Effective Marketing: Are Celebrities Right About Nutrisystem?

What do Dan Marino, Billie Jean King, Charlie Manuel, Angie Everhart, and Marie Osmond have in common? They all claim to have lost a significant amount of weight due to Nutrisystem NTRI and its proprietary weight loss regimen. While there seems to be a lot of consumer support for the product itself, is Nutrisystem a prudent investment for investors?

Nutrisystem's underlying business model appears to make sense and can be easily sustainable, if the product actually works. Nutrisystem essentially manufactures food that is deemed as healthy, yet delicious. It ships out the food along with preparation instructions to clients, and the clients are to follow the instructions to a T. While the model seems straight forward, Nutrisystem's success is dependent on one thing: their client's weight loss. Clients cannot stray from the Nutrisystem diet, whether it is an extra candy bar or an extra helping of an entree.

This presents a large risk for Nutrisystem. Basic nutrition dictates that caloric intake along with proper management of macronutrients, like fat, protein, and carbohydrates, will result in gradual fat loss. Nutrisystem's product gives clients food like pizza and ice cream, however the portions are extremely small. This means that an obese customer, accustomed to eating hefty portions for his meals, could easily have trouble getting used to tiny portions, just to salvage taste. It may be easier for him to eat a large portion of salad.

Considering that Nutrisystem's future prospects of revenues along with client loyalty and referrals are dependent partly on their clients' discipline, Nutrisystem has to aggressively market its product to continue revenue and EPS growth.

It appears that the company has been unable to increase revenues since 2007. Since 2007, revenues have dropped from $777 million to $510 million. Operating expenses, including salaries and marketing, have decreased along with revenues. While salaries should certainly decrease, marketing expenses may be better suited to increase, in an attempt to garner more clients. Ultimately, the net income for the company has been waning over time. In 2006, and 2007, the net income was $85 million and $104 million, respectively. In 2010, the net income was $34 million. Kind of like the Atkins diet, the appeal of Nutrisystem may have been more of a fad rather than a home run product.

Correlating with its diminishing net income numbers, Nutrisystem's cash position has slowly been dwindling. In cash flow from operations, the slowed growth is primarily due to working capital changes. Over the last several years, the company has increased property, plant, and equipment purchases, which may signal attempts to grow the company. Lastly, the company's stock repurchase programs and dividend payments have been squeezing cash from the company's pockets. Progressively, Nutrisystem has experienced cash outflows over the past few years.

Nutrisystem offers a product that many Americans are vying for. Delicious food that can help you lose weight. It comes with a major caveat, and requires clients to eat small portions of the product. In any event, the product's efficacy seems to be reflected in its earnings and cash growth, or lack thereof, over the past few years. Investors who are still compelled with Nutrisystem's business model should read more testimonials about retail clients, understand the company's marketing strategies, and learn more about management's plans for future growth and plans to cope with increasing competition in the weight loss industry.

Nutrisystem is currently trading at about $11.72, down almost 45% for the year.

ACTION ITEMS:

Bullish View:
Traders who believe that Nutrisystem is an appropriate long investment might want to consider the following trades:

• Nutrisystem's business model provides almost 50% of American consumers a highly desired product. The product is also clinically safe and effective when properly applied.

• Various celebrities have endorsed Nutrisystem, legitimately losing weight from the product.

• Nutrisystem's marketing campaign is extremely aggressive, advertising on television everyday on multiple stations.

Bearish:
Traders who believe that Nutrisystem is more suited for a short play may consider an alternate position:

• Nutrisystem seems to have experienced declining revenues over the last several years, which may mean it is losing market share.

• Critics believe Nutrisystem is a fad, just like the Atkins diet and the South Beach diet.

• Nutrisystem's product relies on clients to have a high level of self discipline and prevents them from eating large portions. This increases the risk of failures if clients cannot handle eating small amounts.

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