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Bulking Up Rewards at GNC Holdings Inc (GNC)

GNC Holdings Inc (NYSE:GNC)After a three-year experiment, where GNC Holdings Inc (NYSE:GNC) tweaked its Gold Card membership in select markets, the company expanded the new rewards program to the more than 3,000 U.S. company-owned stores. Usually, a new store membership program is nothing to get excited about, but GNC has one of the best in the biz, and this month, it just got better.

Key changes

Under the old Gold Card program, members paid $15 per year and received a 20% discount on items during the first week of every month (as well as the day they sign up). One of the biggest complaints was that members could only get that 20% discount one week per month. The new program fixes that.

The new Member Price program still costs $15 a year, but customers are able to get a discount every day of the year. What’s more, that discount could reach as high as 50% on some items. As a result, the company has seen higher sign-up rates in all of its test markets.

Increased traffic

Not only does the new rewards program provide customers the benefit of discount shopping
any
day of the month, it provides GNC Holdings Inc (NYSE:GNC) the benefit of having customers shop at its stores
every
day of the month.

Every market in which GNC tested the new rewards program saw improved traffic numbers. Additionally, rewards members did their shopping more evenly throughout the month putting minimal additional strain on current store staff. Overall, Belus Capital Advisors analyst Brian Sozzi estimates those stores saw a 1% to 3% same-store sales boost from the program.

Quelling lost sales

With the Gold Card program, GNC Holdings Inc (NYSE:GNC) was losing sales in the latter weeks of the month. A combination of rogue franchisees and Amazon.com, Inc. (NASDAQ:AMZN) is likely to blame. Many franchisees have elected to put GNC’s “exclusive” products up for sale on Amazon’s marketplace.

William Blair analyst Mark Miller took a survey of 100 random GNC products earlier this year and found 84 of them for sale on Amazon. Comparatively, only 67 were available a year earlier. Additionally, the duplicate products sold for an average discount of 20% on Amazon – the same as the old Gold Card discount.

With discounts as high as 50% on some items under the Member Price program, GNC Holdings Inc (NYSE:GNC) is able to draw customers into stores and convince them to buy products in-store instead of through a third-party like Amazon. Of course, if the new membership program fails to mitigate the effect of franchisees selling through Amazon, GNC could take measures to strictly stop them. For now, however, franchising is an effective way to expand the business, particularly abroad.

Regardless of the success GNC Holdings Inc (NYSE:GNC) has stymieing lost sales, Amazon will barely feel a pinch. While it’s unclear how many GNC products the eCommerce giant sells, it’s an extremely small fraction of the more than $40 billion its third party Amazon Marketplace sellers brought in last year.

Amazon’s commissions and fees generally come out to 20% to 30% of the sales price, so the impact of lost third party sales is even smaller. Couple that with the huge $61 billion in revenue the company sold on its own last year, and the percentage of revenue loss from a relatively small supply of GNC sellers is negligible.

Improved revenue

With the boost from improved traffic while mitigating the franchisee’s cannibalization efforts, GNC Holdings Inc (NYSE:GNC) saw improved revenue numbers at each store they tested the new program.

Additionally, the Gold Card and Member Pricing program gives GNC plenty of data to improve revenue. Accelerated signups from a more attractive rewards program and an initial free-to-join period, ought to give the company a boost in targeting its customers.

GNC can use member data to improve its cross-selling efforts. For example, a member might find an email indicating that since they bought product X, they might consider product Y, and detail the benefits of taking both products in conjunction with one another. The company is a strong direct seller, and the Member Price discounts will give customers another reason to shop at their stores.

Improved margin

Not only is revenue getting a boost from the new program, margins are improving as well. After an initial margin hit from the daily discounts, stores cross the margin dollar neutral line in three to four months. Afterwards, margins accelerate quickly as traffic and transactions increase.

With discounts ranging from 5% to 50%, GNC Holdings Inc (NYSE:GNC) has more flexibility to control its gross margin. A product that’s selling well may only get a 5% discount under the new program, whereas the company was stuck with providing a 20% discount under the old one.

Improved bottom line

For the year, GNC expects the program rollout to be “EPS neutral.” This quarter, the company ought to lose $0.05 or $0.06 per share due to the programs initiation, but those costs will be made up in the latter half of the year.

In 2014, investors ought to see a greater contribution from the Member Price program. This is just one of several factors that can contribute to an acceleration of earnings growth for GNC Holdings Inc (NYSE:GNC). Unlike most, this rewards program has some serious rewards for investors.

The article Bulking Up Rewards at GNC originally appeared on Fool.com.

Adam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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