Bad news for NutriSystem
The fast-growing diet company stalls in the economic slowdown.
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| What's for dinner? Some highlights of NutriSystem's menu. |
(Fortune Magazine) -- Can NutriSystem still produce fat profits if cautious consumers stop spending money to slim down? Last year we recommended the stock of NutriSystem, which was No. 1 on Fortune's 2007 list of 100 Fastest-Growing Companies. But the weakening economy and the pullback in personal spending have hurt the company, which sells diet programs based on its prepackaged meals. The stock is down 64% since we cited it a year ago. (Ouch!)
To their credit, NutriSystem (NTRI) executives have been sounding the alarm. In February they warned that a slowing economy could squeeze the company's typical customers - middle-class Americans. After revenue fell 9% in the second quarter (typically a strong period for diet companies as people start thinking about the beach) and profits slid 25%, president and chief executive Joe Redling again sounded cautious about the company's near-term outlook, noting that consumers are clearly feeling the pinch from housing woes and higher food and gasoline costs.
The company estimates that 2008 revenue will come in at $700 million to $720 million, down from 2007's $777 million. It also said that rising food prices put pressure on profit margins, which shrank to 50% in the second quarter from 54% the year before. Redling said they would continue to shrink. The gloomy outlook led analysts to lower their stock price targets. Citigroup's (C, Fortune 500) Gregory Badishkanian, for example, cut his to $25 from $29.
NutriSystem is taking steps to boost growth. It will introduce a frozen-food line late this autumn, hoping to appeal to new customers who want more than the original prepackaged options. It has also hired former AOL executive Scott Falconer to oversee call-center upgrades and lead a staff dedicated to retaining customers. Over the past few years the bulk of the company's revenue has come from first-timers. Repeat business accounted for only 12% of revenue in 2007, and the company is aiming for 20% in 2008. "We want customers to have success with us, and we want them to come back and use us to maintain their weight," says spokeswoman Cindy Warner.
The company is also experimenting with raising prices, but it will tread carefully: One of its competitive advantages is that its programs are less expensive than those of rivals like WeightWatchers (WTW) and Jenny Craig.
Despite the slowing growth, NutriSystem, based in Horsham, Pa., remains financially strong. At the end of June it had $62 million in cash and almost no debt, and the business doesn't require a lot of investment: Capital expenditures totaled only $3 million in the second quarter. The company's cash flow easily covers the 17.5-cent-per-share quarterly dividend it started paying this May.
One caveat for investors is the fact that no one can know when consumer spending will recover, and consumer-related stocks will continue to suffer until it does. Most analysts covering NutriSystem take a neutral stance: There's no compelling reason to buy the stock now, but if you already own it, you may want to hang on and wait for a recovery. 
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