GNC Holdings (GNC US) shares, the wellness and performance specialty retailer, is off to very unhealthy start to 2017. The stock is already off 40% so far this year, hitting a fresh 52-week low in today’s trading.
Short sellers on the other hand, have enjoyed a mark-to-market paper profit of $66.8 million, net of financing fees, generating a yield of 43% year-to-date. According to our real-time short interest data, S3 now estimates as much 26.8 million shares are currently on loan to bearish investors, an all-time high for the company since listing its shares back in 2011. Short exposure on a notional basis is up close to 78% since the start of the year, with $178 million at risk currently, compared to 12/31/2016, when 9.1 million shares were in short seller’s hands, resulting in $100 million in exposure.
The massive 194% increase in shares being borrowed by bearish speculators since the beginning of 2017 can be attributed to a few factors currently affecting the industry as a whole. These include a lack of product innovation, rising competition from online retailers like Amazon, and product-safety and labeling concerns, all which have hurt sales and margins, reducing overall cash flow.
With financing rates spiking to 9% fee per annum to borrow GNC shares in the sec lending market today, a cheaper way to play the specialty retail health industry may be its peer, Vitamin Shoppe (VSI US). The stock is exposed to similar industry risks as previously mentioned, but with potentially less squeeze (17% of float short vs GNCs 40% of float short) and re-rate risk, with VSI borrow currently being lent at general collateral/cheapest rates. Further, with a P/E ratio of 9.05, VSI shares also trade at premium of 3 times that of GNCs, based on this fundamental metric.
Next catalyst for GNC will be 4/18, when it’s scheduled to report consolidated first quarter results. Analyzing this recent trend of shorting activity, bearish speculators are raising their bets that the stock price, and not the fat, will continue to get trimmed.
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Director, S3 Partners
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