GNC 2008 Annual Report Download - page 44

Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
You should read the following discussion in conjunction with Item 6, "Selected Financial Data" and our consolidated financial statements
and accompanying notes included in this report. The discussion in this section contains forward-looking statements that involve risks and
uncertainties. See Item 1A, "Risk Factors" in this report for a discussion of important factors that could cause actual results to differ materially
from those described or implied by the forward-looking statements contained herein. Please refer to "Forward Looking Statements" included
elsewhere in this report.
Business Overview
We are the largest global specialty retailer of nutritional supplements, which include VMHS, sports nutrition products, diet products, and
other wellness products. We derive our revenues principally from product sales through our company-owned stores and www.gnc.com,
franchise activities, and sales of products manufactured in our facilities to third parties. We sell products through a worldwide network of more
than 6,100 locations operating under the GNC brand name.
Revenues and Operating Performance from our Business Segments
We measure our operating performance primarily through revenues and operating income from our three business segments, Retail,
Franchise, and Manufacturing/Wholesale, and through monitoring of our unallocated costs from our warehousing, distribution and corporate
segments, as follows:
• Retail revenues are generated by sales to consumers at our company-owned stores and through www.gnc.com. Although we believe
that our retail and franchise businesses are not seasonal in nature, historically we have experienced, and expect to continue to
experience, a substantial variation in our net sales and operating results from quarter to quarter, with the first half of the year being
stronger than the second half of the year. According to Nutrition Business Journal's Supplement Business Report 2006, our industry is
projected to grow at an average annual rate of 4% for the next five years due in part to favorable demographics, including an aging
U.S. population, rising healthcare costs, and the desire by many to live longer, healthier lives.
• Franchise revenues are generated primarily from:
(1) product sales to our franchisees;
(2) royalties on franchise retail sales; and
(3) franchise fees, which are charged for initial franchise awards, renewals, and transfers of franchises.
Since we do not anticipate the number of our domestic franchised stores to increase significantly, our domestic franchise revenue growth
will be generated by royalties on increased franchise retail sales and product sales to our existing franchisees. We expect that the increase in
the number of our international franchised stores over the next five years will result in increased initial franchise fees associated with new store
openings and increased manufacturing/wholesale revenues from product sales to new franchisees. As franchise trends continue to improve, we
also anticipate that franchise revenue from international operations will be driven by increased royalties on franchise retail sales and increased
product sales to our franchisees.
• Manufacturing/wholesale revenues are generated through sales of manufactured products to third parties, generally for third-party
private label brands, and the sale of our proprietary and third-party products to and through Rite Aid and drugstore.com. While
revenues generated through our strategic alliance with Rite Aid do not represent a substantial component of our business, we believe
that sales of our products to and through Rite Aid will continue to grow in accordance with our projected retail revenue growth. Our
revenues generated by our manufacturing and wholesale 40