As a technical analysts will tell you, the chart is broken on NutriSystems Inc. (NTRI). On February 25th NTRI stock declined $5.72, or 28.3 percent, to $14.48 after management lowered guidance. A major new product launched by Weight Watchers International, Inc. (WTW) in January is pressuring prices and profits. "We need new product offerings and new sales channels to re-energize top-line growth", NTRI management said.
NTRI is to report 1st Quarter results on Wednesday, April 27th.
WTW is to report 1st Quarter results on Friday, May 6th.
What are the short-term problems facing NTRI?
1) SALES GROWTH RATE: [FAIL]
From the 10K filed 3/27/2011:
"Seasonality
2) PRICE/BOOK RATIO: [FAIL]
From the 10K filed 3/27/2011:
"In the first quarter of 2010, we committed to a plan to sell the business operations conducted by our subsidiary, Nutrisystem Fresh, Inc. (“NuKitchen”), as it was no longer aligned with the business direction of the Company. NuKitchen has been treated as a discontinued operation. During the third quarter of 2010, this business was shut down as we were unsuccessful in locating a buyer. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations for all periods presented. The loss on discontinued operations during 2010 was primarily from operations. During the fourth quarter of 2009, an impairment charge of $4,541 was recorded in connection with the NuKitchen acquisition. This charge consisted of $2,717 of goodwill and $1,824 of identifiable intangible assets. See the discussion contained in Note 12 of the Notes to the Consolidated Financial Statements."
p/b is price over net income/equity
[Note: if charges, goodwill and intangible assets return to normal what will the p/b be?]
3) Chief Marketing Officer executive leaving
What are the short-term problems facing NTRI?
1) SALES GROWTH RATE: [FAIL]
From the 10K filed 3/27/2011:
"Competition
The weight loss industry is very competitive and consists of pharmaceutical products and weight loss programs, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors such as Weight Watchers and Jenny Craig, online diet-oriented sites, self-administered products such as the over-the-counter drug Alli and other medically supervised programs."
"New customer revenue is the main driver of revenue growth. Over the past several years, our financial performance has been adversely impacted by a number of factors, including the economic downturn and declines in consumers’ discretionary spending. We believe these factors have primarily driven the decline in the number of new customer starts during 2008, 2009 and 2010. The decline in new customer starts in previous years has also hampered reactivation revenue during 2010. We are continuing to see a challenging environment develop in 2011 as we experienced significantly reduced sales below the comparable 2010 period throughout the month of January. Our 2011 diet season launch was ineffective in light of intense competitive activity, bargain-focused consumer behavior and weak promotional offerings. To increase sales effectiveness we re-launched our “Rollback” pricing strategy, which increased sales traction in the month of February but had a significant negative impact on gross margins. These factors will have compounding effects through 2011 resulting in decreased revenue and net income. Additionally, we will incur additional charges during the first quarter of 2011 including severance which we expect to be more than offset by reductions in general and administrative expenses throughout 2011. "
[Note: gross margin is 55.9%]
Typically in the weight loss industry, revenue is strongest in the first quarter and lowest in the fourth calendar quarter. We believe our business experiences seasonality, driven by the predisposition of dieters to initiate a diet and the placement of our advertising based on the price and availability of certain media."
[Note: upside surprise?]
2) PRICE/BOOK RATIO: [FAIL]
From the 10K filed 3/27/2011:
"In the first quarter of 2010, we committed to a plan to sell the business operations conducted by our subsidiary, Nutrisystem Fresh, Inc. (“NuKitchen”), as it was no longer aligned with the business direction of the Company. NuKitchen has been treated as a discontinued operation. During the third quarter of 2010, this business was shut down as we were unsuccessful in locating a buyer. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations for all periods presented. The loss on discontinued operations during 2010 was primarily from operations. During the fourth quarter of 2009, an impairment charge of $4,541 was recorded in connection with the NuKitchen acquisition. This charge consisted of $2,717 of goodwill and $1,824 of identifiable intangible assets. See the discussion contained in Note 12 of the Notes to the Consolidated Financial Statements."
p/b is price over net income/equity
[Note: if charges, goodwill and intangible assets return to normal what will the p/b be?]
From the 10K filed 3/27/2011:
"Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures and our ability to select the right markets and media in which to advertise."
4) The dividends may be cut
According to a Motley Fool's article
"With earnings estimates currently below the annual dividend payout, there is risk the dividend will be cut."
[Note: Maybe that belongs under the first bullet]
There is a large block of shares that are shorting the stock. Although it has come down from last month, there are currently 6.6M shares short sales. Should you be a Contrarian? Is it too early for a reversal? Another approach is to "follow the trend" and create a pairs trade with WTW long and NTRI short as a combination.
Again, my methodology is short-term. If you asked a value investor they would say that the p/e * p/b is greater than 22, therefore the NTRI stock is broken. If you asked a technical guy, they would say there is substantial resistance for NTRI to overcome in the 14.30 range. As I try to get better at this "sport" I will just enjoy the week's fun; I won't buy any shares of WTW or NTRI. The odds are that, most likely nothing will happen. But it will be fun to watch for a stock geek like me.
Again, my methodology is short-term. If you asked a value investor they would say that the p/e * p/b is greater than 22, therefore the NTRI stock is broken. If you asked a technical guy, they would say there is substantial resistance for NTRI to overcome in the 14.30 range. As I try to get better at this "sport" I will just enjoy the week's fun; I won't buy any shares of WTW or NTRI. The odds are that, most likely nothing will happen. But it will be fun to watch for a stock geek like me.
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