3/2/2012
Consumer Goods
GNC Holdings Inc.
Ticker: GNC
Recommendation: Buy
Current Price: $32.82
Implied Price: $36.61 (11.56%)
Investment Thesis
Key Statistics
52 Week Price Range
50-Day Moving Average
Estimated Beta
0.74
Dividend Yield
1.34%
Market Capitalization

GNC continues to see tremendous top and bottom line growth because the
company is taking advantage of a market leading position in the fast
growing nutritional supplements industry.

Over the past couple of years, the management team has repositioned GNC
as a growth and brand focused company, which has laid a foundation for a
multi-year payback.

The company has a diversified business model, multiple growth levers, and
hence many ways to win.
$16.08 - $33.70
$XX$XX.XX
$29.21
$3.4 billion
3-Year Revenue CAGR
7.7%
GNC Stock Performance
Trading Statistics
Diluted Shares Outstanding
107 million
$35.00
Average Volume (3-Month)
106.3 million
$33.00
83.70%
$31.00
Institutional Ownership
Insider Ownership
4.96%
$29.00
$27.00
EV/EBITDA
10.5x
$25.00
Margins and Ratios
$23.00
Gross Margin
36.4%
$21.00
EBITDA Margin
16.7%
$19.00
7.9%
$17.00
Net Margin
Debt to Enterprise Value
21.31%
Leverage Ratio
$15.00
Apr-11 May-11 Jun-11
Jul-11
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
Price
.26x
50-Day Avg
Jan-12
Feb-12
200-Day Avg
Covering Analyst: Aaron McGinley
mcginley@uoregon.edu
1
University of Oregon Investment Group
University of Oregon Investment Group
3/2/2012
Business Overview
Figure 1: GNC Listed on NYSE
Corporate History
General Nutrition Centers, Inc. (GNC) was founded in 1935 by David Shakarian
in Pittsburgh, Pennsylvania as a small health food store. In the 1940’s GNC
opened multiple locations and began producing its own vitamin and mineral
supplements as well as foods, beverages, and cosmetics. In the 1960’s a health
food trend swept the nation, which allowed the company to expand outside
Pittsburgh. Mr. Shakarian continued to run the chain of GNCs until his death in
1984. By the 1980’s GNC had over 1,000 retail stores and was an established
player in the industry. Numico, the baby food and clinical nutrition company,
acquired GNC in 1999 and sold the company to Apollo Management in 2003.
In 2007, Ontario Teachers’ Pension Plan and Ares Management bought GNC.
On April 6, 2011 GNC went public at a price of $16.00 per share and currently
trades on the NYSE under the symbol “GNC”.
Organization
Source: T he Wall Street Journal
Figure 2: Segment Revenue Breakdown
Manufacturing/
Wholesale
11%
Franchise
16%
Today, GNC is the leading global specialty retailer of health and wellness
products and is evolving into a highly respected global brand. The product mix
includes vitamins, minerals, herbal supplements, sports nutrition, and diet
products, which are distributed through a multi-channel business model. GNC
is vertically integrated as the operations consist of purchasing raw materials,
manufacturing products, and selling finished goods. The operating segments
include retail, franchise, and manufacturing/wholesale.

The retail segment generates sales through company-owned stores, online
through GNC.com, and through recently acquired LuckyVitamin.com. As
of 12/31/2011 GNC operates 3,046 company-owned stores in the U.S. (all
50 states, D.C. and Puerto Rico) and Canada. Each store has a proven
successful format in malls, strips and downtown locations with a focus on
inviting store fronts and customer service. GNC has had 26 consecutive
quarters of positive domestic company-owned same store sales growth with
accelerating growth in 2010 and 2011.
Retail
73%
Source: Q4 Earnings Call
Figure 3: Yearly Segment Breakdown

Franchise (16% of Sales)
Franchise revenues are generated by sales to franchisees, royalties on
franchise retail sales, and franchise fees. As of 12/31/2011 GNC has 924
domestic franchise locations with 500+ franchisees and 1,590 international
franchise locations in 53 countries. GNC has good relationships with
franchisees, which is evidenced by a 91% franchise renewal rate over the
last 6 years.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
One highlight in this segment is the domestic franchise stores, which are
financially stable with annuity-like cash flow streams. This sub-segment has
seen accelerating same store sales growth along with retail stores.
Revenues are diversified with the largest franchisee only owning and
operating 10 store locations.

Manufacturing/Wholesale
Retail (73% of Sales)
Franchise
Source: Public Filings and UOIG Research
Retail
Manufacturing / Wholesale (11% of Sales)
Manufacturing/wholesale revenues are generated through sales of
manufactured products to third parties, and the sale of proprietary and thirdparty products through Rite Aid, drugstore.com, PetSmart, and Sam’s Club.
As of 12/31/2011 GNC has 2,125 franchise “store-within-a-store” locations
UOIG 2
University of Oregon Investment Group
3/2/2012
in Rite Aids around the country. The driver of this segment relies on highmargin contracts, which GNC is realizing through long-term relationships
with successful companies. In manufacturing, GNC leverages its facilities
to do business with companies like Pfizer, Bayer, and Bausch & Lomb.
Figure 4: GNC Vitapak (VMHS)
Products
Source: GNC.com
Figure 5: Product Growth and % Total
Cate gory
VMHS
2010A
2009A
2008A
496.1
496.4
465.2
% YoY Growth
-0.1%
6.7%
N/A
Sports Nutrition
531.30
443.4
410.1
% YoY Growth
19.8%
8.1%
N/A
Diet
122.30
128.0
148.2
% YoY Growth
-4.5% -13.6%
Although GNC manages the company based on operations from retail, franchise
and manufacturing/wholesale, the company reports sales in four major
nutritional supplement categories including VMHS, sports nutrition, diet, and
other wellness. GNC focuses on high-margin, premium, and value-added
nutritional products. GNC offers over 1,800 SKUs between third-party products
and proprietary products. Proprietary products make up approximately 60% of
revenues in the retail segment.

VMHS includes vitamins and minerals in many different forms and
potencies. GNC is known for offering 40+ different customized daily
vitamin packets under the trademark Vitapak®. In addition, GNC offers a
full range of “alphabet” vitamins and special formulations under the Mega
Men®, Ultra Mega®, Herbal Plus®, and GNC Total Lean franchises. A
key offering under this category includes a full line of whole food-based
supplements and top selling herb and natural remedy products. GNC also
offers supplements to support specific areas of the body, such as joints, the
heart and blood vessels, and the digestive system. In 2010, proprietary
products made up 81% of VMHS sales.
N/A
Other Wellness
93.50
94.3
102.0
% YoY Growth
-0.8%
-7.5%
N/A
T otal U.S. Retail 1,243.2 1,162.1 1,125.5
% of Total
2010A
2009A
2008A
VMHS
39.9%
42.7%
41.3%
Sports Nutrition
42.7%
38.2%
36.4%
Diet
9.8%
11.0%
13.2%
Other Wellness
7.6%
8.1%
9.1%

Sports Nutrition
Sports nutrition products include protein, weight gainers, sports drinks and
bars, and high potency vitamin formulations. GNC is widely recognized as
a premier distributor. Key proprietary brands include Pro Performance®,
Pro Performance® AMP, and Beyond Raw™. AMP and Beyond Raw™
are the #1 sports nutrition products in GNC stores and are only available
through GNC. In 2010, proprietary products accounted for 36% of sports
nutrition sales.
Source: Public Filings
Figure 6: GNC Amp Line (Sports Nutrition)

Diet
Diet products consist of pills, meal replacements, shakes, diet bars, energy
tablets and cleansing products. Primarily, these products increase
metabolism and are used for dieting and weight management. GNCs key
proprietary brand in this category is Total Lean™, which focuses on meal
replacement. This category is cyclical in nature and is less stable than other
categories. In 2010, this category accounted for 10% of retail sales,
significantly down from 27% in 2001.
Source: GNC.com

Figure 7: GNC Total Lean Products (Diet)
VMHS
Other Wellness
Other wellness products represents sales of Gold Card preferred
memberships and other non-supplement products including cosmetics, food
items, health management products, books, and DVDs.
Customers
GNC targets a lifestyle demographic of consumers who are athletic, aspire to
live a healthier lifestyle and are goal-oriented. GNC consumers engage in
fitness routines more than the average U.S. supplement buyer and tend to use
multiple products. The distribution is skewed toward a younger demographic,
with 35% of customers under the age of 35 and 80% under the age of 50.
Source: GNC.com
UOIG 3
University of Oregon Investment Group
Figure 8: CEO on Consumers
“They are into lifestyle. They are
aspirational. They want to look
better. They want to feel better.
They want to live a healthier
lifestyle. They are very dedicated
to what they are doing. That’s the
audience that we want. The other
ones, I won’t chase”
- Joe Fortunato, CEO
Source: Global Consumer Conference
Figure 9: Times Square Broadway @ 52nd
3/2/2012
However, GNC finds the majority of consumers over 50 tend to be heavy users,
especially in the vitamin category. The gender balance is split evenly between
males and females. Also, customers tend to be well-educated with higher than
average income levels and more engaged in social media.
GNC realizes several benefits as a result of the customer demographic. The
younger customers increase average-spend each year and have high lifetime
value. In addition, consumers tend to shop multiple categories and are more
focused on product quality rather than low prices.
Strategic Positioning
Brand
GNC’s brand is significantly better than competitors. According to a Beanstalk
Marketing and LJS & Associates research study, GNC’s brand holds a 94%
awareness rate among consumers. The value of GNC’s brand equity takes shape
through established customer relationships and trust in the form of advertising,
packaging, and other marketing efforts. GNC has been making quality
nutritional products for more than 70 years and maintains the highest standards
of customer satisfaction.

