After Disappointing Quarter, GNC Explores Potential Sale

In an effort “to increase shareholder value," GNC Holdings Inc. revealed Monday its board of directors has begun a review of “strategic and financial alternatives" that include a potential sale of the company.

“The review will include a thorough evaluation of the company's current operating plan, as well as potential value maximizing alternatives such as accelerated refranchising strategies, capital structure optimization, partnerships and other value-creating collaborations, or a potential sale of the company," GNC said in a news release.

To assist in the strategic review, the specialty retailer has retained Goldman, Sachs & Co. as its financial advisor and Wachtell, Lipton, Rosen & Katz as its legal advisor.

“After careful consideration, including discussions with a range of shareholders, we believe it is an appropriate time to undertake a comprehensive review of the company's strategic and financial alternatives," said Michael F. Hines, GNC's chairman, in a statement. "We are in the early stages of a broad review, and will take the time we need to thoroughly evaluate our opportunities to achieve the best result for our shareholders, business partners and associates. While the review is ongoing, GNC will continue to act with the necessary urgency to deliver improved financial performance by addressing our near-term challenges and continuing to execute our strategic initiatives."

The Pittsburgh-based company cautioned there is no guarantee that its review will lead to any specific action.

GNC announced its plan after reporting first-quarter results on April 28 that missed Wall Street’s expectations. Consolidated revenues fell 1.8 percent to $668.9 million from $681.3 million in the year-ago period, and same-store sales shrank 2.6 percent in domestic company-owned stores. Adjusted earnings per share (EPS) of 69 cents missed a consensus estimate by 8 percent, according to Zacks Equity Research.

Financial analysts were disappointed with the first-quarter results, with Zacks noting in an April 29 blog that GNC’s lowered EPS estimate for the year “dims hopes of a turnaround in the near term."

“Choppy sales and multiple downward earnings revisions over the past year underscore the inherent risks in turning around a business facing industry headwinds," Deutsche Bank Securities said in an April 28 research note.

Update on Oregon Lawsuit

Separate from its business challenges, GNC also faces a lawsuit by Oregon Attorney General Ellen Rosenblum. Rosenblum alleged GNC sold unlawful ingredients—namely picamilon and BMPEA—in its dietary supplements in violation of Oregon’s Unlawful Trade Practices Act (UTPA).

Last October, GNC removed the case to federal court, but on March 31, a federal magistrate recommended that a district court judge send the lawsuit back to the Multnomah County Circuit Court. In his findings and recommendations, U.S. Magistrate Judge Paul Papak rejected GNC’s contention that Oregon’s claims under the UTPA mark a proscribed effort to enforce the Federal Food, Drug & Cosmetic Act (FDCA).

In objecting to the magistrate’s recommendations and findings, GNC argued the case must be heard in federal court.

“The specific sections of the FDCA that the State alleges GNC violated are excluded from the FDCA’s list of provisions that may be enforced by the State Attorneys General," GNC said in an April 18 court filing through its counsel. “These specific sections may only be enforced by the FDA in federal court."