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Shares of the $3 billion health and wellness retailer, at $37.50, are down nearly 36% for the year to date. They trade at a P/E ratio of 11.79x (2015 estimates) with 11.6% EPS growth (-0.4% this year), price to sales ratio of 1.25x, and a price to book ratio of 4.44x. Revenue growth is expected to accelerate from +0.1% to +5.1% next year.
The 1.71% dividend yield (next ex-dividend date is on Sept. 10) is comparable to that of the SPDR S&P 500 ETF Trust's (SPY) 1.80% yield. On Aug. 13, GNC raised its two-year share repurchase program to $500 million from $250 million (roughly 15% of the total market capitalization); 5.64% of the total float is currently sold short (an estimated 1.3 days to cover).
The average analyst price target on the stock is $44.58 (19.33% above the current share price). There is one sell rating, 10 hold ratings and 7 buy ratings. On Aug. 11, Credit Suisse upgraded the stock to outperform from neutral with a $43 price target. The main reason for the upgrade was Archbold's prior success and his "rich" history with private equity firms (i.e., a possible sale of the company).
Low Bar Following Weak Earnings
Prior to Archbold's arrival, on July 29, GNC reported second-quarter EPS of 77 cents compared to the Wall Street consensus estimate of 79 cents on revenue of $675.2 million against the $705.02 million estimate (-0.2% year over year growth). Same-store sales fell 4% compared to 6.8% growth in the same period of 2013. The company lowered FY14 EPS guidance to $2.85 from $3.05-$3.10, the third consecutive EPS miss.
At one point this news sent the stock down nearly 47% year to date. However, a vote of confidence came on Aug. 18 when board member Michael Hines purchased 30,000 shares of GNC for $35.41 each ($1,062,300). He had previously owned just 7,118 shares.
Bullish Price Action On The Weekly Chart
Courtesy of StockCharts.com
Unusual Options Activity
On Friday, someone purchased approximately 2,500 October $37.50 calls for $1.75-$1.90 each. The call to put ratio was more than 6:1 (6 calls traded for every put traded). Call activity was about two times the average daily volume (typically trades 1,962 calls per day). Implied volatility rose 3.3% to 35.67 (ranged from 23.28 to 55.68 over the last 52 weeks). Total call open interest was 41,816 contracts vs total put open interest of 23,011 contracts. The big call buyer has $450K in premium on the line with a breakeven of $39.25-$39.40 on October options expiration.
GNC Options Trade Idea
Buy the Oct $37.50/$40 call spread for a $1.00 debit or better
(Buy the Oct $37.50 call and sell the Oct $40 call, all in one trade)
Stop loss- None
1st upside target- $2.00
2nd upside target- $2.45
Read More: 10 Stocks Carl Icahn Loves in 2014 >p/>At the time of publication, Mitchell was long the Oct $37.50/$40 call spreads.
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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates GNC HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate GNC HOLDINGS INC (GNC) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, notable return on equity, attractive valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: GNC Ratings Report