Live Well Campaign
The “Live Well” campaign has repositioned GNC to connect better with
consumers. The message of the campaign focuses on conveying a general
health, wellness, and fitness appeal versus purely muscle building. GNC
has a $50 to $60 million dollar advertising budget, which is being used in
deals with top tier ad agencies such as McKinney and Omnicom Group.
Advertising is driving the campaign through print ads in magazines
including ESPN, Men’s Fitness, and GQ. In addition, large scale billboards
are put up in key outdoor areas such as Times Square and Beverly Hills.

GNC’s stores are recognizable and attractive. With over 7,500 locations
worldwide and over 5,500 in the US, GNC’s presence swamps competitors.
GNC has 11 times the store fronts in the U.S. than the next competitor. All
stores are homogeneous and offer a similar product selection, which makes
GNC reliable to customers. Part of the re-branding effort was to modernize
store fronts with glass display cabinets showing more advertisements and to
have centrally located point of sales (POS) desks that attract customers.
GNC uses high-tech POS software to track sales to consumers as well as
for “back office” functions including inventory management and profit
analysis.
Source: GNC Investor Presentation
Figure 10: Total U.S. Store Count
6000
5549
5000

4000
3000
2000
1000
507
444
Vitamin
Shoppe
Vitamin
World
Location, Location, Location
Established Credibility
Consumers trust the GNC brand. When consumers choose GNC they know
exactly what they’re getting in their products. GNC has a truth in labeling
policy, which discloses a wealth of information about each product. Every
label shows the important nutritional information that consumers need to
make informed decisions about improving the quality of their lives. GNC
provides all ingredient information even when not required by federal
labeling standards.
0
GNC
Source: GNC Investor Presentation
Loyal Customers
GNC maintains customer loyalty through the company’s Gold Card preferred
membership program. Consumers can purchase a GNC Gold Card for $15 and
UOIG 4
University of Oregon Investment Group
Figure 11: Med. Advisory Board Key Members
Name
Dr. Joseph C. Maroon,
F.A.C.S.
Dr. Daniel Edmundowicz,
M.S., F.A.C.C.
Felicia Stoler, M.S., R.D
Dr. Frank J. Costa
Dr. Anita Courcoulas,
M.P.H., F.A.C.S.
Re cognition
World-renowned
neurosurgeon, author,
triathlete
Leading expert in
preventive cardiology and
cholesterol management
Nutrition expert, exercise
physiologist and host of
T LC's "Honey We're Killing
the Kids"
Internationally acclaimed
urological surgeon and men's
health lecturer
Source: Public Filings
Figure 12: 1,800+ SKUs
3/2/2012
can save 20% in store and on-line on the day the card is purchased and during
the first seven days of the month for one year. Gold Card members also receive
personalized information and exclusive offers. GNC has about 5 million gold
card members who account for more than 50% of retail sales. According to
GNC, members spend more than two times as much as non-members and tend to
buy across multiple categories. The Gold Card program keeps customers loyal
and allows GNC to collect a significant amount of consumer data. According to
recent surveys, GNC shoppers are highly satisfied with selection, new products,
and overall quality of experience.
Innovative Products
GNC’s innovative product offering is a significant competitive advantage.
Proprietary products and third-party products with preferred distribution rights
account for 56% of retail sales. GNC identifies shifting consumer trends
through market research and through interactions with customers and leading
industry vendors.
GNC’s in-house product development group creates unique merchandise that
can only be purchased from GNC. The product development group consists of
about 80 people including PhDs, doctors, and a credentialed medical advisory
board. GNC has vertically integrated infrastructure, which easily allows for
new products to go from the idea stage, to product development, to testing and
trials, to release. Furthermore, GNC’s close relationships with vendor partners
allows for first-to-market opportunities.
Diversified Business Model
GNC derives sales through multiple channels in multiple geographies. In
addition, GNC’s business is diversified through a broad product assortment
across multiple categories. GNC currently carries over 1,800 SKUs and is not
dependent on any one vendor for a material supply of third-party products. In
addition, no one vendor supplies more than 10% of raw material inputs. GNC’s
customer base is quickly expanding to multiple types of people of all ages.
Exceptional Customer Service
Source: GNC.com
Figure 13: Customer Service
GNC differentiates itself from mass merchandisers and online competition
through customer service. GNC heavily invests in human resources to hire and
train associates. Training takes place at GNC University, which is a partnership
between GNC and the University of Florida’s College of Agriculture and Life
Sciences. Trainees are taught about fundamental nutrition concepts, specifics
about GNC products, and how to sell and build customer relationships. GNC
believes it has a very knowledgeable work force, which leads to customer
satisfaction.
Business Growth Strategies
Recent Transformation of GNC
Source: GNC.com
GNC has gone through major developments in the past few years financially and
strategically, resulting in accelerated growth. Beginning in 2006, a new
management team led by CEO Joe Fortunato modernized and revamped the
GNC brand. GNC went from having a bodybuilding connotation, left over from
the 1980s, to being an overall health and wellness company for a wide variety of
consumers. The enhanced marketing approach brought new product packaging
and media campaigns with the “Live Well” theme. The team increased GNC’s
focus on proprietary products, which included the launching of Vitapak®, Pro
Performance® AMP and GNC Total Lean. In 2009, GNC redesigned their
UOIG 5
University of Oregon Investment Group
3/2/2012
10.7%
10.3%
10.1%
6.5%
7.1%
5.8%
7.5%
3.1%
4.3%
1.2%
0.3%
4.5%
1.5%
2.5%
2.2%
0.2%
0.5%
1.6%
3.3%
2005
2006
2007
2008
2009
2010
Source: GNC Investor Presentation
Figure 15: International Franchise Stores
1590
858
961
1078
1190
1307
1437
Source: Public Filings
Figure 16: International Franchise Revenue
$128
$108
$78
$86
$67
GNC will grow in existing and new markets through new franchise locations,
brand building initiatives, and an increase in wholesale distribution.
International revenue has grown at an 18% CAGR since 2011. GNC has
opened approximately 100 net new stores year over year during this time period
and opened 154 net new stores in 2011. GNC is currently looking to partner
with a direct marketer in China and will expand the Live Well campaign abroad.
In 2010, GNC started registering products with the Chinese government. In
2011, GNC made wholesale sales into 120 stores, including major retailers such
as Shanghai Pharma and City Shop. Furthermore in 2011, GNC signed a
contract with Rich Life to sell products in 120 stores. According to GNC, China
is an $18 Billion market which is largely untapped. By the end of 2011, GNC
had opened about 300 locations in China.
$56
GNC is not in the EU, Russia, India, or Brazil. The company estimates that it is
underpenetrated, often by as much as 50%, in current countries. With 1500+
locations in 53 countries, GNC plan on growing organically with new stores and
with increases in same-store sales.
2005 2006 2007 2008 2009 2010 2011
Source: Public Filings
E-Commerce Expansion
Figure 17: GNC.com Top Line
$77
$59
$47
$36
$28
$17
2006
2011
GNC will take advantage of domestic industry growth forecasts through brand
building initiatives, launching new proprietary products, and expanding both the
size and number of stores. GNC believes the U.S. market can support 4500
locations, which the company will take advantage of by targeting key
metropolitan areas. GNC opened 54 net new stores in 2011 and plans on
opening 700 to 800 in the next three years. In addition, GNC plans on
expanding retail square footage by about 4% per year. As of Q4 2011, GNC has
had 26 consecutive quarters of positive domestic company-owned same store
sales growth. GNC’s network of retail stores provides a high degree of
operating leverage, which will drive the domestic retail business and expand
operating margins.
Growth in International Markets, China
2005 2006 2007 2008 2009 2010 2011
$46
GNC has grown consolidated revenues from $1.3 billion in 2005 to $1.8 billion
in 2010, a CAGR of 6.7%. EBITDA has grown from $113.2 million in 2005 to
$259.4 million in 2010, a CAGR of 18.0%. EBITDA margin has increased from
8.6% in 2005 to 14.2% in 2010. The recent success can be attributed to
management’s repositioning efforts to establish a foundation for growth and
innovation.
Growth in the Domestic Retail Business
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1.0%
5.4%
6.5%
8.1%
11.5%
11.7%
14.5%
Figure 14: 26 Consecutive Quarters of Positive Comps website, upgraded POS systems, and invested to streamline the supply chain.
Part of this investment included expanding capacity at manufacturing plants and
enhancing packaging capabilities.
2007
2008
2009
2010
GNC is making concerted efforts to take market share in one of the fastest
growing and highest margin channels in the industry. After the website redesign
in 2009, GNC.com was on Internet Retailer’s list of the 100 hottest online retail
sites. In 2011, GNC acquired leading health and wellness retailer
Luckyvitamin.com for $21 million, which is expected to be accretive in 2012.
In e-commerce overall, revenue growth has been over 25% year over year for
the past three years. There exists stiff competition in this market and GNC plans
on acquiring more web banners to gain market share.
2011
Source: Public Filings
UOIG 6
University of Oregon Investment Group
Leveraging the Brand
Figure 18: GNC International Locations
Other
Hong Kong
Peru
Singapore
Turkey
Chile
Canada
South Korea
Mexico
504
58
58
60
66
66
3/2/2012
T otal:1,700+
locations
139
174
422
GNC is leveraging the brand and production capabilities to sell more proprietary
products through corporate partnerships. In 2007, GNC and Rite Aid extended
the strategic alliance for Rite Aid to open an additional 1,125 store-within-astore locations by 2014. In 2010, GNC partnered with PetSmart to sell
exclusively GNC-branded pet supplements. Later in 2010, PepsiCo launched its
Gatorade G Series Pro through a distribution alliance with GNC. Then in 2011,
consistent with the strategy, GNC continued to expand into the mass market by
partnering with Sam’s Club to make wholesale sales. Management has
indicated that GNC has three more deals lined up and ready to go soon,
including securing a large manufacturing contract. GNC’s team is committed to
finding more corporate partnerships with leading consumer brand companies.
Source: Public Filings
Figure 18.5: Industry Revenue % Change
Industry
6
Overview
4
GNC primarily operates in the U.S. nutritional supplements industry where the
major products offered include sports nutrition, vitamin, and mineral
supplements. Approximately 95% of GNC’s sales come from the U.S. market.
The purpose of the industry is to improve the individuals’ health and general
condition.
2
0
(2)
(4)
(6)
(8)
Source: IBIS World
Figure 19: YoY Growth in Supplements
10%
8%
6%
Increasing health awareness trends, an aging population, and innovative
products are driving growth in the industry. According to Nutrition Business
Journal’s Supplement Business Report 2011, the industry generated $26.9
billion in sales in 2009 and $28.1 billion in 2010, and is projected to grow at an
average annual rate of approximately 4% through 2015. According to IBIS
World research, the broader U.S. health store industry is expected to have
annual growth of 3% through 2016. GNC indicates the sports nutrition segment
is a $3.2 billion dollar business, which will grow to $4.3 billion by 2015 (7.7%
in 2012). In addition, GNC forecasts the vitamin business to grow at 6.4% in
2012. These are the two fastest growing segments of the industry.
4%
Sports Nutrition
2%
0%
Sports Nutrition Supplements
Dietary Supplements
Source: Nutrition Business Journal, Morgan Stanley
Figure 20: Sports Nutrition Growth
Sports Nutrition CAGR = 6.2% $4.3
$3.2
GNC Est.
Market
Share
(25%)
Sports nutrition supplements are intended to be used in addition to a healthy diet
and exercise. The industry offers products including protein and weight gainers,
meal replacements, nutrition bars, sport drinks and other supplements to increase
energy and enhance recovery after a workout. The products come in many
forms such as powders, tablets, capsules, soft gels, and liquids.
The sports nutrition segment should continue the growth that it has seen over the
past five years. According to a food and health survey from the International
Food Information Council, the number of Americans reporting that they are
physically active continues to increase compared to 2006. According to IBIS
World, sports nutrition is gaining acceptance among all types of consumers who
are seeking a healthier lifestyle because products are convenient, easy to
consume, and can meet dietary needs. New product innovation and a continued
mainstream acceptance will drive growth.
Vitamins and Minerals
$0.8
2010
2015E
Vitamin and mineral supplements are taken to support health and prevent
deficiencies of necessary vitamins and minerals for specific health conditions or
life stages. Products include multi-vitamins, lettered vitamins (vitamin A, C, D,
E, B-complex, etc.), calcium, magnesium, chromium, zinc, and other major and
Source: NBJ and Public Filings
UOIG 7
University of Oregon Investment Group
3/2/2012
Figure 21: Supplement Industry Revenue Growth trace vitamins and minerals. The products are typically available in tablets,
capsules, vegi-capsules, softgels, gelcaps, liquids, and powders.
2006-2010 CAGR
2010-2015E CAGR
The vitamin and mineral segment has seen growth as a result of an increase in
NBJ 2006 NBJ 2011 2009 NBJ 2011 NBJ
health awareness among consumers and rising costs of health care. Within the
Supplement Report
Report
Report
Report
segment, the product mix has shifted from multi-vitamins and lettered vitamins
Categories Estimate Actual
Estimate Estimate towards specialty and sports specific supplements. The trends seen over the past
Vitamins
Sports
Nutrition
3.7%
6.4%
3.9%
3.8%
five years are expected to continue into the future.
4.7%
7.7%
5.2%
6.2%
GNC has found that consumers consider vitamins and minerals to be a low
ticket item, which rank only second to food in terms of necessity. According to
the National Health and Nutrition Examination Survey, more than 50% of adults
are taking a dietary supplement and 35% use a multivitamin product. According
to the International Food Information Council’s (IFIC) Food & Health Survey,
Americans are more health conscience and are actively seeking information
about preventative care. IFIC found that 92% of consumers can name a
supplement and its associated benefit, up from 77% in 2002. According to IBIS
World, older white women with higher education levels, lower BMIs, and higher
physical activity levels are the most likely consumer to be using a supplement.
In addition, consumers with family history of breast cancer or prostate cancer
report higher supplemental vitamin and mineral use.
Source: Nutrition Business Journal
Figure 22: Healthy Eating Index
77%
76%
75%
74%
73%
72%
71%
70%
69%
68%
Macro Factors
 Healthy Eating Index
The Healthy Eating Index (HEI) is a measure of the U.S. population’s diet
quality relative to federal dietary guidelines. The research is put together by
the USDA Center for Nutrition Policy and Promotion, the USDA Food and
Nutrition Service, and the National Cancer Institute. The measure is a score
out of 100 where 80 is considered good, 51-80 is considered fair, and less
than 51 is considered poor. The HEI is a good proxy for health
consciousness in the U.S., which affects the use of nutritional supplements.
According to IBIS world, this driver is expected to increase during 2012.
However, the index shows modest declines in the long-term.
Source: IBIS World
Figure 23: Consumer Sentiment Index
100
80
60
40
20

