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Bear of the Day: NutriSystem (NTRI)

Kevin Cook
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NutriSystem (NTRI) is the $1.5 billion #3 player in weight-loss prepared meal and pre-packaged food delivery.

But the company delivered in-line fourth-quarter earnings on February 26 and prepared guidance for 2018 that was well-below expectations, sending the stock down 25% the next day.

NutriSystem reported Q4 revenue of $131.2 million, a 20% increase year-over-year, beating the Zacks consensus of $129 million. The direct-to-consumer business was up 21% on double-digit growth for its core NutriSystem brand, with $7 million in contributions from South Beach.

For fiscal 2018, NutriSystem guidance indicates that revenues and adjusted EBITDA will be relatively flat at the midpoint of the given ranges of $685-$705 million and $106-$110 million range vs. consensus $791.6 million and $132.5 million.

Consequently, analysts lowered their EPS estimates in recent days, with this year's profit projection falling from $2.28 to $2.05.

Ever Since South Beach

You may recall that in December of 2015, Nutrisystem purchased the South Beach Diet brand, which had more than 23 million books in print at the time, for only $15 million. The company developed meal plans, marketing and retail channels for the brand in 2016 with the goal of launching new products in 2017.

The investments appeared to work as the company recorded revenue growth from $463 million to $697 million in that 2-year period. And the South Beach Diet expected to contribute $70 million in sales in its second year.

And while this product innovation appears to be taking a slow growth path, the real key to revenue growth is still new customer acquisition.

Analysts at B. Riley/FBR concluded that NutriSystem management "was surprised by the deceleration in new customer additions resulting from unforeseen changes in viewership at several TV stations and a worn-out creative formula." The firm lowered its price target on NTRI shares from $74 to $52.

The Diet Wars

Kicking off the so-called "diet season" in early January, U.S. News & World Report released its annual Best Diet rankings for 2018 and Weight Watchers (WTW) once again nabbed the top spot in the Best Commercial Diet category.

The program is also ranked number one for Best Weight-Loss Diets and Fast Weight-Loss Diets. The annual assessment profiles 40 diet plans ranked across nine categories. Of note, this was the 8th consecutive win by Weight Watchers in the commercial category.

Meanwhile Nutrisystem’s ranking held steady at #5 in the Best Commercial Diet category and its new South Beach Diet program rose three notches to #7.

Weight Watchers is still clearly riding a resurgent wave of success brought on by its chief ambassador and star investor Oprah Winfrey. But that didn't stop the company from pursuing further brand celebrity with the recent addition of DJ Khaled to the lineup.

As Kara Anderson, CFA at B. Riley/FBR noted, the company’s new social media ambassador can elevate the brand further and to new audiences through his massive following on Twitter (TWTR), Snapchat (SNAP), Facebook (FB), and Instagram which has nearly 9 million by itself.

Besides the obvious savvy technology marketing going on at WTW, the push to have a male spokesperson opens up an entirely new audience as big as half the population.

A Force to Be Reckoned With

And where NutriSystem is losing the war, Weight Watchers is excelling. WTW also reported earnings this past week and in addition to top and bottom line beats, the company announced a 23% jump in subscribers -- nearly 600,000 more people than a year ago.

While Oprah probably gets most of the credit for the current turnaround effort -- sales had declined from a peak near $1.8 billion in 2013 to just $1.165 billion in 2016 -- there is another force at the helm.

I saw an interview from last summer with the CEO of Weight Watchers, Mindy Grossman, former head retailer of Home Shopping Network (HSN). Richard Quest, who interviewed me after the Flash Crash of May 2010, wanted to mostly talk about Oprah and DJ Khaled.

But Grossman took every opportunity to describe an ecosystem of science-based behavior modification and community -- their two main pillars -- with expansion of the mission to holistic health and mindfulness.

And she has capitalized on internet and social media technology to leverage their existing pillars with new initiatives, like an internal social community platform called Connect.
Her goal has been to transform Weight Watchers from a diet and weight loss company to a more holistic health and wellness brand with programs like Beyond the Scale.

"Everybody asks me who our competition is and the reality is that our competition is people thinking they can do this themselves. Only five percent of people use a commercial weight loss program. So I want to be a partner to the other 95% who want to be healthier."

I'm not saying you should buy WTW tomorrow. NTRI still has a strong valuation advantage, trading at just 15 times forward EPS while WTW trades near 40X .

But right now, NTRI has lost earnings momentum and until it returns shares could go sideways or decline further until improvement is seen in subsequent quarters. The Zacks Rank will let you know.

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