Nutrisystem hits plateau. Is NTRI the next diet fad after Atkins?

Implications: Evaluation of NTRI Q3 performance: Q3 underperformance is not an indicator of a fad diet. Competition and lack of new campaign are primary drivers of recent performance. However, this might be an early indicator that NTRI is done with their steep growth phase and enters into the maturity phase with rather flat performance when it comes to new customer acquisition. CAC and related ad spending have to be adjusted since it might have surpassed point of diminishing return. Conversely, revenue should still grow YOY since reactivations will drive over 20% of the business in 2008. 2008 will be a critical year for NTRI in terms of establishing an authentic weight loss brand. Q4 will not bring any relieve, since NTRI has to keep spending in December to generate leads in January. Thus, CAC will get worse Q4. Long term outlook is sill positive as long as NTRI can prove their reactivation model in 2008 (27% of REV).

Analysis:  

Key factors contributing to NTRI’s 3rd quarter performance:

• Q3 estimate for new customers was 245,000 compared to 235,000 in Q3 2006. However, Q3 2006 featured a new campaign with Dan Marino and experienced tremendous reception in the male dieter population! 2007 featured no new campaign!
• NTRI should be aware of the fact that celebrity campaigns in the diet category wear out fast. Management should have been proactive and rotate new high caliber celebrity in.
• On top of that, Q3 is an OFF diet cycle, thus making it even harder to beat last years numbers.
• CAC was trending upwards at $182 or +17% YOY in Q2 2007. Q3 CAC estimated to be above $210. Client is harder to get and/or point of diminishing return is reached.
• New weight loss drug “alli” – introduced June 07. Expected to be a temporary situation, but 2 million users for “alli” in first quarter after introduction is higher than total NTRI audience 2003 - 2007!
• “alli” resides in same DIY diet subcategory as NTRI. Thus, cannibalization potential for NTRI is very high. Conversely, WTW might not see same negative impact, since they reside in different sub category.
• “alli” will come back in Q1 and Q2 2008 and fight for a slice of the diet population. Despite high abandonment rate and low repeat purchase pattern for “alli” users, new trial users are abundant! (50 million dieters in the DIY diet category)
• WTW is getting better at spending and allocating their advertising dollars. New campaign seems to resonate with customers. The more NTRI slides, the more WTW will gain…