The Consumer Sentiment Index (CSI) and the Consumer Confidence Index
(CCI) are measures of consumer confidence published monthly by the
University of Michigan/Thompson Reuters and the Conference Board,
respectively. The CSI seeks to measure how consumers view their personal
finances, the short-term economy, and the long-term economy. The CCI
measures how consumers are expressing their activities of savings and
spending. Both indexes are good proxies for activity in the retail sector.
According to IBIS World, these drivers are expected to increase in 2012 as
well as in the long-term.
0
Source: IBIS World
Figure 24: Private Health Insurance
220.0
215.0
210.0
205.0
200.0
195.0
190.0
185.0
180.0
Surveys of Consumers

Health Insurance
Health insurance coverage provides protection against the cost of medical
expenses. According to U.S. Census Bureau data, about 65% of Americans
have private health insurance, up from about 55% in 2005. In addition,
about 17.1% of Americans are uninsured, up from about 15% in 2007. The
rise can be attributed partially to unemployment caused by the recession.
More generally, both of these numbers have been rising since 2000. The
cost of health care has increased as well as a result of innovations in
medical technology and pharmaceuticals. As these numbers increase,
individuals take more preventative care, including using more nutritional
Source: IBIS World
UOIG 8
University of Oregon Investment Group
3/2/2012
Figure 25: Healthcare Reform Signing
supplements. According to IBIS World, this driver is expected to increase
during 2012.
In 2010 President Obama signed into law the Patient Protection and
Affordable Care Act (PPACA). The healthcare reform bill will require
Americans to purchase insurance beginning in 2014. According to
Congressional Budget Office forecasts, the bill will reduce the number of
uninsured by 32 million, leaving only 23 million uninsured in 2019. This
will have negative impacts on the nutritional supplements industry in the
long-term since people will rely more heavily on medicine covered by
insurance.

Source: Official White House Photo
Private non-residential construction consists of retail and other industries’
buildings and structures installed during the year, compiled by the U.S.
Census Bureau. The rise and fall of construction spending is determined by
business growth and consumption. The cost of retail real estate depends
upon the construction market. According to IBIS World, costs are expected
to rise during 2012 as well as in the long-term, posing a risk.
Figure 26: Private Non-Res. Construction
700.0
600.0
500.0
400.0
300.0

200.0
Private Non-Residential Construction
Aging Population
Aging population is when the median age of a country rises as a result of
increasing life expectancy or declining fertility. The median age of the
global population is the highest it has ever been, primarily as a result of
declining birth rates and faster futility transitions. According to the U.N.,
the median age of developed countries rose from 29.0 in 1950 to 37.3 in
2000, and is expected to rise to 45.5 in 2050. According to the Department
of Health and Human Services, the percentage of people in the U.S. who are
65+ is expected to rise from 12.4% in 2000 to 19% in 2030. Furthermore,
according to U.S. Census Bureau data, the population aged 50+ is expected
to grow more than twice as fast as the overall population through 2016. An
aging population means individuals have more health problems and higher
disposable incomes, which will drive demand in the nutritional supplements
industry in the long-term.
100.0
0.0
Source: IBIS World
Figure 27: Median Age of Population
38.0
37.0
36.0
35.0
34.0
33.0
32.0
31.0
30.0

Regulation
The industry is subject to several regulating bodies including the Food and
Drug Administration (FDA), Federal Trade Commission (FTC), and the
Consumer Product Safety Commission and the Postal Service. The level of
regulation is considered medium and steady by IBIS World. Activities
subject to regulation include the processing, formulation, packaging,
labeling, advertising, distributing, and selling of products. The Dietary
Supplement Health and Education Act of 1994 (DSHEA) defined rules for
ingredients and labeling of supplements. Essentially the regulation in the
industry makes sure the ingredients (post 1994) are registered with the FDA
and products are marketed for their intended use.
Source: IBIS World
Figure 28: Middle-class as % of World Pop.
80
60

40
20
0
1700
1850
1950
West
1980
Asia
2006
Chinese Middle Class
The Chinese market has a burgeoning middle class and is presenting an
opportunity for retailers. According to the McKinsey Quarterly, about 5%
of China’s 1.3 billion citizens are wealthy and another 10% can be
considered middle class. Although the percentages are small, the numbers
translate into 200 million people or two-thirds of the entire U.S. population.
According to GNC’s management, China represents an $18 billion market
for the nutritional supplements industry.
Source: T he Economist, Surjit Bhalla
UOIG 9
University of Oregon Investment Group
Figure 29: Whey Concentrate Price up 34%
3/2/2012

