Goldman Sachs recently reported that they have increased their rating on nutritional supplement retailer, GNC Holdings Inc (NYSE:GNC). The firm has upgraded GNC from “Neutral” to “Buy,” and has increased the company’s price target from $44 to $50. A Goldman Sachs analyst commented:

The story’s underlying appeal relates to wellness exposure / rapid category growth; an emerging global presence in a potent category; heavy private brand representation that protects margins and provides shelter from online incursions; a new marketing campaign; and shareholder-friendly capital allocation.

Right now there are no companies with a dominating position in the nutritional supplements industry, making it an industry of investors’ paradise. A growing health consciousness, fueled by increasing research and mass communication, has opened the door to every age level, and has helped nutritional supplements shoot well pass the $10 billion mark. In this post I will share why I believe GNC Holdings Inc (NYSE:GNC) is a compelling growth story in this industry.

Company Overview

Pittsburgh-based GNC Holdings, formerly known as General Nutrition, operates a chain of health and wellness stores throughout the United States and internationally. The company is a global specialty retailer of health and wellness products including vitamins, minerals and herbal supplements ("VMHS") products, sports nutrition products and diet products.

The company's well-known brands include Mega Men, Ultra Mega, GNC Total Lean, Pro Performance, and Pro Performance AMP, as well as internationally recognized third-party brands. The company sells many of its nutritional products through its more than 5,900 retail locations in the United States in addition to more than 2,100 store-within-a-store locations at Rite Aid pharmacies. It also has distribution and franchise locations in 56 countries around the globe.

2012 Financial Highlights

• The company grew its customer base adding 1.1 million Gold Card members, and 2.2 million email addresses. They now have nearly 6 million active Gold Card members and more than 11 million email addresses.
• In each quarter of 2012, domestic retail same-store sales exceeded 20% on a two-year basis.
• Online GNC.com posted its fourth consecutive year of revenue growth greater than 25%, expanded operating margins, conversion rate increased 50 bps, and unique visitors were up nearly 20%.
• LuckyVitamin.com also grew revenues by more than 25% on a pro forma basis; leveraging GNC’s merchandising and marketing capabilities. EBITDA margin rate expanded as the business capitalized on an expected supply chain efficiencies.
• Canadian operation posted a strong year on the strength of new product innovations.

GNC’s High Gross Margin leads to a Solid Balance Sheet

GNC’s product line includes a lot of proprietary products. The increased prevalence of proprietary products naturally increases their gross margin because the company is vertically integrated. GNC manages their whole supply chain from acquiring materials, production, inventory and distribution. They own the trucks and lease out all the real estate. Proprietary production allows them to cut out the middle men and achieve a higher gross margin on products.