Stock Showdown: Weight Watchers vs. Nutrisystem

by James Brumley | August 5, 2013 10:40 am

With Weight Watchers International (WTW[1]) and Nutrisystem (NTRI[2]) being close competitors in the same industry, you might think the two would dole out a fairly comparable performance for investors.

You’d be wrong, though … at least if you’re talking about recent results. Nutrisystem shares are up 66% since mid-April, while Weight Watchers shares are off 30% since mid-February (most of which was driven by Friday’s 19% plunge).

What’s the deal — and more importantly, what’s next?

Kaboom!

What’s the prod for a one-day, 19% plunge from a stock? For Weight Watchers, it was drastically lower guidance for the remainder of the year. Although Q2’s operating profit of $1.39 topped estimates of $1.11, the company lowered 2013’s previous profit estimates by about 4%.

It’s a minor contraction in the outlook, in terms of percentage. But, the market didn’t like the colors the media used to paint the alarming picture; big holes in Weight Watchers’ game plan were exposed. One of the biggest holes was a lack of competitiveness on the web-based front. Although WTW provides online weight-management tools for its members, similar apps are available for free.

The net result of losing ground because of free web-based tools is fading paid memberships … and therefore deteriorating revenue. The total number of members who attend meetings are projected to fall somewhere around 15% in 2013, on the heels of 2012’s 10% drop in meeting attendance. Online-only members are expected to slump by just a single-digit percentage this year, but after last year’s 10% improvement in online membership, that’s an alarming swing that, given the growing amount of competition from similar but free apps, could turn into a nasty trend.

Throw in the fact that Weight Watchers’ debt of $2.4 billion is now a tad greater than the company’s market cap of $2.1 billion, and it’s tough to imagine how it’s ever going to dig itself out of a very deep hole.

To the Moon!

While Weight Watchers has been getting drubbed, Nutrisystem has been on a roll. The stock is up 66% in just the past few months, with the latest leg of the rally inspired by (and this must be maddening for WTW and its investors) raised guidance for the rest of the year. NTRI expects to earn about 10% more in 2013 than it had previously forecast.

That’s not to say 2013 has been easy or even good for Nutrisystem. Second-quarter revenue fell nearly 22%, and earnings slumped 29%, from 31 cents per share in Q2 2012 to 22 cents this time around. The decline in earnings for last quarter is just the latest in a long string of shrinking profits. Ditto for sales, which have fallen every year from 2007’s peak of $776 million, down to last year’s $397 million. This year’s top line is again projected to be weaker.

So what, pray tell, could spark a 66% rebound in a stock that’s clearly fighting a severe uphill battle? Simple: Glimmers of hope for a turnaround.

One of the bigger glimmers is its newest major distribution channel … Walmart (WMT[3]). The partnership started in April with around 2,000 Walmart stores putting Nutrisystem’s 5-day ‘Jumpstart’ kit on their shelves. As of last month, that relationship was expanded to nearly double the number of Walmart locales.

The biggest factor of all, however, is new CEO Dawn Zier, who took the helm in November and is largely credited with getting the Nutrisysytem brand into Walmart’s merchandise mix. She’s got the chops to do more, too, not because of her expertise in food-marketing, but because of her experience in consumer marketing; she oversaw the marketing of Readers Digest for several years, getting measurable traction for the struggling print magazine before it withered away into the fog of the digital age. Translation: She knows how to sell a relatively mundane product to the masses, like using the right celebrity endorsements (e.g. Melissa Joan Hart).

The Winner Is …

Given the comparative performance of the two stocks, it would be easy to call WTW an oversold equity ripe for a bounce and deem NTRI an overbought name that’s ready to pull back. But, in the case of Weight Watchers vs. Nutrisystem, the results each stock has seen of late are deserved. And more of the same (respectively) could be in store.

Despite how clear Weight Watchers’ problems are — free competing apps and waning interest in attending meetings — there’s still no real plan to overcome them. Conversely, Nutrisystem has yet to fully reach the full potential of its relationship with Walmart, and Dawn Zier has just gotten started as CEO.

Throw in the fact that Nutrisystem has no long-term debt to nag at its growth for years, and NTRI is hands-down the diet plan name to own — even with a somewhat frothy forward-looking P/E of 26.

The turnaround has just begun.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WTW: http://studio-5.financialcontent.com/investplace/quote?Symbol=WTW
  2. NTRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTRI
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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