Input Costs
Input costs are associated primarily with the price of whey protein, natural
and synthetic vitamins, herbs, minerals and gelatin. Whey protein is a
significant input for the industry and is considered the most popular
nutritional supplement for health and muscle building benefits. Whey is a
byproduct of cheese. According to Morgan Stanley research, demand for
cheese is not increasing nearly as fast as demand for whey going into
protein shakes and other sports nutrition products. As a result, there are
supply and demand imbalances causing inflation. In addition, dairy
products are seeing inflation and adding to costs.
3,000.0
2,500.0
2,000.0
1,500.0
1,000.0
500.0
0.0
2009
2010

2011
Pet Stores Industry
Recently, players in the nutritional supplements industry have been entering
the pet stores industry to offer nutritional supplements to pets. Through the
recession, the pet store industry saw positive growth as consumers reported
cutting down on personal discretionary spending before scaling down on
spending for pets. According to IBIS World, the industry is expected to
expand at an annual rate of 4.2% through 2016.
Source: USDA, Morgan Stanley
Figure 30: GNC Ultra Mega for Pets
Competition
The nutritional supplements industry is large, fragmented, and highly
competitive. The top four players only account for approximately 14% of sales.
According to GNC, the market consists of specialty retailers, supermarkets,
drugstores, mass merchants, multi-level marketing organizations, mail-order
companies, other Internet sites and a variety of other smaller participants.
Specialty stores, such GNC, offer a large range of products and high customer
service, whereas the mass merchants offer a limited assortment with less
customer care. GNC believes the fragmentation in the market provides large
operators, like GNC, the ability to compete more effectively due to scale
advantages.
Source: GNC.com
Figure 31: Market Share
Vitamin
Shoppe
5%
GNC
Bodybuilding
8%
1%
NBT Y
1%
Companies compete on marketing, quality of assortment of products, and price.
In addition, GNC believes innovation is critical because the market is highly
sensitive to new products. IBIS World defines the keys to success as controlling
stock on hand, altering goods and services in favor of market conditions,
establishing a brand name, being accessible to clients, having an experienced
and intelligent work force, and having a supply contract. Other important
factors include having locations in high traffic areas and having well-designed
shop fronts.
Other
85%
Source: IBIS World
Figure 31.5: Outpacing Industry Growth
Figure 31.5: Outpacing Industry Growth
2001
2011
7%
7%
27%
10%
8%
11%
VMHS
&
Sports
66%
27%
28%
VMHS
Major Companies
 GNC
45%
VMHS &
Sports
83%
Sports
30%
Herbs
Source: GNC Investor Presentation
Diet
As the industry faces competition from other retailers the competitive
environment will become more difficult, forcing consolidation. IBIS World
projects the number of firms in the industry to fall at a rate of 2% through 2016,
faster than the last five years. Consolidation will help boost profit margins and
reduce industry costs.
Other
GNC is by far the market leader in the industry and is the world’s largest
specialty retailer of nutritional products. IBIS World estimates GNC’s
market share of the entire health store industry to be 8%. GNC has 11
times the retail store fronts as the next largest competitor (Vitamin Shoppe).
GNC is gaining market share by outpacing industry growth in sports
nutrition and vitamins and minerals. GNC has an estimated market share of
25% in sports nutrition.
UOIG 10
University of Oregon Investment Group
3/2/2012

Figure 32: Notable Competitors
Vitamin Shoppe
Vitamin Shoppe (VSI) is regarded as the next largest specialty retailer with
an estimated market share of 4.8%. VSI is a successful competitor with a
large product offering, low prices, a nimble business model, and a favorable
capital structure. VSI should continue to take market share through organic
growth and acquisitions.

NBTY
NBTY Inc. (NBTY) has an estimated market share of about 1.1% including
operations under the name Vitamin World. NBTY is slightly smaller than
VSI in terms of retail footprint but is a successful competitor. NBTY has
made over 30 acquisitions since 1986 and has continued to take market
share. This trend is expected to continue into the future.

Source: Company Websites
Bodybuilding.com
Bodybuilding.com, LLC has less than 1% market share. However,
bodybuilding.com has been a growing presence in e-commerce market
since inception in 1999. Bodybuilding.com has seen multiple years of
double digit growth and the trend is expected to continue into the future.
Figure 33: CEO

Other Competitors
The rest of the market is highly fragmented. Other notable players include
Weider Nutrition International Corporation, Nutraceutical International
Corporation, Wal-Mart, Target, Costco and other mass merchandisers.
Management
Source: Milken Institute
Figure 33.5: Management 2012 Outlook
($ in millions)
2011A
2012E
Revenue
2,070.0
2,280.0
% YoY Growth
13.7%
10.0%
1.52
1.82
79.9%
20.0%
46.3
50.0
Diluted EPS
% YoY Growth
D&A
Interest expense
45.5
42.0
T ax Rate
36.9%
37.0%
Same Stores Sales Growth
10.1%
Mid-Single
Capital Expenditures
% YoY Growth
43.8
50.0
34.8%
14.2%
Source: 4Q Conference Call
Figure 34: Principle Ownership 9/30/2011
Name
Ownership Percent Position
J. Fortunato
2,095,354
2.0%
CEO
M. Nuzzo
180,000
<1%
VP, CFO
N. Axelrod
248,807
<1%
Chairman
D. Berg
18,625
<1%
VP, COO
T . Dowd
368,727
<1%
VP, GM
All Directors/Execs
(18 people)
3,604,208
Source: Public Filings
3.4%
GNC’s management team is highly experienced in the retail industry and has a
proven track record of leadership. In particular, the team has successfully
executed key growth initiatives that were outlined in 2006. The team effectively
navigated the financial crisis and is currently growing the business in a difficult
economic environment.
President and CEO
Joseph Fortunato has been CEO since 2005. Prior to CEO, Mr. Fortunato served
as VP, COO, VP of Retail Operations and Store Development, and VP of
Financial Operations. Other work experience includes President of Fortunato &
Associates Financial Consulting Group and Controller of Motor Coils
Manufacturing Company. Mr. Fortunato received his undergraduate degree in
Finance from Duquesne University in 1975.
CFO
Micheal M. Nuzzo has been CFO since 2008. Prior to GNC, Mr. Nuzzo’s work
experience includes VP of Abercrombie and Fitch, as well as other senior level
positions. Mr. Nuzzo was a senior consultant at William M. Mercer and
Medimetrix Group. Mr. Nuzzo earned his undergraduate degree in Economics
from Kenyon College in 1992 and MBA in Finance and Accounting from
University of Chicago in 1998.
CMO
Jeffrey R. Hennion has been VP and CMO since July 2011. Prior to GNC, Mr.
Hennion worked at Dick’s Sporting Goods for 10 years, serving as VP and
CMO as well as other senior level positions. Prior to Dick’s, Mr. Hennion spent
11 years at Alcoa. Mr. Hennion received a BA in Economics from
Northwestern University and an MBA in Finance from Duquesne University.
UOIG 11
University of Oregon Investment Group
3/2/2012
Recent News
Figure 35: GNC Corporate HQ
“GNC thriving and staying put in Pittsburg” (2/21/2012) –
Mclarthy Tribune IS
GNC put up a new sign outside corporate offices in downtown Pittsburg that
says, “GNC’s World Headquarters.” The news is significant for GNC indicating
the homegrown company will be keeping headquarters at home. Just 13 months
ago GNC was considering a sale to the Chinese firm Bright Food, which would
of meant a move oversees. GNC chose to go public, whose shares have almost
doubled and have performed better than high-profile IPOs such as LinkedIn and
Groupon. Today, GNC’s market cap is over $3.1 billion and growing.
“GNC Holdings, Inc. Reports Fourth Quarter and Full Year
2011 Results” (2/16/2012) – PRNewswire
Source: GNC.com
Figure 36: Recent News
GNC’s fourth quarter revenue increases 16.9% to $509.6 million, adjusted
EBITDA increases 43.3%, and same store sales increases 12.1%. The board
authorized and declared cash dividend of $0.11 per share for the first quarter.
Management gives 2012 outlook.
“GNC Raises $2.79 million for St. Jude Children's Research
Hospital® in 8th Annual St. Jude Thanks and Giving®
Campaign” (1/30/2012) – PRNewswire
GNC’s employees and customers increased the amount donated by 40%
compared to 2010. The program raises funds for the lifesaving research and
treatment done at St. Jude to help children fight cancer and other deadly
diseases. GNC has been a committed partner with St. Jude and will continue to
be in the future.
“Team USA Soccer Stars Alex Morgan and Heather Mitts Join
the GNC Live Well Team as Brand Ambassadors” (1/18/2012)
– PRNewswire
Source: stjude.org
Figure 37: Recent News
GNC signs two of the biggest stars in women’s soccer to work with GNC in
reaching out to aspiring athletes and fitness enthusiasts. The players join the
Live Well team that includes ESPN college sports reporter and two-time Emmy
Award winner Jenn Brown and professional beach volleyball athlete Nora
Tobin. According to Jeff Hennion, CMO of GNC, “[the players] are inspiring
examples of athletes … They truly represent GNC’s Live Well concept to the
fullest.”
Catalysts
Upside
 Consumer awareness of health and wellness and rising healthcare costs may


Source: PRNewswire
increase the use of GNC’s products
Demand for condition-specific products based on the release of scientific
research and the development of a relevant product
New contract deals that expand distribution and brand awareness
Downside
 Unanticipated negative side effects from products resulting in unfavorable

publicity and negative consumer perception
Use of ingredients with lack of long-term experience with human
consumption could create uncertainties about health risks
UOIG 12
University of Oregon Investment Group
Figure 38: Comps Checklist
Metric
Market Cap
Sales
What it Tells You
Size of share capital, large companies'
shares tend to be more liquid &
therefore trade on a higher multiple
3/2/2012




