Thursday, February 15, 2007

Color On Quarter: NutriSystem (NASDAQ:NTRI)

Several firms commenting NutriSystem (NASDAQ:NTRI) after co surprised positively with its results and outlook yesterday after the close.

- Lazard notes that NutriSystem raised the guidance range for 1Q revenues and EPS to $205-$215 million and $0.88-$0.92, respectively, from the prior range of $200-$210 million and $0.82-$0.86, due to momentum in the men's segment and reactivations, as well as improvements in CAC over the course of the quarter. The company also provided initial 2007 revenue and EPS guidance of $720-$740 million (+27%-30% year-over year) and $3.00-$3.10 (+31%-35%) vs. firm's estimates of $745 million and $2.85. Firm is also introducing above-consensus 2008 estimates of $875 million and $3.50.

Firm says that reactivations key in offsetting higher CAC. As it becomes more expensive to add incremental new customers, firm expects NutriSystem to increase focus on reactivating prior customers, who convert at a much lower marketing cost through direct mail/email campaigns.

Management has targeted $80 million in revenues and $25 million in after-tax profit from reactivations in 2007 (~$0.65/share). Importantly, reactivating customers are not included in the company's new customer count; as a result, firm believes marketing as a percentage of revenues is becoming a more accurate measure of efficiency than CAC.

Price tgt goes to $75 from $72.

- BB&T notes that the company raised Q1 07 guidance from its initial thoughts on January 31, 2007. It raised Q1 revenue guidance by $5 M, to a new range of $205-$215 M, and EPS by $0.06 to a new range of $0.88 to $0.92. These figures are up 40% and 47%, respectively, from Q1 06. Firm thinks the major difference in guidance between Jan 31 and yesterday was the company's pullback from some ineffective media buys, which both raised advertising costs and decreased conversion rates earlier in the quarter.

NutriSystem also provided its first take at FY 07 guidance, at $3.00 to $3.10, significantly above $2.89 consensus and firm's $2.95 estimate. Factors contributing to 2007 growth should include a roughly 20% increase in media spending, targeting new customer segments such as
seniors, while continuing to penetrate men's and women's markets. This should drive roughly 25% revenue growth and roughly 35% EPS growth, with cost of goods being the most significant leverage point in the income statement.

- Stifel is the most negative of the bunch, noting that they have, since the outset, been focused on the negatives and continue to do so. Firm believes the company uses marketing gimmickry to convince customers to use its program and they believe the company has been very successful thus far because the market is so large. Firm believes the satisfaction rates of its overall customer base is low (online third-party opinion surveys) and they believe that there are several components of the NTRI's advertisements that are not inline with management's comments in 4Q06 press release of having a singular focus on its customer. Firm knows companies that have a singular focus on the customer such as Amazon and Blue Nile, and the NTRI consumer value proposition does not qualify, in their opinion. NTRI ads suggest five meals per day yet only four of the eighteen components of daily diet are purchased from NTRI (4/17 for women), the three NTRI foods and snack amount to approx 700 calories daily, low cost of $294 becomes $400-$450 after adding supplements, and convenience (the non-NTRI foods require grocery visits and refrigeration in many cases). Also, the average customer stay is 8.9 weeks which means the company churns its customer base 1.5x per quarter.

- Kaufman says that while the company continues to grow and deliver, the stock has become a target of the expectations game. While this is unavoidable for growth stocks, firm believe the share buyback will help in reducing the volatility in the stock. With confidence restored by the new guidance, firm believes that the stock has acquired characteristics that can be appreciated by both growth and value investors.

Notablecalls: Strange turn of events in quite a short time as the company upped the Q1 guidance provided just few weeks ago. While the guidance for Q1 and 2007 is better than expected, the Q1 guidance fluctuation shows how exposed the numbers (and even more, the stock) is to marketing experiments by the mgmt. As such, don't think the stock will command the multiples it used to enjoy before outset.

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