GNC CEO Shakeup Could Be a Healthy Sign for Investors

Tickers in this article: GNC SPY TLB VSI

NEW YORK ( TheStreet) -- GNC Holding's recent naming of Michael Archbold as CEO brings in an experienced and proven industry insider.

Archbold is a former chief executive of Talbots and President and COO of Vitamin Shoppe . The 25-year retail veteran replaces Joseph Fortunato, who had been the CEO for nearly nine years.

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Shares of the $3 billion health and wellness retailer, at $37.50, are down nearly 36% for the year to date. They trade at a P/E ratio of 11.79x (2015 estimates) with 11.6% EPS growth (-0.4% this year), price to sales ratio of 1.25x, and a price to book ratio of 4.44x. Revenue growth is expected to accelerate from +0.1% to +5.1% next year.

The 1.71% dividend yield (next ex-dividend date is on Sept. 10) is comparable to that of the SPDR S&P 500 ETF Trust's 1.80% yield. On Aug. 13, GNC raised its two-year share repurchase program to $500 million from $250 million (roughly 15% of the total market capitalization); 5.64% of the total float is currently sold short (an estimated 1.3 days to cover).

The average analyst price target on the stock is $44.58 (19.33% above the current share price). There is one sell rating, 10 hold ratings and 7 buy ratings. On Aug. 11, Credit Suisse upgraded the stock to outperform from neutral with a $43 price target. The main reason for the upgrade was Archbold's prior success and his "rich" history with private equity firms (i.e., a possible sale of the company).

Low Bar Following Weak Earnings

Prior to Archbold's arrival, on July 29, GNC reported second-quarter EPS of 77 cents compared to the Wall Street consensus estimate of 79 cents on revenue of $675.2 million against the $705.02 million estimate (-0.2% year over year growth). Same-store sales fell 4% compared to 6.8% growth in the same period of 2013. The company lowered FY14 EPS guidance to $2.85 from $3.05-$3.10, the third consecutive EPS miss.

At one point this news sent the stock down nearly 47% year to date. However, a vote of confidence came on Aug. 18 when board member Michael Hines purchased 30,000 shares of GNC for $35.41 each ($1,062,300). He had previously owned just 7,118 shares.

Bullish Price Action On The Weekly Chart

Courtesy of StockCharts.com

Unusual Options Activity

On Friday, someone purchased approximately 2,500 October $37.50 calls for $1.75-$1.90 each. The call to put ratio was more than 6:1 (6 calls traded for every put traded). Call activity was about two times the average daily volume (typically trades 1,962 calls per day). Implied volatility rose 3.3% to 35.67 (ranged from 23.28 to 55.68 over the last 52 weeks). Total call open interest was 41,816 contracts vs total put open interest of 23,011 contracts. The big call buyer has $450K in premium on the line with a breakeven of $39.25-$39.40 on October options expiration.