Increased costs associated with new governmental regulation
Decline in disposable income and consumer spending
Insufficient cash flow from operation to service debt
Product recalls (Hydroxycut 2009)
Comparables Analysis
Size of business
Intensity of investment in the
Cap Ex
business as a driver for future profit
growth
Different products can grow at
Industry mix different rates and/or have very
different profitibility
Expected EPS Future growth in earnings - very
growth
important, a key driver of value
Unlevered
Volatility of earnings from assets
beta
Other Considerations:
Business mix, margins, geographic spread of sales,
recent and forecast investment, size, growth rates of
sales, profits, and customers, client book, forecast
profitability
Source: AdkinsMatchet&T oy
GNC operates in the specialty retail industry and will be driven by trends in
retail, health, and changing demographics. GNC is compared to companies of
relative size with similar drivers of future profitability including direct
competitors and notable specialty retail companies. GNC’s peers include
Vitamin Shoppe (VSI), Nu Skin Enterprises (NUS), Sally Beauty Holdings
(SBH), American Eagle Outfitters (AEO), Ulta Salon Cosmetics & Fragrance
(ULTA), Fresh Market (TFM), Under Amour (UA), and Herbalife (HFL) based
on comparable size, growth, profitability, and capital structure. After looking at
key qualitative metrics such as business mix, customers, and geographic mix,
only VSI, NUS, and HLF are used in the valuation because of significant
similarities to GNC.
The relative price is based on forward looking (2012E) EV/EBIT, EV/EBIDTA,
and P/E multiples. The valuation includes both enterprise multiples and equity
value multiples to adjust for non-recurring items easily, to adjust for leverage,
and also, to be consistent with market practice. The multiples are calculated
based on the 2012 financial period ended December 31, 2012 (NTM).
Figure 38: Comparables Companies
Vitamin Shoppe, Inc. (VSI) (33.33%):
VSI sells vitamins, minerals, nutritional supplements, herbs, sports nutrition
formulas, homeopathic remedies, natural beauty and personal care, natural pet
food, low carb foods, and diet and weight management supplements. The
company sells products through retail stores, mail order catalogs, and through
vitaminshoppe.com. The company operates 500 stores in the United States.
Nu Skin Enterprises, Inc. (NUS) (33.33%):
Nu Skin Enterprises sells micronutrient supplements, targeted solution (antiaging) supplements, and weight management products. It sells products through
retail stores, and independent distributors in the United States (16.3%), North
Asia (44.6%), China (17.4%), and other locations around the world (21.7%).
Herbalife Ltd. Common Stock (HLF) (33.33):
Source: Company Websites
Herbalife sells weight management, nutritional supplement, energy, sports and
fitness, and personal care products in the United States (21.8%), Mexico and
Central America (12.2%), China (6.7%), and in other countries around the world
(59.3%). The company also sells skin cleansers, toners, moisturizers and facial
masks, shampoos and conditioners, anti-aging products, body-wash items, and a
selection of fragrances for men and women. The company sells products
through retail stores and through independent distributors.
UOIG 13
University of Oregon Investment Group
3/2/2012
Discounted Cash Flow Analysis
Figure 40: Hist. and Proj. Revenue
Three years of historical data is collected from GNC’s 2011 S1 filing and put
into the DCF model. Several adjustments are made to normalize the numbers
including the exclusion of pretax expenses related to management and strategic
alternatives analysis fees, executive severance expenses, and fees related to postIPO debt repayment. In addition, earnings are adjusted for non-recurring tax
benefits.
3,500.0
3,000.0
2,500.0
2,000.0
1,500.0
1,000.0
500.0
0.0
Revenue
Retail
Franchise
Manufacturing/Wholesale
Source: Public Filings, UOIG Research
Figure 41: Hist. and Proj. EBITDA
700.0
600.0
500.0
400.0
300.0
200.0
100.0
0.0
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
GNC’s revenue is projected using the market share method by creating a market
map. Management guidance and industry analysis indicated the relevant market
size of the nutritional supplements industry is currently $29.1 billion and GNC’s
market share is 7.1%. The industry is expected to grow at 4% year over year
through 2015. After the growth stage of the industry, the market will slow down
to grow in line with national GDP growth of 3%. GNC’s market share is
expected to increase to a sustainable level of 8% by 2015 through competitive
advantages.
GNC’s revenue by segment as a percent of total is held relatively constant,
which is in line with historical numbers. GNC’s growth plans provide
significant opportunities to improve each segment.
Therefore, there is no
obvious segment growing faster than another.
COGS
EBITDA
EBIDTA Margin
Source: Public Filings, UOIG Research
Figure 42: Margin Trends
40.0%
30.0%
COGS include product costs, costs of warehousing and distribution and
occupancy costs. Depreciation is taken out and projected separately. COGS are
projected using the percent of revenue method, and crosschecked against analyst
estimates. COGS fall slightly as a percent of revenue to capture a shift towards
higher margin 3rd party business, an increase in e-commerce, and a continued
increase in occupancy leverage. These margin drivers will more than offset
rising input costs. Input costs will rise because whey protein makes up roughly
half of the product volume in sports nutrition, which is 43% of GNC’s retail
sales. According to Morgan Stanley research, 20% of products may experience
cost inflation going forward. Ultimately, as GNC captures market share, the
company should be able to charge higher prices in a less competitive market.
20.0%
SG&A
10.0%
SG&A includes compensation and related benefits, advertising and promotion
expense, and other SG&A expenses. Amortization is projected separately.
SG&A is projected as a percent of revenue.
0.0%
EBITDA Margin
EBIT Margin
Gross Margin
Net Margin
Source: Public Filings, UOIG Research
Compensation and related benefits decrease as a percent of revenue through
2015 to represent a high degree of operating leverage and economies of scale.
Although this trend is expected to continue as GNC’s existing network can
support scale economies, wages are projected to increase to provide higher
customer service in order to effectively compete with warehouse clubs,
supercenters, and online retailers. Therefore, SG&A remains relatively constant
after 2016.
UOIG 14
University of Oregon Investment Group
Figure 43: Balance Sheet
Balance She e t
Data ($ in
millions)
Cash and Cash
Equivalents
2008
2009
2010
2011E
42.0
75.0
194.0
179.0
PP&E
206.0
200.0
193.0
205.0
Goodwill
623.0
625.0
625.0
625.0
Other Assets
1,421.0 1,404.0
1,413.0 1,452.0
T otal Assets
2,292.0 2,304.0
2,425.0 2,448.0
Debt
1,108.0 1,075.0
1,058.0
920.0
529.0
543.0
532.0
Other Liabilities
511.0
T otal Liabilities
T otal Shareholders'
Equity
1,640.0 1,586.0
718.0
838.0
985.0
Net Debt
1,066.0 1,000.0
865.0
741.0
652.0
1,587.0 1,463.0
Source: Public Filings, UOIG Research
Retail
2008A 2009A 2010A 2011A
33.1
20.6
23.3
N/A
0.0
0.0
0.1
N/A
11.1
4.5
4.3
N/A
4.5
3.5
4.9
N/A
