Will Cannabis Products Bring Shoppers Back to GNC?
GNC Holdings (NYSE:GNC) recently announced that it will start selling 12 new CBD-infused topical cream products from Physician’s Grade and Myaderm, which include facial creams, body lotion, and shampoo. CBD is the non-psychoactive ingredient in marijuana that treats pain but doesn’t get users high.
The products will be sold exclusively at GNC locations and online stores in 23 states and the District of Columbia. GNC CEO Ken Martindale stated that the retailer is “committed to offering high-quality, innovative products that are being introduced in new categories like CBD,” and believes that the products could attract new customers.
GNC’s decision wasn’t surprising, since plenty of other retailers already have jumped on the CBD bandwagon. But will it really move the needle for the retailer, which lost more than 90% of its market value over the past three years?
What happened to GNC?
GNC was once the market leader in vitamin and supplements. However, superstores, warehouse retailers, and e-tailers started luring away its customers with similar products. Sluggish mall traffic, an aggressive loyalty program that reduced the company’s sales growth and margins, and lawsuits that questioned the safety of its supplements exacerbated the pain.
Its partnership with Amazon, which offered GNC products to Prime subscribers, offset some of those declines over the past two years. However, GNC warned during its latest conference call that the maturity of that relationship could become a headwind with tougher year-over-year comparisons in 2019.
GNC expanded overseas with franchises (especially in China), but its international business generated just 9% of its sales last quarter. Meanwhile, its core domestic business, which consists of company-owned and franchised locations, reported negative same-store sales throughout most of 2018.
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GNC also divested weaker brands like LuckyVitamin, secured a $300 million investment from China’s Harbin Pharmaceutical Group, and formed a new joint venture with supplement manufacturer IVC to streamline its supply chain.
However, none of those efforts address its core problem of sluggish domestic sales. The one bright spot from last-quarter’s earnings report was the performance of two new product lines — TamaFlex joint health supplements and Earth Genius plant-based supplements — which tempered GNC’s same-store sales declines. Therefore, launching exclusive new products could still bring shoppers back to GNC’s stores.
Can CBD save GNC?
That’s where CBD products come in. Cowen & Co. estimates that annual sales of CBD products, which are legal in more states than recreational marijuana, could surge from $600 million to $2 billion in 2018 to $16 billion by 2025. The firm estimates that topical creams currently account for 26% of the market.
Those bullish forecasts caused many retailers — including Walmart, CVS, LVMH‘s Sephora, Neiman Marcus, and even Designer Brands‘ DSW — to sell their own CBD products. Shoppers can also buy CBD products on Amazon, but they’re usually labeled as “hemp” products because selling CBD products violates the retailer’s rules.
The CBD market represents an easy way for companies to hop on the cannabis bandwagon without selling recreational marijuana. But that’s a big problem for GNC: If shoppers can buy CBD products on Amazon, Walmart, or pick them up with shoes at DSW, they probably won’t visit GNC unless they really crave its channel-exclusive Physician’s Grade and Myaderm products.
Don’t believe the hype
GNC’s stock rallied after the news, but it’s highly doubtful that selling CBD products will resolve its biggest problems. Investors looking for a potential turnaround play should instead take a closer look at GNC’s rival Vitamin Shoppe, which impressed investors with the stabilization of its gross margins last quarter.