archbold, 53, was credited in the success of Vitamin Shoppe, where he was president and chief operating officer, after it went public in 2009. Its sales increased 4 percent over the next three years.

He said GNC’s biggest opportunity is to grow sales in a market that is expanding quickly. He said the $35 billion vitamin and supplement industry is growing at about 6 percent a year. GNC, with $1.8 billion in annual sales, captures only 5 percent of the industry’s sales.

“That gives me great confidence in our ability to grow,” Archbold said. “We will continue to be the fastest growing company in the vitamin space.”

Alex Nixon is a Trib Total Media staff writer. Reach him at 412-320-7928 or [email protected].

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