Reality Check for Nutrisystem

Implications:  After 3 years of impressive growth it might be time for a reality check for Nutrisystem (NTRI). The stock got “pounded” this week after NTRI issued a lower than expected guidance for Q107 and a Citigroup analyst lowered his target price by $13 (from $105 to $92).  Is it time for bypass surgery or did this marketing machine just catch a cold. Let’s take a closer look at some of their metrics, projections and key initiatives to reach a better diagnosis.

Analysis:

Reality Check for Nutrisystem

By Dirk Aschmoneit – Nestle Nutrition / Jenny Craig

After 3 years of impressive growth it might be time for a reality check for Nutrisystem (NTRI). The stock got “pounded” this week after NTRI issued a lower than expected guidance for Q107 and a Citigroup analyst lowered his target price by $13 (from $105 to $92).

The last time the stock took this kind of a beating was after the Q206 call when one of the key executives decided to leave the company and CAC was trending higher due to the expansion of the men’s program. In my opinion it was an absolute over reaction in 2006…the company outperformed every forecast and blows by every single metric…but if you don’t understand the weight loss category or how to build a brand with an aggressive investment spending approach, you abandon ship I guess.

But let’s move on to Q107. This time company earnings projections for the quarter are lower than analysts’ projections. Furthermore, CAC is estimated to be moderately higher on a YOY comparison. Is it time for bypass surgery or did this marketing machine just catch a cold. Let’s take a closer look at some of their metrics, projections and key initiatives to reach a better diagnosis. There are issues, no doubt, and 2007 is a very important & telling year, but in general I view NTRI as a well oiled marketing machine that is here to stay.

Growth: NTRI left the growth phase and entered the maturity phase. Thus, you won’t see triple digit growth rates anymore. Reasonable expectations are ~ $750M for 07 and ~ $950M for 08 in total sales. Within 5 years they might reach Weight Watcher (WTW) size (in $sales). Very impressive.

Effectiveness: NTRI’s weight loss program is built around prepackaged, calorie controlled food. The marketing message on what makes their food special is built on the glycemic index. Nothing new or revolutionary here! No intellectual property either. Glycemic index is as new as the 1994 bestseller The Zone Diet by Dr. Barry Sears, and there is no consensus in the scientific field about the efficacy of the glycemic index. If a starving and smart lawyer or the FTC would look a little bit closer at the commercials you might expect to see some lawsuits down the road. Just last month several diet companies (including Bayer!) got their wrist slapped ($25M) after they sold billions of dollars over the past 7 years.

Reactivation: Long-term success and high brand awareness comes from repeat business in this category. Weight Watchers creates clients for life! NTRI expects $80M in income from reactivations for 07. Without going into the complicating computing method for reactivations I would argue that $80M represents only 10% of their 9 month+ clients. Compared to great brands in this category this number is dismal and might be the key indicator for a high churn model.

Differentiation: Low cost and convenience are touted as two of the competitive advantages when compared to other category players (WTW, Jenny Craig). Convenience is valid if you enjoy eating bad tasting food. Low price (Hagan calls it the Wal Mart approach)? Forbes magazine looked last fall at the true cost of several programs and found that the NTRI cost per week is closer to $115 versus the under $10/day proclaimed by NTRI.

Key Initiatives: GNC is performing below expectations. Not a surprise here! GNC is known for pretending to really care for strong brands. But it is a different kind of caring. They don’t care selling your product, they just like the brand to drive traffic into the store and than they sell you their GNC branded products! Retail expansion: Just one sentence for this one. Maybe there are people out there that pay premium price for bad tasting snacks…I haven’t met too many of them. Last time I checked Taste ruled.