Being healthy is no longer a fad. In many respects, it’s becoming a requirement.#-ad_banner-#

People are spending increasing amounts of money on healthy lifestyles, from gym memberships to supplements. However, there has been some controversy recently around multivitamins and whether they actually provide any health benefits.

Most notably, an editorial last month in the Annals of Internal Medicine, a prestigious academic journal, questioned the validity of vitamins in preventing heart attacks and cancer. But nutritionists are rushing to the defense of the multivitamin industry, noting that the purpose of taking a multivitamin is to address the nutritional deficiencies in our diets.

For vitamin company investors, the thing to remember is that this isn’t the first time that the benefits of multivitamins have been called into question. The same debate came up in the early ’90s, but the industry has remained resilient and grown into a billion-dollar market. People want to look and feel good, and they’ll continue to spend on supplements to do so.

With 6,500 stores and a growing presence in e-commerce, GNC (NYSE: GNC) is one of the top retailers of vitamins and supplements. One of the most commonly overlooked aspects of GNC is its suite of proprietary brands, which includes Total Lean, Mega Men and Ultra Mega. Nearly 60% of its sales are from these brands, giving the company a solid competitive advantage.

GNC can also count an aging population as a tailwind. As the baby boomer generation gets older, the demand for vitamins will most likely increase.

	Flickr/HealthGauge
	With 6,500 stores and a growing presence in e-commerce, GNC is one of the top retailers of vitamins and supplements.

On one hand, GNC continues to face competition from e-commerce, namely Amazon.com (Nasdaq: AMZN) — but GNC has its own rapidly growing e-commerce platform, with year-over-year sales growth of 25% during the first three quarters of 2013. And there’s still plenty of room for the online segment to grow: Only 10% of GNC’s total sales are made online.

Digging deeper, the other large opportunity for GNC lies in margin expansion: Its e-commerce platform has operating margins above 25%, but its retail segment’s operating margins are under 20%. As e-commerce sales continue to outpace conventional brick-and-mortar sales, however, that’s a recipe for margin growth.

The other growth lever that GNC can pull in 2014 is international growth. In mid-2013, GNC opened its first stand-alone store in China, with plans to open another 25 stores this year. International growth should also help improve GNC’s margins, in addition to any top-line benefits.

The majority of GNC’s international growth will come from franchised store expansion, versus company owned. The beauty here is that franchise stores generate margins on EBIT (earnings before interest and taxes) of over 35%, compared with less than 20% at company-owned stores. Currently, less than 15% of GNC’s sales are from international markets.

GNC has dominated its top peer, Vitamin Shoppe (NYSE: VSI), over the past 12 months. This is a trend that is likely to continue.

GNC trades at less than 17 times forward earnings, while its three-year average price-to-earnings (P/E) ratio is over 20. In comparison, Vitamin Shoppe trades at 21 times forward earnings, but its return on equity is less than half of GNC’s. A multiple of 20 on GNC’s estimated 2014 earnings per share (EPS) of $3.47 suggests a target price close to $70 in just over a year, or 20% upside.

Risks to Consider: GNC’s products are discretionary in nature, thus, a weak economic environment would limit the demand for its products. Amazon, another potential threat, could easily disrupt the industry by putting pressure on demand and pricing for the vitamin retailers. Yet another risk is that Americans may decide to stop buying multivitamins — but that seems farfetched, considering that many Americans take multivitamins as part of their daily routine and that multivitamins have survived similar challenges before.

Action to take –> Buy GNC with upside to almost $70, which suggests over 20% upside from its current price. However, risk-averse investors might be best served by waiting a few weeks to see how the impact of the critical editorial plays out.

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