Summary
GNC's debt burden is substantial even after the closing of all preferred stock transactions.
The company has the ability to meaningfully reduce debt over the coming year and achieve better terms in future refinancings.
However, the company's success will be driven by its ability to maintain operating margin and manage future erosion in same-store sales results.
GNC Holdings (GNC) operates under a significant debt burden and one of the key drivers of the company's depressed market valuation. The challenges the company faced earlier this year refinancing its maturing term loan reflected deep skepticism in the credit markets about the company's ability to successfully navigate a difficult retail environment generally and, more specifically, the competitive factors in the company's core supplements and vitamins segment.
However, despite the challenges, the company is making incremental progress. The closing of the Harbin preferred stock transaction, albeit in stages, will significantly reduce the company's debt burden and possibly also ongoing cash commitments in the event the company elects to pay preferred stock dividends in additional shares of preferred stock. In addition, free cash flows available for debt repayment are sufficient and should remain well above the company's minimum principal debt payments despite likely short-term erosion associated with the forthcoming China joint venture. In the longer term, the benefits from closing underperforming company stores, both in terms of inventory reduction and operating results, could further boost free cash flows for debt repayment. However, much depends on the company's ability to moderate same store sales declines and avoid another significant downturn in the marketplace.
