NutriSystem's Rapid Weight Loss

The shares have tumbled in recent days amid negative analyst comments and a disappointing profit outlook from the weight-management outfit

Shares of NutriSystem (NTRI) have undergone a short-term weight loss that would startle the company's customers. Following a series of negative comments from analysts -- and an earnings preannouncement on Jan. 30 that disappointed Wall Street -- shares of the provider of weight management and fitness products and services have tumbled 28% from their Jan. 25 close of $61.13 to finish at $44.05 in Nasdaq trading Jan. 31.

On Jan. 26, Thomas Weisel Partners analyst Jim Duffy downgraded his opinion on the shares to market weight from overweight. According to Duffy, despite apparent meaningful year-to-year increases in advertising activity (in online and other media), year-to-year growth rates in unique visitors to have decelerated. He sees this as a potential sign that the company has reached the point of diminishing return on advertising spending, prompting the analyst to temper his growth expectations and outlook for the stock. Duffy cut his $3.35 2007 EPS estimate to $3.06.

In another negative analyst move, Citigroup's Gregory Badishkanian cut his $105 price target on the shares to $95 on Jan. 30, but maintained his buy recommendation. Badishkanian pointed out a slew of negatives for the company, such as soft Web site traffic and below-plan results from a test of its products at GNC retail stores. The analyst also noted that, similar to the last few quarters, management was likely to provide conservative guidance for the upcoming diet season.

But while Badishkanian sees near-term volatility in the shares, he thinks the company's long-term prospects remain intact. The analyst indicated that the company's weight-loss plan for men is still doing well, and though still in the early stages, NutriSystem's senior plan -- which features Hall of Fame football coach Don Shula as its pitchman -- is gaining some momentum.

But the only momentum for NutriSystem shareholders has been to the downside. After the close of trading Jan. 30, the company said it expected fourth-quarter earnings per share to be between 50 and 53 cents per share on revenues between $131-$133 million (that would be a 90% yearly rise in revenues). For the 2007 first quarter, the company expects EPS of 82 to 86 cents on revenues between $200-$210 million (that would be a 36% yearly rise in revenue). The company will report fourth quarter and full-year 2006 results after the market close on Feb. 14.

"We capped off 2006 with a solid fourth quarter," said NutriSystem CFO James D. Brown in a press release. "We continue to experience strong new customer growth and solid reactivation rates." But he cautioned that effort to gain customers in the men's and seniors' market segments -- combined with "unseasonably higher media rates" to advertise its programs -- would result in "moderately" higher customer acquisition costs in the first quarter.

That set the stage for the third significant drop in the stock in the span of 4 trading days, as the shares lost another 15% on Jan. 31. Stifel Financial analyst Scott Devitt was among those expressing disappointment at the company's outlook for the first quarter. In a Jan. 31 note, the analyst said he believes the company will continue to have to "pay up" to acquire growth, and "does not recommend purchase" of the shares at current levels.

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