T otal Cap Ex
48.7
28.7
32.5
43.8
% of Revenue
2.9%
1.7%
1.8%
2.1%
Franchise
Manufacturing/
Wholesale
Corporate/
Other
Source: Public Filings
Figure 44.5: New Store Openings
Management Expectations
2011A 2012E
Net new domestic
131
125
Net new domestic franchise
21
15
Net new international
154
150
Net new store-within-a-store
122
50
Source: Public Filings, UOIG Research
Figure 45: Beta
Be ta
We ight
10 Mo. Daily
0.80
33.33%
10 Mo. Weekly
0.50
0.00%
0.68
33.33%
1.40
0.00%
0.75
33.33%
Adj. 10 Mo.
Weekly
10 Mo.
Monthly
52 Wk. Adj.
Hamada
Estimate d
GNC Be ta
Advertising and promotion will follow a similar pattern as compensation. The
expense has high leverage ability in existing markets. In addition, GNC will
incur expenses in new markets. The effects will net and the expense will remain
relatively constant after 2016.
D&A
Depreciation is projected as a percent of previous year’s ending net PP&E. The
long-term asset mix is not expected to change significantly, which includes land,
building, machinery, furniture and fixtures, and software. The estimated
average life of the assets are 5 years, which is why depreciation has been around
20% of previous PP&E.
Amortization is projected using managements direct guidance presented in
GNC’s S1/A filing. Amortization remains relatively constant. Intangible assets
are expected to increase in value at a constant rate.
Capital Expenditures
Figure 44: Capital Expenditures
($ in millions)
3/2/2012
0.74
Source: UOIG Research
Capital expenditures consist of certain periodic updates to company owned
stores and ongoing upgrades and improvements to manufacturing facilities,
which includes expenses associated with new stores, store maintenance,
remodels, and corporate IT. Management guidance and analyst estimates are
used through 2015. Capital expenditures are projected to stay constant as a
percent of revenue.
Acquisitions
GNC has historically made small acquisitions to enter new markets. For
example, in 2011 GNC acquired Luckyvitamin.com for 1% of revenue to gain a
greater foothold in e-commerce. In addition, GNC’s IPO provided funds for
future acquisitions. GNC’s management has expressed interest in pursuing
other acquisitions, particularly in the e-commerce space to add to the
banner of brands. However, considering it is highly unpredictable as to when
management will pull the trigger and it is expected to be of relatively small size,
no acquisition amount is projected.
Operating Working Capital
Working capital is the amount of short-term resources needed in operations.
For the sake of calculating free cash flows, only operational assets are
considered because the assets are not earning a fair market rate of return. Cash
and short-term debt are not included. Operating assets are projected based on
percentage of relevant driver and turn ratios. The majority of current assets and
current liabilities are kept relatively constant.
Beta
GNC’s estimated beta is a weighted average of several regressions against the
S&P 500. The regressions include a 10-month daily, a 10-month weekly, an
adjusted 10-month weekly, a 10-month monthly, and a 52-week adjusted
Hamada. GNC has only been public for 10 months, therefore as many data
points as possible are used. The adjusted beta is an estimate of future beta,
using historical data but assuming the beta will move towards the market
UOIG 15
University of Oregon Investment Group
3/2/2012
average over time. The estimated beta is reasonable for a retail company in the
health foods industry.
Figure 46: Solvency
200
12
10
8
6
4
2
0
150
100
50
0
Net debt/equity
Net interest cover
Cost of Debt
The most recent debt issuance was on March 4, 2011 when GNC entered into a
$1.2 billion term loan facility with a term of seven years and an $80.0 million
revolving credit facility with a term of five years. The current interest rate paid
on the borrowing is 4.025%. Since the issuance of the bank loan, Moody’s
upgraded GNC from B2 to B1 and upgraded the bank loan rating from B1 to
Ba3. With this in mind, GNC’s cost of debt is most likely lower than 4.025%.
The 4.025% rate is used anyway because of immaterial changes and to be
conservative.
Source: Public Filings, Deutsche Bank
Risk-Free Rate & Market Risk Premium
The 10-year Treasury bond is used in WACC to discount the projected free cash
flows to match the maturity of the cash flows. Respectively, the 30-year
Treasury bond is used in WACC for the terminal value.
Figure 47: Profitability
20.0%
The market risk premium is the additional return over the risk-free rate that
investors expect for putting money in the stock market. Group consensus of 7%
is used.
15.0%
10.0%
5.0%
0.0%
Tax Rate
ROE
Management has indicated the tax rate for 2012 will be 37%. In the long run, a
tax rate of 36.5% is used, which is more in line with analyst estimates and
historical rates.
ROA
Source: Company Filings, Deutsche Bank
Mid-Year Discounting
Figure 48: Value Driver Formula
On average, GNC receives cash flows in the middle of year and does not
experience significant annual cyclicality. GNC receives a continuous stream of
cash flows throughout the year. The adjusted unlevered free cash flows are
discounted at the midpoint of fiscal years.
Calculation of Terminal Value
Source: AMT
Figure 49: Price Target
Valuation
Price
Weight
DCF
38.03
50%
Comps
35.19
50%
Price T arget
Current Price
Undervalued
36.61
32.82
11.56%
Source: UOIG Research
Historically, GNC has required plowback to grow. GNC is expected to grow
into perpetuity with a terminal growth rate of 3%. GNC will need to reinvest to
sustain the growth. In order to capture the cost of growth, the Value Driver
method is used to calculate the terminal value instead of the Gordon Growth
model. In the Gordon Growth model, growth is not linked to the growth of
fixed assets or operating working capital, which indicates the company is getting
the growth for free. The value driver method is more appropriate to calculate
the terminal value for GNC.
Recommendation
Based on Comps and DCF analysis, GNC has a price target of $36.61. At the
current market price GNC is undervalued by 11.56%. GNC is in the right sector
at the right time and is capitalizing for future growth. Led by a strong
management team and favorable macro conditions, GNC will perform better
than the market expects. GNC is a buy for all UOIG portfolios.
UOIG 16
3/2/2012
Appendix 1 – Comparable Analysis
University of Oregon Investment
Group
Comparables Analysis
($ in millions)
Stock Characteristics
Current Price
Unlevered Beta
Size
Market Capitalization
Enterprise Value
Growth
2011A/E Same Store Sales
2012E Same Store Sales
2013E Same Store Sales
2011E EPS Growth
2012E EPS Growth
2013E EPS Growth
2012E Reinvestment Rate
2012E Sales Growth
2012E Profit Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Debt / EV
Net Debt / EBITDA
2012E Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Adj. Net Income
Valuation
EV/EBIT
EV/EBITDA
P/E
VSI
33.3%
$44.66
0.61
3,308.00
3,203.00
NUS
33.3%
$53.26
0.56
N/A
N/A
N/A
33.2%
9.5%
12.1%
20.8%
22.1%
7,767.00
7,728.00
HLF
33.3%
$66.77
0.65
36.65%
9.73%
14.07%
5.98%
(1.0%)
(2.7%)
(3.1%)
(15.5%)
22.3%
17.6%
33.1%
6.5%
2,771.00
2,289.00
AEO
0.0%
$14.30
0.57
0.00%
(0.4)
35.18%
11.74%
16.04%
7.13%
11.0%
10.6%
5.5%
59.2%
25.8%
28.3%
65.5%
19.1%
5,186.00
5,565.00
ULTA
0.0%
$83.76
0.68
