S&P Cuts Outlook on GNC Holdings (GNC) to Negative Following Recent Q1 Results

S&P Global Ratings today revised its outlook on the GNC Holdings Inc. (NYSE: GNC) to negative from stable. At the same time, we affirmed all ratings, including the 'BB+' corporate credit rating.

"The rating action follows GNC's weaker-than-expected operating results during the first quarter of 2016, with sales declining 0.2% and margins contracting about 200 basis points (bps) versus the year ago period, resulting in a number of operating initiatives by management," said credit analyst Mathew Christy. "This is combined with the company's announcement of a strategic review process that could result in the sale of the company, an accelerated refranchising effort, increased leverage, or another outcome. We believe the company's operating initiatives (entailing areas such as marketing, branding, customer service, and inventory management) are necessary and could help improve operating trends overtime, but we also think any positive effects from the initiatives will be gradual and see execution risk provided the overall weak retail environment. Moreover, we see an increased risk for a more aggressive financial policy following the conclusion of the company's strategic review process."

The negative outlook reflects our expectation that negative sales trends and margin erosion will persist in 2016, primarily because of lower comparable sales and shifting promotional strategies, and project a low-single-digit decline in revenue and a 120-bp margin decline. We believe the company's operating initiatives (aimed at brand image, marketing efforts, and inventory management) will ultimately ease the negative trends over the next 12 to 24 months, but the impact will be gradual. We also see risks with the execution, timing and effectiveness of management's initiatives, and the potential for a more aggressive financial policy following the completion of the company's strategic review process.

We could lower our ratings if the sales decline and margin deleverage becomes more pronounced or extends further than our base-case projection. This could occur if management cannot improve operations and customer traffic trends, leading to a persistent mid-single-digit sales decline and margins falling by about 200 bps. This would result in total adjusted debt to EBITDA greater than 3.3x and FFO to debt below 20%. We could also lower the rating if the company adopts a more aggressive financial policy as a result of its strategic initiative review, increasing debt by more $200 million on a sustained basis.

We could revise the outlook back to stable if we believe the company's operating initiatives will be successful in stabilizing or improving same-store sales trends, franchise initiative adoption, and margins for 2016 and beyond. This will also result in strengthened free operating cash flow generation prospects, the reduction in revolver borrowings, and improved credit metrics.

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