There's just one catch, though. Its product is designed to fail.
NutriSystem, Inc. (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 (WMT) and Walgreen's (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.
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-- Frederick M. Steier