$1,323.10
431.80
106.10
145.40
62.80
3.46%
0.5
32.64%
8.02%
10.99%
4.75%
5.0%
4.9%
4.7%
25.0%
22.4%
26.0%
96.5%
17.8%
2,129.00
2,195.00
TFM
0.0%
$44.39
0.58
22.1x
18.2x
36.0x
$1,797.80
869.50
205.30
249.40
125.10
1.86%
0.1
48.36%
11.42%
13.87%
6.96%
N/A
N/A
N/A
38.1%
25.7%
27.5%
60.7%
22.1%
4,499.00
4,538.00
UA
0.0%
$87.04
1.00
11.6x
10.2x
17.3x
$3,524.30
1,740.50
496.10
563.50
251.60
25.36%
2.5
49.39%
14.08%
15.99%
7.14%
6.1%
5.8%
4.6%
37.2%
22.6%
15.8%
36.8%
7.8%
4,360.00
5,746.00
SBH
0.0%
$23.37
0.43
Ticker 3
$32.82
0.60
1,307.00
1,302.00
N/A
N/A
N/A
27.5%
9.9%
12.4%
42.4%
6.6%
80.42%
15.97%
18.05%
11.33%
0.00%
(1.0)
$2,107.80
741.50
247.50
338.10
150.20
20.7x
15.1x
33.9x
Ticker 7
Min
Weight Avg. Median
$14.30
54.90
$48.96
0.43
0.61
0.60
3,477.00
4,233.00
7.3%
5.4%
5.2%
45.6%
13.4%
20.0%
42.5%
9.0%
83.67%
15.89%
17.87%
10.26%
2.87%
(0.1)
$3,340.40
1,224.10
325.00
469.90
199.80
22.5x
16.5x
34.5x
Ticker 6
3,834.00
3,870.50
10.1%
mid-single
mid-single
84.9%
18.2%
15.6%
28.1%
10.8%
34.04%
9.60%
11.95%
5.81%
4.31%
(0.3)
$3,745.40
3,012.20
598.00
675.90
424.40
7.0x
4.9x
13.9x
Ticker 5
4,127.33
4,077.67
6.1%
5.4%
4.7%
35.2%
22.4%
18.8%
42.5%
13.4%
36.31%
15.61%
17.66%
8.72%
1.55%
(0.0)
$1,859.80
1,556.10
295.50
332.40
190.90
12.9x
11.4x
18.3x
Ticker 4
Max
$87.04
1.00
1,307.00
1,302.00
2.4%
1.8%
1.7%
35.4%
10.9%
14.8%
35.2%
12.6%
42.50%
11.58%
15.03%
7.04%
21.31%
1.9
$929.90
316.50
89.30
111.10
54.00
10.8x
9.6x
17.3x
Ticker 3
7,767.00
7,728.00
(1.0%)
(2.7%)
(3.1%)
(15.5%)
9.5%
12.1%
20.8%
6.5%
66.04%
13.82%
15.96%
9.13%
2.37%
(0.0)
$2,280.00
827.76
355.80
402.70
198.84
14.6x
11.7x
24.2x
Ticker 2
11.0%
10.6%
5.5%
84.9%
25.8%
28.3%
96.5%
22.1%
32.64%
8.02%
10.99%
4.75%
2.91%
(0.1)
$1,983.80
1,046.80
271.50
335.25
170.55
11.9x
10.5x
17.5x
Ticker 1
83.67%
15.97%
18.05%
11.33%
0.00%
(1.0)
$2,178.37
1,628.27
327.60
373.13
223.10
13.8x
11.6x
21.3x
Analysis Ticker
25.36%
2.5
$929.90
316.50
89.30
111.10
54.00
12.8x
10.9x
19.9x
GNC
$3,745.40
3,012.20
598.00
675.90
424.40
7.0x
4.9x
13.9x
$35.19
32.82
7.23%
Implied Price Weight
35.1
33.33%
33.8
33.33%
36.7
33.33%
22.5x
18.2x
36.0x
Multiple
EV/EBIT
EV/EBITDA
P/E
Price Target
Current Price
Undervalued
UOIG 17
3/2/2012
Appendix 2 – Discounted Cash Flows Analysis
University of Oregon Investment
Group
Discounted Cash Flow Analysis
2020E
3.0%
3,191.3
2019E
3,098.3
2018E
3,008.1
2017E
2,920.5
2016E
2,821.7
2015E
2,726.3
2014E
2,621.4
3.0%
2013E
2,441.8
1,897.7
2012E
2,280.0
3.0%
2011A
2,072.3
1,842.4
2010A
1,822.2
3.5%
2009A
1,707.0
1,788.8
2008A
1,656.7
3.5%
($ in millions)
Total revenue
1,728.3
1,954.6
4.0%
54.3
61.3%
1,676.7
61.3%
20.0%
7.4%
52.4
1,182.3
1,618.7
61.3%
20.0%
7.1%
50.5
1,148.2
1,513.9
61.3%
20.0%
10.0%
61.3%
48.5
1,115.2
1,413.6
61.5%
46.5
20.0%
13.7%
61.8%
44.5
1,083.2
1,280.7
62.0%
42.5
20.0%
6.7%
62.0%
40.9
1,046.9
1,140.7
61.8%
38.6
20.0%
3.0%
62.6%
38.2
1,005.1
1,079.5
63.2%
39.2
960.2
20.0%
6.7%
Adj. COGS
63.4%
36.9
887.0
20.0%
1,051.0
% of Revenue
31.6
827.8
20.0%
% YoY Growth
Depreciation
753.4
19.8%
414.9
37.0%
642.3
402.8
37.1%
19.6%
391.0
37.1%
N/A
379.7
37.1%
590.6
366.8
37.1%
N/A
354.4
36.9%
574.1
340.8
36.6%
% of previous PP&E
Gross Profit
323.5
36.3%
63.8
13.0%
307.8
13.0%
2.0%
36.3%
13.0%
62.0
294.2
13.0%
60.2
36.4%
13.0%
58.4
273.8
13.0%
56.4
35.2%
13.0%
57.3
263.0
13.3%
59.0
34.6%
13.5%
56.2
249.8
14.2%
54.7
34.7%
15.0%
52.0
Gross Margin
15.4%
51.7
Adj. Compensation and related benefits
15.1%
50.0
% of Revenue
55.1
8.0
4.5%
Advertising and promotion
4.5%
560.0
135.6
8.0
2.0%
4.5%
544.0
131.4
8.0
2.0%
4.5%
528.6
127.4
8.0
2.0%
4.5%
513.7
123.4
8.0
2.0%
4.5%
496.7
119.0
7.7
2.1%
4.6%
470.8
115.0
7.8
2.3%
4.7%
439.8
112.8
8.1
2.3%
4.8%
392.5
57.4
17.5%
106.7
8.3
55.8
17.6%
2.4%
4.8%
355.8
54.1
17.6%
101.2
8.0
52.6
17.6%
99.5
4.8%
299.7
50.8
17.6%
2.5%
7.8
49.1
17.3%
88.2
4.8%
221.1
47.2
16.8%
2.8%
9.8
44.0
16.1%
82.4
5.1%
185.5
41.1
15.6%
2.9%
10.9
45.5
14.5%
83.8
% Revenue
173.9
65.4
12.1%
3.3%
Adj. Amortization of intangibles
69.9
10.9%
% of Revenue
Adj. EBIT
83.0
10.5%
Adj. other selling, general, and administrative
EBIT Margin
(1.0)
2.2%
(0.9)
1.8%
(1.0)
1.8%
(1.0)
1.8%
(1.1)
1.8%
(1.1)
1.8%
(1.2)
1.8%
(1.2)
1.8%
(1.2)
1.8%
(1.3)
1.8%
Norm. Interest expense
(0.7)
503.8
(.04%)
3.6%
489.5
(.04%)
(0.2)
475.6
(.04%)
4.1%
462.3
(.04%)
(1.2)
447.0
(.04%)
5.0%
422.8
(.04%)
% of Revenue
393.7
183.9
15.8%
(.04%)
178.7
15.8%
349.5
173.6
15.8%
(.04%)
168.7
15.8%
315.6
163.2
15.8%
(.04%)
154.3
15.5%
255.2
143.7
15.0%
(.05%)
127.6
14.3%
156.3
116.8
13.8%
(.04%)
91.6
12.3%
115.8
50.4
8.6%
(.01%)
41.6
6.8%
92.0
32.0
5.6%
(.07%)
Interest income
% of Revenue
% of Revenue
Adj. Earnings Before Taxes
Norm. Income tax expense (benefit)
10.0%
36.5
62.3
10.0%
319.9
60.4
418.7
36.50%
10.0%
35.4
310.8
58.5
406.6
36.50%
10.1%
34.4
302.0
56.5
394.9
36.50%
10.1%
33.4
293.6
54.5
383.4
36.50%
9.8%
32.3
283.9
52.2
370.6
36.50%
9.5%
31.2
268.5
50.3
351.8
36.50%
9.1%
30.0
250.0
49.0
330.2
36.50%
8.7%
27.9
895.0
13.1%
222.0
46.9
298.8
868.9
13.1%
36.50%
7.9%
25.9
843.6
13.1%
198.8
46.3
271.6
819.0
13.1%
37.00%
5.8%
28.7
791.3
13.1%
163.6
46.7
238.6
767.1
12.9%
36.90%
4.3%
44.3
740.5
12.6%
105.9
46.6
196.9
692.8
12.2%
32.24%
3.6%
44.8
647.9
11.9%
74.2
43.2
165.6
591.3
11.5%
35.90%
Net Margin
54.1
525.4
10.8%
60.0
Add Back: Depreciation and Amortization
157.4
9.7%
34.77%
Add Back: Interest Expense*(1-Tax Rate)
506.7
Norm. Effective tax rate
Operating Cash Flow
N/A
9.5%
Adj. Net Income (loss)
% of Revenue
% of Revenue
Capital Expenditures
Change in Operating Working Capital
% of Revenue
Operating Working Capital
% of Revenue
Current Operating Liabilities
% of Revenue
0.0
2.9%
48.7
N/A
N/A
N/A
N/A
N/A
N/A
0.0
1.7%
28.7
N/A
18.1%
308.8
11.6%
197.9
29.7%
0.0
1.8%
32.5
9.8
17.5%
318.6
11.3%
206.8
28.8%
20.1
2.1%
43.8
43.1
17.5%
361.7
11.1%
229.6
28.5%
0.0%
0.0
2.2%
50.0
39.2
17.6%
400.9
10.8%
247.0
28.4%
222.0
0.0%
0.0
2.0%
48.8
27.9
17.6%
428.9
10.8%
263.9
28.4%
248.3
0.0%
0.0
2.0%
52.4
29.5
17.5%
458.3
10.8%
282.2
28.2%
278.0
0.0%
0.0
2.0%
54.5
19.3
17.5%
477.6
10.6%
289.5
28.1%
299.5
0.0%
0.0
2.0%
56.4
14.6
17.4%
492.3
10.6%
299.0
28.0%
307.8
0.0%
0.0
2.0%
58.4
17.3
17.4%
509.5
10.6%
309.5
28.0%
319.4
0.0%
0.0
2.0%
60.2
15.3
17.4%
524.8
10.6%
318.8
28.0%
328.9
0.0%
0.0
2.0%
62.0
15.8
17.4%
540.6
10.6%
328.3
28.0%
338.8
0.0%
0.0
2.0%
63.8
16.2
17.4%
556.8
10.6%
338.2
28.0%
Current Operating Assets
Acquisitions
182.4
8.50
204.3
1.0%
7.50
210.5
131.6
6.50
217.0
0.0%
5.50
221.9
154.6
4.50
229.2
85.3
3.50
225.7
0.0%
2.50
214.0
28.7
1.50
203.1
0.0%
0.50
177.1
% of Revenue
Discounted Adj. Unlevered Free Cash Flow
Adj. Unlevered Free Cash Flow
Discount Period
UOIG 18
University of Oregon Investment
Group
3/2/2012
Appendix 3 – Revenue Model
GNC Market Map
($ in millions)
2008A
2009A
2010A
2011A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Total Market
N/A
26,900.0
28,010.0
29,130.4
30,295.6
31,507.4
32,767.7
34,078.4
35,271.2
36,505.7
37,600.9
38,728.9
39,890.7
% Growth
N/A
N/A
4.13%
4.00%
4.00%
4.00%
4.00%
4.00%
3.50%
3.50%
3.00%
3.00%
3.00%
Market Share
N/A
6.3%
6.5%
7.1%
7.5%
7.8%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
1,656.7
1,707.0
1,822.2
2,072.3
2,280.0
2,441.8
2,621.4
2,726.3
2,821.7
2,920.5
3,008.1
3,098.3
3,191.3
N/A
3.03%
6.75%
13.73%
10.02%
7.10%
7.35%
4.00%
3.50%
3.50%
3.00%
3.00%
3.00%
Total Revenue
% Growth
Revenue by Segment
($ in millions)
