T Nation

2nd Wall Street Journal article on GNC

GNC Stores Were Allegedly Told to Put
Expired Merchandise Back on Shelves

By JESSE EISINGER
Staff Reporter of THE WALL STREET JOURNAL

Faced with mounting inventory, General nutrition Cos. executives earlier this year were told to put expired merchandise back on GNC store shelves and try to sell it.

Former executives of the big retailer of vitamins and nutritional supplements say the instructions came from Tom Dowd, who was then a senior vice president at GNC. In a conference call, Mr. Dowd told about 25 vice presidents and other midlevel executives “to take the product out that wasn’t rancid and put it on the floor,” according to a former senior executive at GNC, a division of the Dutch food company Numico NV. “The product was growing in the back room and we didn’t want to show the Dutch the tremendous amount of expired inventory out there.”

In response to questions from The Wall Street Journal Europe, GNC confirmed in a statement that the call took place, “probably in early February.” But the company said Mr. Dowd was acting on his own. GNC said it has never been its policy to sell products past their sell-by dates.

While expired vitamins and supplements would be very unlikely to pose any health risks, such products can lose potency over time. What’s more, selling a product past its expiration date, without flagging it as such, would be considered a deceptive trade practice under U.S. federal and state trade law, according to
Lisa Raleigh, an assistant attorney general in Florida. The attorney general’s office last week opened an investigation into GNC’s selling of out-of-date products after receiving anonymous complaints, including one from a disgruntled customer. Ms. Raleigh said her office has found a “broad cross-section of
products” that were out of date on sale at GNC stores.

Mike Meyers, GNC's president and chief operating officer, said in an interview that he had no knowledge of the conference call suggesting the sales until last week. "I never, ever -- directly or indirectly -- provided any sort of direction to Tom Dowd or anybody to sell expired product," Mr. Meyers said. GNC also said that neither Greg Horn, the company's chief executive officer, nor any member of the Numico management team directed or condoned such actions. A spokesman for Numico said, "If [Tom Dowd] has done that, he should not have done that." Mr. Dowd, a 13-year veteran of GNC, was "terminated" from the company in March, GNC said; the company declined to comment publicly on the reasons.

Some of the former executives, however, said they believed the order to sell expired products came from GNC’s top management. “That decision wouldn’t have come from Tom Dowd,” said one of the executives who was on the
conference call. “That decision had to come from above him.” He and seven other former executives spoke on condition of anonymity, citing their severance packages with GNC.

The former executives don’t agree on how long the policy lasted, but most say the directive was rescinded within weeks after store managers and executives protested. “The problem was they kept changing it,” said a former divisional
sales director. “There was so much confusion. It was a circus.”

GNC, with about 4,500 stores, is the world’s largest chain of vitamin and supplement stores. Numico, a maker of infant formula, agreed to purchase GNC in 1999, spurring investor hopes that the slow-growing company would get a shot in the arm from what was then a hot market for supplements.

But the vitamin and supplement market has slowed markedly in the past year and a half, reflecting negative publicity surrounding some supplements, a lack of new blockbusters and slowing economies. GNC also has suffered management upheaval recently; at least 10 middle- to high-ranking executives have left the company this year, including four senior officials in its southeastern U.S. division.

GNC said in its written statement that it has reduced total inventory by more than $33 million (36.1 million euros) in the first seven months of this year and that inventory at the end of June was "at comparable levels to the year-earlier levels" and "appropriate." But the former executives say the buildup of unsold products was a serious problem. "It was kind of like our own Y2K bug," said a former executive who left GNC voluntarily earlier this year. "We had a lot of inventory that was expiring. Instead of taking that loss, they were stockpiling it."

People who have recently visited GNC stores in New York, Boston and Florida say they saw expired products on the shelves, some being sold at full price. A bottle of Nature’s Way Goldenseal, bought in August for $16.59 in a
GNC corporate store in Boston, expired in May. A bottle of Advanced Carotenoid Complex that expired in December 2000 was purchased in August at a GNC store in Manhattan, on sale for $7.80.

In recent days, GNC has scrambled to take out-of-date products, including items such as power bars and drinks, off its shelves, say people familiar with the matter. GNC said it is taking prompt corrective measures to pull any expired product from its shelves. It notes that putting sell-by dates on its products isn’t
required by law.

Even when outdated products are removed from shelves, that isn’t always recorded promptly or accurately, according to some former executives. GNC said that at the beginning of this year, it changed its procedures for keeping track of products that have expired, been shoplifted, damaged or otherwise
rendered invalid. Previously, store managers recorded such items weekly as a “known loss.” Now, store managers put the expired or damaged goods in a back room and wait for auditors to make a count. GNC has set up an obsolete inventory reserve for each store and keeps a running estimate of the losses.

GNC said the new procedure gives it "very good information that we didn't have before on why product" is being classified as a known loss.

Changes in accounting procedures can be a cause for concern among investors. It could be “a red flag,” said Paul Brown, chairman of the accounting department at New York University’s Stern School of Business. In this case, GNC is “injecting estimation into the process,” which might not be as good as tallying product loss immediately, he said. But Mr. Brown said retailers commonly use estimates of such losses rather than immediate counts, and he hasn’t studied GNC’s procedures.

Several former executives said GNC audited stores in a haphazard manner; some of the executives said the scheduling of audits could be used to boost reported earnings in the short term. GNC said the new procedures haven’t led
to any major change in known losses.

One more reason to stay out of GNCs. Ignorant clerks were not enough. Now, their high prices don’t even guaranty unexpired merchandise. Who knows what else they are doing??