(By Balaseshan) Deutsche Bank analyst Charles Grom downgraded rating of GNC Holdings Inc. (NYSE:GNC) to "Hold" from "Buy" on limited near-term catalysts. The brokerage cut price target to $42 from $50 on shares of the specialty retailer of nutritional supplements.
Grom said since January 4, GNC is up about 30% (SPX up 12%), reflecting GNC's strong execution and two favorable EPS revisions in 1Q/2Q. More recently, over the past few weeks, a number of positive catalysts (e.g. DMAA clarification, secondary overhang removal, & material stock buyback) have passed, with surprisingly little movement in the stock.
At the same time, material insider selling by the CEO Joseph Fortunato has made the analyst less comfortable in recommending the stock. All told, he continues to have a great deal of respect for the management team and their success in driving the business. However, given the current dynamics, he is moving to the sidelines.
Grom said CEO has continued to aggressively sell shares in recent months and has reset 10b5-1 at least 2 times in 2012 – both of which give him concern. The latest sales were under a 10b5-1 plan adopted on May 7, 2012. Combined, year-to-date he estimates that the CEO has sold about 50% of the 1.2 million of shares granted under the options, even though they don't expire for another five years.
The analyst said multiple positive catalysts have come (and gone) in recent weeks with shares seeing little if any favorable reaction, which is not a great sign. They included: strong 2Q EPS/guidance raise; clarity on DMAA overhang, completed secondary, and completion of the company's $300 million buyback program.
Grom is modestly more concerned about GNC's ability to continue to drive out-sized comps, particularly since recent same-store sales strength has been largely a function of a higher average basket, which is now in the high $40's – up considerably in the past two years.
Looking ahead, while the analyst believes GNC has more dry powder on this front in the second half of 2012, he does question the sustainability in 2013.
The brokerage lowered its 2012 EPS estimate to $2.23 from $2.25 and its 2013 estimate to $2.60 from $2.70.
The analyst has taken down 2013 comps growth estimate to 6.0% from 8.0%, to reflect a more modest gain in the two-year trend. Finally, he is reducing price target to $42 (from $50), which is based on 16 times his 2013 EPS estimate.
GNC is trading down 4.54% at $35.51 on Thursday.