Retail
% Growth
% of Revenue
2008A
2009A
2010A
2011A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
1,219.3
1,256.3
1,344.4
1,518.5
1,710.0
1,831.4
1,966.1
2,044.7
2,116.3
2,190.3
2,256.1
2,323.7
4.34%
3.04%
7.01%
12.96%
12.61%
7.10%
7.35%
4.00%
3.50%
3.50%
3.00%
3.00%
2,393.4
3.00%
73.60%
73.60%
73.78%
73.28%
75.00%
75.00%
75.00%
75.00%
75.00%
75.00%
75.00%
75.00%
75.00%
Franchise
258.0
264.2
293.5
334.8
353.4
378.5
406.3
422.6
437.4
452.7
466.3
480.2
494.6
% Growth
7.02%
2.38%
11.12%
14.05%
5.56%
7.10%
7.35%
4.00%
3.50%
3.50%
3.00%
3.00%
3.00%
% of Revenue
Manufacturing/
Wholesale
15.57%
15.48%
16.11%
16.16%
15.50%
15.50%
15.50%
15.50%
15.50%
15.50%
15.50%
15.50%
15.50%
179.4
186.5
184.3
218.9
216.6
232.0
249.0
259.0
268.1
277.4
285.8
294.3
303.2
% Growth
25.37%
3.97%
(1.21%)
18.82%
(1.07%)
7.10%
7.35%
4.00%
3.50%
3.50%
3.00%
3.00%
3.00%
% of Revenue
10.83%
10.93%
10.11%
10.57%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
9.50%
Total Revenue
1,656.7
1,707.0
1,822.2
2,072.3
2,280.0
2,441.8
2,621.4
2,726.3
2,821.7
2,920.5
3,008.1
3,098.3
3,191.3
6.69%
3.03%
6.75%
13.73%
10.02%
7.10%
7.35%
4.00%
3.50%
3.50%
3.00%
3.00%
3.00%
% Growth
Appendix 4 – Working Capital and Long Term Asset Model
Working Capital and Long Term Assets
($ in millions)
Total Revenue
Current Assets
Accounts receivable, net
Days Sales Outstanding A/R
% of Revenue
Inventories
Days Inventory Outstanding
% of Clean COGS
Prepaid and other
Days Prepaid and Other Outstanding
% of SG&A
Total Current Operating Assets
% of Revenue
% YoY Growth
Long Term Assets
Net PP&E beginning
Capital expenditures
Depreciation
Net PP&E ending
% of Revenue
Total Current Operating Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts payable
Days Payable Outstanding
% of COGS
Accrued payroll and related liabilities
Days Payroll and Related Liabilities Outstanding
% of Compensation and Related Benefits
Accrued interest
Days Interest Outstanding
% of Interest Expense
Deferred revenue and other current liabilities
% of Revenue
Total Current Operating Liabilities
% of Revenue
% YoY Growth
2008A
2009A
2010A
2011A/E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
1,656.7
1,707.0
1,822.2
2,072.3
2,280.0
2,441.8
2,621.4
2,726.3
2,821.7
2,920.5
3,008.1
3,098.3
3,191.3
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
93.9
20.1
5.5%
370.5
125.3
34.3%
42.3
N/A
10.7%
506.7
29.7%
102.9
19.7
5.6%
381.9
120.4
33.5%
40.6
73.1
9.8%
525.4
28.8%
3.7%
109.1
18.7
5.3%
435.4
116.8
34.0%
46.8
71.7
10.5%
591.3
28.5%
12.5%
118.6
18.2
5.2%
480.6
118.3
34.0%
48.7
75.2
10.5%
647.9
28.4%
9.6%
127.0
18.4
5.2%
514.7
120.0
34.0%
51.1
74.9
10.5%
692.8
28.4%
6.9%
136.3
18.3
5.2%
550.4
120.1
34.0%
53.8
74.7
10.5%
740.5
28.2%
6.9%
141.8
18.7
5.2%
570.1
122.3
34.0%
55.3
75.8
10.5%
767.1
28.1%
3.6%
146.7
18.7
5.2%
587.6
122.2
34.0%
56.9
75.6
10.5%
791.3
28.0%
3.1%
151.9
18.7
5.2%
608.2
122.0
34.0%
59.0
75.3
10.5%
819.0
28.0%
3.5%
156.4
18.7
5.2%
626.4
122.3
34.0%
60.8
75.5
10.5%
843.6
28.0%
3.0%
161.1
18.8
5.2%
645.2
122.6
34.0%
62.6
75.7
10.5%
868.9
28.0%
3.0%
165.9
18.7
5.2%
664.6
122.3
34.0%
64.5
75.5
10.5%
895.0
28.0%
3.0%
48.7
(31.6)
N/A
N/A
28.7
(36.9)
199.6
11.7%
706.3
41.4%
32.5
(39.2)
193.4
10.6%
718.8
39.4%
43.8
(38.2)
193.2
9.3%
784.5
37.9%
193.2
50.0
(38.6)
204.6
9.0%
852.4
37.4%
204.6
48.8
(40.9)
212.5
8.7%
905.3
37.1%
212.5
52.4
(42.5)
222.4
8.5%
962.9
36.7%
222.4
54.5
(44.5)
232.5
8.5%
999.6
36.7%
232.5
56.4
(46.5)
242.4
8.6%
1,033.7
36.6%
242.4
58.4
(48.5)
252.3
8.6%
1,071.3
36.7%
252.3
60.2
(50.5)
262.0
8.7%
1,105.6
36.8%
262.0
62.0
(52.4)
271.6
8.8%
1,140.5
36.8%
271.6
63.8
(54.3)
281.1
8.8%
1,176.1
36.9%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
95.9
N/A
8.9%
22.3
30.9
8.5%
14.6
76.0
20.8%
65.2
3.8%
197.9
11.6%
98.7
62.3
8.6%
25.7
31.9
9.4%
13.4
77.9
20.4%
69.1
3.8%
206.8
11.3%
4.5%
115.3
61.1
9.0%
26.5
32.4
9.0%
9.1
73.2
20.0%
78.7
3.8%
229.6
11.1%
11.0%
124.4
61.9
8.8%
27.7
32.1
9.0%
8.2
76.9
20.0%
86.6
3.8%
247.0
10.8%
7.6%
133.2
62.1
8.8%
29.1
32.1
9.0%
8.8
70.6
20.0%
92.8
3.8%
263.9
10.8%
6.9%
142.4
62.2
8.8%
30.7
32.0
9.0%
9.4
70.5
20.0%
99.6
3.8%
282.2
10.8%
6.9%
144.2
62.6
8.6%
31.9
32.3
9.0%
9.8
71.8
20.0%
103.6
3.8%
289.5
10.6%
2.6%
148.6
61.8
8.6%
33.0
32.3
9.0%
10.2
71.8
20.0%
107.2
3.8%
299.0
10.6%
3.3%
153.8
61.7
8.6%
34.2
32.3
9.0%
10.5
71.8
20.0%
111.0
3.8%
309.5
10.6%
3.5%
158.5
61.9
8.6%
35.2
32.4
9.0%
10.8
71.9
20.0%
114.3
3.8%
318.8
10.6%
3.0%
163.2
62.0
8.6%
36.3
32.5
9.0%
11.2
72.1
20.0%
117.7
3.8%
328.3
10.6%
3.0%
168.1
61.9
8.6%
37.3
32.4
9.0%
11.5
71.9
20.0%
121.3
3.8%
338.2
10.6%
3.0%
UOIG 19
University of Oregon Investment
Group
3/2/2012
Appendix 5 – Discounted Cash Flows Analysis Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate
Considerations
Considerations
36.50% Terminal Growth Rate
3.00%
Avg. Industry Debt / Equity
10.50%
Risk Free Rate
1.97% Terminal Value
5,532
Avg. Industry Tax Rate
32.50%
Terminal Risk Free Rate
3.12% PV of Terminal Value
3,107
Current Reinvestment Rate
39.69%
1,903
Reinvestment Rate in Perpetuity
14.27%
Implied Return on Capital in Perpetuity
21.02%
Beta
0.74 Sum of PV Free Cash Flows
Market Risk Premium
7.00% Firm Value
5,010
% Equity
77.8% Total Debt
902
Terminal Value as a % of Total
62.0%
% Debt
22.20% Cash & Cash Equivalents
146
Implied 2012E EBITDA Multiple
12.4x
Implied Terminal Year Multiple
8.9x
Terminal Free Cash Flow Growth Rate
3%
Cost of Debt
4.03% Market Capitalization
4,108
CAPM
7.15% Fully Diluted Shares
WACC
6.13% Implied Price
Terminal CAPM
8.30% Current Price
32.82
Terminal WACC
7.02% Undervalued
15.89%
108
38.03
Appendix 6 – Shareholder Information
Shareholder Information
2008A
2009A
2010A
2011A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Basic weighted average shares outstanding
87.76
87.42
87.34
104.39
104.39
104.39
104.39
104.39
104.39
104.39
104.39
104.39
104.39
Diluted weighted average shares outstanding
87.79
87.86
88.92
107.00
108.00
108.00
108.00
108.00
108.00
108.00
108.00
108.00
108.00
Adj. earnings per share
0.43
0.58
0.87
1.57
1.90
2.13
2.39
2.57
2.72
2.81
2.89
2.98
YoY % Growth
N/A
Adj diluted earnings per share
0.43
YoY % Growth
N/A
34.9%
50.0%
0.58
34.9%
0.85
46.6%
80.2%
1.53
79.9%
21.5%
1.84
20.4%
11.6%
2.06
11.6%
12.6%
2.31
12.6%
7.4%
2.49
7.4%
5.7%
2.63
5.7%
3.4%
2.72
3.4%
2.9%
2.80
2.9%
2.9%
3.06
2.9%
2.88
2.9%
2.96
2.9%
Appendix 7 – Sensitivity Analysis
Implied Price
Adjusted Beta
Terminal Growth Rate
38
0.54
2.0%
46.59
2.5%
47.67
0.64
41.26
41.99
42.92
44.16
45.91
0.74
36.89
37.40
38.03
38.85
39.93
0.84
33.24
33.60
34.05
34.61
35.32
0.94
30.13
30.40
3.0%
49.11
30.72
3.5%
51.15
31.12
4.0%
54.23
31.61
Appendix 8 – Sources
Nutrition Business Journal
Beanstalk Marketing and LJS & Associates
The Buxton Company
The Wall Street Journal
SEC Filings
Yahoo Finance
Google Finance
Charles Schwab Research
Company Investor Relations
Company presentations
Prospectuses
Press releases
Earnings call transcripts
IBIS World
S&P Net Advantage
ONEsearch
Mergent Online
Factset
The Economist
U.S. Government Agencies
McKinsey Quarterly
Morgan Stanley Research
International Food Information Council
U.S. Census Bureau
Congressional Budget Office
Department of Health and Human Services
U.N. Research
United States Department of Agriculture
Milken Institute
PRNewswire
Mclarthy Tribune IS
AdkinsMatchett&Toy (AMT)
Deutsche Bank Research
UOIG Research
UOIG 20