Thursday, October 04, 2007
By the way...
The market is my bitch. However, every once in awhile, it tries to run away and act all uppity and shit. This is the part where I pimp smack her-- and tell her to "get back to the hotel and make me my money."
Net, net -- despite the losses, he's still a big winner.
Keep throwing the heat Fly...
I hear they'll make room for solar & burrito in the name of their company
diclaimer: if you buy CREG because of my pumpage, China may fall into a depression and take you, your money & your life with it
Cracks Starting to Show in NutriSystem
By Larsen Kusick
10/4/2007 12:28 PM EDT
When I see a company with both a high rate of growth and a large percentage of its stock shorted, my eyes usually light up, sensing an opportunity. NutriSystem (NTRI) is one that's been on my radar for a while, because the company certainly has showed impressive growth over the past three years while perpetually having more than 40% of its float shorted.
After the company's negative guidance after the close yesterday, investors can check their screens and see that shares of NutriSystem are falling into "bargain basement" territory for a high-growth stock. But investors should avoid this value trap at all costs.
Ideally, when jumping on the bullish side of an investment that has a lot of bears, you want to have a thesis as to why all the doubters are wrong. Here's where I've run into trouble when analyzing NutriSystem -- I couldn't come up with an ironclad reason that the success is sustainable. So far, the shorts have been wrong, but will they continue to be wrong?
I've seen the commercials -- yes, they look cheesy, but hey, they seem to be working. As long as they keep hitting their sales targets and maintain business momentum, it's hard to take the bear side. But once that momentum starts to sputter, all bets are off.
When going over NutriSystem's second-quarter earnings numbers, I was surprised by how cheap the stock was. Looking at the consensus 2007 estimates, shares were trading at just over 13 times earnings expectations earlier this week, despite the fact that earnings are expected to grow more than 50% this year and another 20% next year. With the stock getting hit today following management's earnings warning, shares look like even more of a bargain.
Investing is rarely that simple, however.
If a growth stock is trading at a low multiple, the market is telling you something. In this case, NutriSystem is an also-ran to Weight Watchers (WTW) , which has established a strong brand over the course of decades. NutriSystem, on the other hand, has been a huge success with its portion-based meal program, driving the stock up 66% in 2004, 1,164% in 2005 and 76% in 2006. As of today, however, shares are down more than 45% year to date.
So what we have here is a little company that took a shot and made it big, joining Weight Watchers, eDiets (DIET) and Jenny Craig as a major player on the weight-loss scene. One of the key differentiators for NutriSystem has been its success in expanding its addressable market by bringing men into the fold using Dan Marino and other famous sports figures in its marketing campaigns.
The main problem I see is that NutriSystem's business model is far from unique. It advertises heavily, bringing new customers to its Web site to order monthly shipments of food that amount to $320-$370 a month for men and $294-$340 for women. The company has to keep its prices high, as its cost to acquire customers continues to rise: up to $182 per person in the second quarter from $155 in the previous quarter. Judging by the company's sales growth, there's no question that some people like having food shipped to them every month. But it's not that convenient. Customers have to add a number of ingredients bought from the supermarket.
The other issue that makes me bearish on NutriSystem -- at any price -- is that the vast majority of its revenue comes from first-time customers.
In 2006, Weight Watchers generated 58% of its revenues from meeting fees, with 24% coming from product sales. By contrast, customers reordering NutriSystem's food make up around 10% of revenue. A comment by analysts at CIBC, which covers both companies, stated that the average period of time a member stays on NutriSystem is about 10 to 11 weeks, with a return rate likely below 10%. Once again, Weight Watchers stands out because although its customers use its products and services for a similar period of time, those who stop have a 75% return rate within 18 months.
My point is that NutriSystem may run into serious problems continuing to drive revenue growth. Once someone uses NutriSystem, you can generally scratch them off the list of potential future customers. This isn't a story like Weight Watchers, where the combination of an ongoing service/community model and an established brand generates stable, recurring revenue.
Instead, NutriSystem is all about spending a lot on marketing to get people to plunk down for a supply of their food, with the hope of taking off a specific number of pounds. The customer either follows the regimen or doesn't, loses some weight or doesn't and the transaction is complete.
Hence, there is very limited brand loyalty, and more of a chance that someone sitting in a room, watching football in a group of friends, sees a NutriSystem commercial and says, "My wife wanted me to lose weight, and I tried that stuff and it didn't work." This isn't to say NutriSystem doesn't work -- there's just a significant chance that the consumer either doesn't like most of the food, doesn't stick to the routine or continues the couch-potato lifestyle that renders a reduced-calorie intake of minimal value.
The reverse could also be true, in that the company may sometimes benefit from word of mouth. But in the end, NutriSystem's business model is similar to a lot of failed diet programs -- advertise a lot and take advantage of people's interest in losing weight with limited effort.
I doubt that NutriSystem will be going out of business in the next few years, but I can't see investors paying up for this "cheap" stock when it's peddling a product that's extremely vulnerable to competition and equally dependent on a high advertising budget.
Yesterday's earnings warning does not create an opportunity for investors. If anything, the warning could be the first sign that NutriSystem's sales have peaked, and that no amount of increased marketing will be able to overcome its declining addressable market.
Just keep in mind that when they change their name to Chnia Recycling Energy Solar Burrito Corp, the stock should go to the moon ... or back to thirteen cents, whichever the case may be
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