GNC 2010 Annual Report Download - page 49

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 a leading 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 online through
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 6,900 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 the management of 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 online 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 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. As a leader in our industry, we expect our retail revenue growth to be consistent with projected
industry growth as a result of our disproportionate market share, scale economies in purchasing and advertising, strong brand
awareness, and vertical integration.
• 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 grow substantially, we expect 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 an
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 revenues from product sales to new franchisees. As international franchise trends continue to improve, we
also anticipate that franchise revenue from international operations will be driven by increased product sales to our franchisees. Since our
international franchisees pay royalties to us in U.S. dollars, any strengthening of the U.S. dollar relative to our franchisees' local currency may
offset some of the growth in royalty revenue.
• 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 www.drugstore.com.
License fee revenue from the opening of GNC franchised store-within-a-store locations within Rite Aid stores is also recorded in this
segment. Our revenues generated by our manufacturing and wholesale operations are subject to our available manufacturing
capacity. 43