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Is GNC A Good Buy?

Source: GNC

GNC is poised to go public tomorrow, as its owners Ares Management and the Ontario Teachers Pension Plan hope to take some money off the table and to push further growth.

So what do you have to know about GNC?

Here are the nuts and bolts. There have roughly 7,200 stores, did $1.82 billion in sales last year and have had 22 straight quarters of consecutive same store sales growth.

About 42 percent of company sales are from vitamins, minerals, herbs and supplements, 38 percent is from sports nutrition products, 11 percent come from diet products and the rest is rounded out by other wellness items.

When you walk into a GNC these days, you’ll notice that it’s nothing like a GNC looked like even three years ago.

There are fewer products for body builders. You know, those products that walk the fine line with the Federal Trade Commission. Keep in mind, it was only three years ago that five percent of GNC’s retail sales came from Hydroxycut.

There are also images of women and products for them as well, as driving them into GNC is the key to future diversification and growth. Women, in turns out, are better regular buyers of vitamins and supplements than men are and women buy those products for the men in their lives as well.

You also notice that roughly 50 percent of the products in the store are GNC label.

For any investor, that’s a good sign.

The health and wellness market is extremely price competitive, so making the product themselves — in the United States — allows them to not only control product standards and distribution, but also allows them to remain in the game with Vitamin Shoppe and even the drug stores.

This business is expected to grow more than five percent a year until at least 2015.

Whether GNC has the right prices is dependent on what exactly they are selling versus the competitors. Overall, their products tend to have more substance to them are, in many cases and clinically tested. But it’s going to be up to the sales force in the stores to convey to the potential customer that GNC’s fish oil is better and worth paying more for. That’s key because brand loyalty will insure that on a second purchase they stick with GNC and don’t go online for the cheapest alternative.

GNC does have tremendous loyalty. I’ve heard that roughly 30 percent of their total customer base, 4.5 million, have the company’s Gold Card. It’s key for the customer from a savings standpoint, but it’s good from the company standpoint to have information about the people who spend there. About 50 percent of the business is from repeat customers who use their Gold Cards.

Margins on selling other brands in the sports nutrition space are not good because of the competition, but margins on GNC protein powders and other products in the space are spectacular.

There are obviously exposure points for GNC. It has long term debt of over $1 billion on its balance sheets. Its products are still is subject to government regulations and the company has to continue to make more and more of the products they sell in order to be able to cut out the middle man and be able to bake in the cost of having stores to display their products versus some online competitors. Bad margin is one of the greatest criticisms of one of GNC’s competitors that went public last year, Vitamin Shoppe, even though shares have steadily climbed since the company went public in late 2009.

Questions? Comments? SportsBiz@cnbc.com