Nutrisystem (NTRI) is trading sharply lower today (-24%) after reporting disappointing Q4 results/guidance last night. The Q4 results were decent, but a drop-off in new customers caused Q1 guidance to come up well short.
In terms of quick background, NTRI is a provider of weight management products and services. Typically, its customers purchase monthly food packages containing a 28-day supply of breakfasts, lunches, dinners, snacks and desserts, which they supplement with fresh fruits, vegetables and dairy. Additionally, NTRI offers counseling options from trained weight loss counselors and registered dietitians. Nutrisystem sells its program primarily through a direct-to-consumer (DTC) approach using commercials and online ads. Its program does not require customers to visit centers, measure foods or count calories.
Over the past few years, NTRI has invested in ecommerce, made foundational investments and, perhaps most importantly, expanded into retail. A few years ago, NTRI was not in any retail store but now it's in Wal-Mart and other retailers. Improving product innovation was also key: Fast 5+ to jump start weight loss, its more upscale Simply Fresh offering and NTRI has expanded more into shakes. Being able to change menu items quickly has been another key area of focus. Also, NTRI acquired the South Beach Diet brand in late 2015 to launch its South Beach Diet program, an all-new structured meal delivery weight-loss program.
Turning to the Q4 results, non-GAAP EPS came in at $0.42 while revenue rose 20.5% year/year to $131.2 mln. Both results were actually better than market expectations. The problem mostly stems from the guidance. For Q1, NTRI expects EPS of just $0.03-0.08 and revenue of $204-209 mln. Both numbers are well below market expectations. The full year 2018 guidance was also below market expectations: EPS of $1.99-2.09 and revenue of $685-705 mln.
So what is going on? The company says its Nutrisystem brand had a slower than expected start to the Diet Season (New Year's resolutions drive Q1 results). Its ad campaign failed to generate more new customers versus last year. What has been a highly successful creative approach has shown some fatigue in early 2018.
On the call, NTRI said its creative approach worked extraordinarily well for four years, but got tired as it increased airing the same commercials over and over. Its 2018 campaign failed to break through and convey enough newness and excitement about the program. NTRI is working on a creative revamp of its advertising designed to refresh the look, more clearly articulate its brand strength, and focus more on new program elements.
A second related point is that NTRI underestimated the viewership shift away from certain news stations in a post-inauguration January and February timeframe. NTRI also came in a little heavy on some of its upfront ad buys. As a result, NTRI did not spend and optimize its media mix as quickly as it could have as eyeballs shifted to other stations.
To fix the problem, the company is in the process of revamping its advertising and rebalancing its media buys. Importantly, NTRI views this as a temporary and fixable setback and they anticipate returning to meaningful growth in 2019. All other key metrics around the business are sound and continuing to grow.
On the positive side, NTRI says it's seeing extraordinary growth in its South Beach Diet program thus far in 2018. And the company believes this growth is just getting started. Also, its Nutrisystem Lean 13 program and Nutrisystem for Men program had very strong consumer appeal as did its newly launched South Beach Diet. Also, NTRI saw continued growth in its shakes and a la carte sales.
In sum, this drop off in new customers was unexpected and took the market by surprise. It spooked many investors which caused the stock to sell off today. Hopefully, the company is right and this is just a temporary setback but time will tell. We will see if their new ad campaign can reinvigorate growth. On a final note, in addition to earnings, the company did increase its quarterly dividend by 43% to $0.25/sh. With this large increase and the lower stock price, NTRI's dividend yield has jumped to 3.3%, which is quite attractive.