There might be hope for GNC yet.
Shares of the struggling Pittsburgh 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.
But on Monday, GNC's board chairman said the company was in the process of exploring “strategic alternatives,” including its sale. 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 an 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.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. 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.
Shelly Banjo is a Bloomberg News columnist.
