Nutrisystem – gaining momentum with its weight control products – nutrisystem inc (nasdaq ntri) seeking alpha gas after eating fruit

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I have recently reviewed Nutrisystem, Inc. (NASDAQ: NTRI) 2017 annual report. The results are very interesting, so I decided to write an article on this company. In a nut shell, Nutrisystem sells weight management products and services, ranging from nutritionally balanced weight loss programs to multi-day kits. The company offers counseling, ready-to-eat food, and programs.

I have started to follow this company during Fall 2017, and I bought a few shares back then. Since then, the company published 2 quarterly financial results, which were received by the markets with mix feelings, given the price movement of the stock.

The numbers above show how much the company has managed to grow its top and bottom lines from 2013 to 2017. Revenues increased by 18%/yr on average from 2013 to 2017, while the profits increased by 67% during the same period. This is good, mostly for growth investors. By looking at the income statements, I like the fact the net margin increased from 2% in 2013 to around 8% in 2017. The company managed to generate an economy of scale, which is positive going forward.

If we look at the the revenue growth for the last 2 years (2016 & 2017), the company managed to increase its revenue from new customers and from reactivation (returning customers). Between 2015 and 2016, the company increased its revenues by $82M, for which $57.7M (70%) came from new customers while $24M (29%) came from reactivation revenue. Between 2016 and 2017, the revenue increased by $152M, for which $107.5M (70%) came from new customers and $37.8M (24%) came from reactivation revenue. During both years (2016 & 2017), revenue from sales on QVC grew modestly ($2.2M in 2016, no growth in 2017) and revenue from retail saw a drop in 2016 (-$1.7M) and a slight gain in 2017 ($5.2M).

I must also point out that the vast majority of its revenue (91% in 2017) came from direct sales, whether from its own website or by phone. Only 6% of its revenue comes from retails and 2-3% comes from sales on the QVC website. I see this as a good thing, since by-passing 3rd parties should allow the company to keep most of the profit margin generated from the sales of its products.

On the other hand, since the company depend mostly on new customers and direct sales, its future growth depend heavily on its marketing strategy, which was criticized by some for the lackluster sales on its South Beach diet product, which is supposed to drive revenues up in years to come.

Let’s now discuss the current situation and the outlook. As I have written in the second paragraph of this article, the stock price has moved quite a bit since i first picked up on this company. The stock price went from 50$ to 28$ between November 2017 and February 2018. The stock price gained back a few dollars since then to reach its current market price of 33$. The big fall came after the company issued what was considered as disappointing financial results back in February. Even though the numbers were quite good, the expectations were very high. The disappointment was mostly directed to the revised forecast, which were lowered, especially with regards to the sales of Nutrisystem South Beach diet. This product was promoted by Nutrisystem, however the sales did not match expectations.

The stock price then bounced up a bit to a more realistic valuation, thanks to strong numbers for its Q1 2018 financial results. I agree the stock was overvalued back in November, and the sharp drop since the beginning of the year provides a nice entry point for potential investors.

The challenge of Nutrisystem is that it may not be known as much as its other competitors, most notably WTW. However, the company has a strong balance sheet and should have enough cash to finance additional marketing of its products to help getting its brand and its products known, and to gain additional clients. The South Beach Diet will be one product that should help fuel the revenues going forward.

I also believe that awareness to live a healthy lifestyle will be a pattern that will grow in years to come. The fact that a company like Nutrisystem can deliver ready-to-eat products designed by nutritionists will be interesting for people with not much time (or desire) to cook their own meals.

We must however discuss the risks involved in investing on Nutrisystem. First of all, even though the financial numbers are positive, we must remember that Nutrisystem is playing on a field with other players with a more widely known brand (read Weight Watchers). It will be a challenge to gain market shares from such a brand. The marketing decisions will be key in Nutrisystem’s capabilities to increase significantly its market shares in years to come.

One other risk worth considering is the fact that Nutrisystem’s products should not be seen as life-or-death products. During an economic slowdown, we should expect customers to cut their expenses on such products. This would have a negative impact on the financial statements. Nutrisystem should flourish within a dynamic economy but should falter if the economy shows signs of weaknesses.