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Published: May 26, 2010
America is getting fatter. The Journal of the American
Medical Association released a report earlier this year that
showed the obesity rates in men and women had increased from
around 27% in 1999 to as high as 34% today. That's more than 130
million Americans. What better company to take advantage of this
trend than a diet company?
There's just one catch, though. Its product is designed to fail.
NutriSystem, Inc. (Nasdaq: NTRI) might take exception to
my saying that their product is designed to fail, so let me
clarify. I don't mean they actually intend for it to fail, but
human nature is such that few people who ever start a diet
rarely keep off whatever weight they manage to lose. A study
released by Cornell professor David Levitsky, published in the
journal Physiology and Behavior, concluded that since a person
who diets may lose weight initially, the body's metabolism slows
down, and when normal eating is resumed, the weight is regained.
And that's the beauty of NutriSystem's
business model.
In the first paragraph of NutriSystem's
10-K filing, it says the company's entire system is based on
the customer purchasing monthly packages of low-calorie prepared
food "until notified by the customers to stop our shipments." At
that point, the person goes off NutriSystem having lost the
weight they desired, but might resume normal eating habits, and
may gain back their lost weight. They may even return to
NutriSystem, but we can't be sure since the company does not
disclose how many repeat customers they have.
But no matter. In this case, human nature is NutriSystem's best
friend, whether people keep the weight off or not. A Gallup
survey reported 42% of Americans attempted dieting in 2008, and
of these only 8% participated in a commercial diet program. That
means the market is gigantic for NutriSystem, who may grab
market share from people who failed on another diet and are
cycling through NutriSystem.
NutriSystem has been around for 35 years, believe it or not, and
their product is simple to use. Customers order the food online,
pay about $12 a day, stick to the plan for about three months,
and then, at some point, cancel. The company has developed a
thorough support network, from online bulletin boards to
counselors, and has a strong marketing strategy to boot. (You
may have seen their commercials featuring everyone from football
hall of famer Dan Marino to singer Marie Osmond.)
Aside from typical media spends, the
company has managed to get itself into Costco, Sam's Club,
Wal-Mart (NYSE: WMT) and Walgreen's (NYSE: WAG). It
also offers its products via QVC, which accounts for 5% of
revenue. The company also re-evaluated its distribution network
in 2008 and made numerous improvements in inventory management.
And just for the curious, 72% of NutriSystem's customers are
women.
The risks involved in NutriSystem are not terribly great,
although one must always evaluate them independently. Dieting is
as American as the apple pie we aren't supposed to eat, and
there simply isn't going to be a time when the diet market won't
be gigantic. So the key for NutriSystem is protecting its brand
and maintaining its presence via effective marketing. Don't
discount how difficult this is. Thanks to the Internet, media
consumption has fragmented and NutriSystem must stay present in
all forms of media -- not just TV and newspapers anymore.
Economy-related risks certainly also exist, but even in bad
times, the company has remained profitable.
Financially, the company is on sound footing, despite a -19%
revenue decline and a -48% clubbing to earnings, thanks to the
economy. The company managed to remain profitable in this most
recent quarter, earning $4.8 million and generating trailing
twelve month
free cash flow of $25 million. NutriSystem also holds $90
million in cash and has no debt to concern itself with.
Particularly compelling is that 34% of the shares are held by
insiders, an astonishing level of insider commitment and should
give comfort to individual investors. The stock also pays a
respectable 3% dividend.
For those interested in a
small-cap stock with big-time comeback potential,
NutriSystem has all of the elements in place.
-- Frederick Steier
Contributor
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