GNC is no stranger to economic turbulence. The retailer traces its history to the middle of the Great Depression, when, in 1935, David Shakarian opened a health food store in Pittsburgh. The store, Lackzoom, specialized in yogurt (still fairly new to the U.S. at the time) and other health foods. 

Floods destroyed Shakarian's first two stores, but he rebuilt, expanded, changed the company's name to "General Nutrition Centers," and eventually the retailer started making its own vitamins and supplements. 

The company would go on to add thousands of locations in the U.S. and abroad. It's been through recessions, retail upheavals, financial crises and now a pandemic that has landed hard at the door of the industry. 

After years of distress and efforts to backstop its finances, and a pandemic that forced it to temporarily shut down 1,200 domestic stores, GNC filed for bankruptcy this week. 

It entered Chapter 11 with a forked plan to turn itself over to either lenders or a buyer. Both options show that key stakeholders see value in the nutrition retailer and think it has a future beyond its current distress and the wider COVID-19 crisis in retail.

Pre-pandemic woes

GNC's footprint is sprawling, with around 2,500 company-owned stores in the U.S. and 132 in Canada, CFO Tricia Tolivar said in a court filing. That is on top of 917 domestic franchise stores, split among 344 franchisees. Internationally, the company has another 1,886 franchise locations. All told, the company has about 11,000 employees, including 4,000 full-timers.

Among the vitamins, protein products, supplements, herbs, beauty products, and performance food and drinks are GNC's own branded and proprietary products, which also sell wholesale to Rite Aid, PetSmart, Sam's Club and other retailers. 

The recent shifts in retail away from malls and traditional retailers have taken their toll on GNC, which in 2016 carried $1.6 billion in funded debt — a figure it managed to get under $1 billion through a deal with Harbin Pharmaceutical Group that brought in a major equity capital infusion and set the stage for a joint venture to license GNC's products in mainland China. 

But GNC's debt load was still heavy for a retailer whose revenue has declined for five straight years and has posted a negative profit for three years out of the past five. With its retail business struggling, GNC closed some 206 stores in 2018, 314 stores in 2019 and 76 stores in the first three months of 2020. It also managed to negotiate accommodations from landlords on 1,500 leases, Tolivar said. 

But the company continued struggled financially. Last year it brought on advisers to help find relief for its balance sheet. In March, before the COVID-19 crisis was at full tilt, the company said it likely wouldn't be able to generate enough cash to pay on a group of notes coming due. GNC also said it expected sales declines of nearly $300 million for its 2019 year. 

Essential?

COVID-19 proved too much for the company to manage outside of Chapter 11. The company, according to internal memos obtained by Retail Dive in March, deemed itself essential because it carried some food and beverage items. Not every state agreed, and several employees told Retail Dive they felt unsafe working the retailer's stores amid the pandemic, in part because the company wasn't providing them with sanitation products or social distancing protocols. 

GNC would later temporarily close around 40% of its stores in the U.S. and Canada because of local government restrictions. As Tolivar said in her filing, "Although GNC's business was deemed essential in many locations, many municipalities disagreed with this classification, resulting in significant forced closures."

The pandemic in large part led to a sales decline of up to 60% at GNC's brick-and-mortar stores in April and May, according to Tolivar. Large increases in online demand (80% in April and over 100% in May) offset some of that, but GNC still posted steep double-digit sales losses in March, April and May. 

Many of the company's stores are reopened and results are "improving," according to Tolivar. But, she said, GNC does not expect that "the reopening of additional stores will generate near-term revenue that comes close to the Company's pre-pandemic in-store revenue."

"Indeed, while the Company is hopeful that the pandemic will subside soon, it is simply unclear what course this pandemic will take and whether customers will feel more comfortable venturing outside their homes to shop for health and nutrition products," Tolivar said. 

The pandemic also derailed the company's effort to refinance its debt, sending it into court for help. 

Bankruptcy plan(s)

GNC has a plan to exit bankruptcy. Actually, it has two plans. In one scenario, it would shed debt and turn itself over to a group of lenders holding a sizable chunk of its debt. GNC also said in a press release that it plans to close 800 to 1,200 stores — a significant number that would nevertheless leave it with a sizable footprint.

At the same time, the company has "reached an agreement in principle" to sell itself to Harbin for $760 million, according to Tolivar. A sale, if it happens, would run through an auction process, which could fetch other prospective buyers and higher bids.  

A group of bondholders have objected to aspects of GNC's Chapter 11 plans. Specifically they took aim at the retailer's proposed debtor-in-possession financing, which exists to keep companies liquid and operating healthily through the court process.

In part, the group was concerned about how much of GNC's bankruptcy loan rolls up pre-bankruptcy debt by replacing it and, potentially, giving those secured lenders priority treatment through the Chapter 11 process. But they also expressed worries about the speed of the case, as laid out by the DIP milestones.  

"Without showing any necessity therefor, the Debtors [i.e., GNC] have agreed to aggressive milestones which permit their senior creditors to take advantage of a temporary dip in value because of the impact of Covid-19," the bondholders said in their objection, while asking for more time for "sufficient marketing of the Debtors business and assets in order to maximize recovery for all stakeholders."

Despite the contested financing — which a judge approved Thursday over the bondholders' objections — GNC's prospects for exiting bankruptcy are lifted by multiple parties' willingness to take it on as an operating company. Other retailers that have entered bankruptcy with mere hopes for a suitor or a reorganization plan have not faired nearly as well. That was the case with Pier 1, which ultimately opted to liquidate, and Stage Stores may suffer the same fate in the coming months as well. 

Along with closing stores, the company plans on investing in its omnichannel services, including a buy online pickup in-store (BOPIS) option to launch later this year. 

Fitch analysts said in a note this week that they believe that "despite its challenges, GNC has a viable position in the retail marketplace, as a segment leader in the vitamin, mineral and health supplement space with good brand recognition, a sticky customer base, and positive cash flow."