NutriSystem Pulls Its Weight

The diet-plan provider forecasts higher-than-expected revenue for the first quarter as marketing efforts bear fruit

After a year of disappointing earnings reports, NutriSystem (NTRI) finally had some good news for investors.

NutriSystem said on Apr. 8 that it expects to report roughly $216 million in revenue for the first quarter on Apr. 23, more than the $200 million to $210 million range it had projected. The company also anticipates operating profits of $21 million to $24 million, which would translate to between 62 and 71 cents per share. The company also said it had cash and cash equivalents of $43 million and no debt at the end of March.

The diet and fitness company also appointed President and Chief Operating Officer Joseph Redling to succeed Michael Hagan as Chief Executive, effective May 1, and said Redling has been elected to the Board, effective immediately. Hagan will become non-executive Chairman of NutriSystem on May 1.

Shares of the Horsham, Pa.-based company, which emphasizes portion control and regulated carbohydrate intake in its weight-loss plan, surged as much as 33% to $19.90 before sliding back to close 24.4% higher at $18.59 on Apr. 8. Within the past year the stock price has fallen as much as 83% from a 52-week peak of $79.09.

NutriSystem also said it had bought back 3.3 million shares, or nearly 10%, of its outstanding shares, for $45 million through the end of March.

Wall Street analysts had an average revenue forecast of $203.5 million and average earnings estimate of 33 cents per share for the March quarter.

“This is first time in a year or more that NutriSystem has had a positive pre-announcement about their business,” which is why the stock was up, says Laura Ann Richardson, an analyst at BB&T Capital Markets in McLean, Va.

In a news release, Chairman and Chief Executive Hagan attributed the better-than-expected revenue to more efficient marketing in the latter part of the quarter and said the revenue trend had stabilized since January. He also cited more success in retaining customers and in reactivating former customers.

“The availability of advertising time in the spot market has been a little better. They’re getting more time they want to buy [because] there’s less demand,” says Richardson, who has a hold rating on the stock.

“They didn’t mention the price, but usually when advertising time is available, it means that prices are down,” she says. (BB&T expects to receive or intends to seek compensation for investment banking services from NutriSystem in the next three months and makes a market in NutriSystem’s securities.)

The jump in the stock price on Tuesday came partly from short covering by traders who have bet against the stock in the belief that the level of profits that NutriSystem has earned in recent years can’t be sustained over the long term since diets tend to be seen as fads and eventually lose their appeal, says Bill Sutherland, an analyst at Boenning & Scattergood outside Philadelphia. (The firm may receive or seek compensation for investment banking services from NutriSystem in the next three months.)

There had been more than 20 million shares of shorts in the market, he says.

The management change will seen as positive by most investors, he says. Redling “brings good skills from his online experience at AOL [as CEO of the international division and chief marketing officer before that] and in brand management,” says Sutherland.

Sutherland returned his rating to market outperform from market perform and raised his first-quarter estimate to 42 cents from 33 cents per share. He also boosted his full year 2008 forecast to $2.39 from $2.25 per share.

While the business environment for consumer companies on the whole is worse than it was at this time last year, Nutrisystem is bucking the trend by going from missing expectations to beating them, says Richardson at BB&T.

One supportive factor at a time when consumers are tightening their purse strings is NutriSystem’s price point, says Sutherland at Boenning.

“You get a box of meals for a month for a little over $300, so basically you’re eating for $10 a day, plus fresh fruits and vegetables you buy,” he says.

The overall cost isn’t much more than what people spend on normal food, plus customers like the convenience of having the meals dropped at their doorstep once a month. People also appreciate the anonymity, as opposed to having to go to a location and waiting in line to weigh in and check points, he says.

On the downside, however, “Some of [the food] is not too tasty and you get tired of it,” despite the appearance of variety, he adds.

NutriSystem hopes to address that by introducing a premium-priced line of frozen entrees that will supplement the existing shelf-stable meal plan. The company is now testing those products and plans to roll them out later this year.

“That should help stir some interest [among consumers] and help retention [so that] people won’t give up so easily” on the weight-loss program, Sutherland says.

There are other new initiatives underway at the NutriSystem that could eventually add to its profitability, too.

There are a number of ideas that Redling plans to put in place to make the online model more central to the company’s sales strategy, says Sutherland. It plans to improve the customer experience by offering counseling to customers, which would strengthen the communal aspect of the diet products.

In an Apr. 8 research note, Sutherland mentioned a two-week-free promotion that NutriSystem is posting on its web site that offers customers who stay on the Nourish plan for a second month an additional other free week of food. Since the only incremental cost of this program is food and shipping, the company’s earnings before interest and taxes would go from slightly negative in the first month to a direct EBIT margin of 45% in the second month, he wrote in the note.

But gross margins will likely fall by more than 2% to 51% on higher food and freight costs, he said. After a spike in the first quarter, marketing costs as a percent of revenue should average 22% to 23% for the balance of 2008, he said.

The company has also invested in a water filtration system called ZeroWater aimed at the consumer market, which will be marketed through NutriSystem and will be its first effort to diversify its products, according to Sutherland’s note. Management believes ZeroWater will turn profitable toward the end of 2008.

NutriSystem also has its eye on international markets, with plans to launch in the United Kingdom in 2009 and in Germany, probably with the help of a local partner, sometime later, Sutherland wrote.

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