Summary
GNC’s share price has declined greatly over the last few years as the business has deteriorated and risks multiplied in the face of generally negative sentiment on retail.
We assess whether there remains a compelling short argument in view of the company’s depressed share price and current outcome probabilities.
We conclude that a short position at the current share price results in a negative expected value under virtually all realistic outcome probability combinations.
The present short position risk/reward balance is unjustifiably tilted towards risk, making a short position at the current price very difficult to justify.
GNC Holdings, Inc. (GNC) is one of the market's most heavily shorted companies with, at last report, just under 27 million shares sold short. The short interest represents nearly a third of the company's public float despite actually being marginally less than the recent peak over 30 million shares. The short trade has been exceptionally profitable over the last few years as the company has struggled with multiple challenges, but the persistence of the short interest in the face of the significant stock price decline draws into question the rationale of initiating or maintaining a short position at the current price. The historical short narrative with respect to GNC - weak conventional retail and increasing competition - has been largely accurate. However, given the company's restructuring, refinancing, and ongoing (though depressed) profitability and cash flow generation, does the short opportunity on a going forward basis still have a sufficiently positive expected value?
