NutriSystem: The Wal-Mart Effect

“I do want to take a check on some shares of Nutrisystems moving sharply in the after hours session. You see the spike there. There is news it has reached a deal to sell its meals at Walmart. Certainly a huge boost selling its meals at the world’s biggest retailer. I mean, this is a huge story for as a matter of fact, it was September 17th that there was an enormous amount of call buying looking at the up-side strikes at the time. They already got one move up to stock pulled back again, and now you get this today. This is a big announcement for Nutrisystem.

Big short interest in this stock as well. So people are going to get squeezed probably big-time look for a big volume day. But this stock should continue higher.

Isn’t it amazing as an owner of Walmart everything you mention in a sentence with Walmart runs. Walmart just stays flat. Slow and steady.” — CNBC’s Fast Money 10/5/2009

Shares of Nutrisystem (NTRI) surged more than 25% in morning trading after yesterday’s announcement that their health food starter pack will be appearing at a retail store for the first time. Well, this is not just any retail chain, the two-week starter meal pack will be available at more than 3200 Wal-Mart (WMT) stores. The packs will sell for $148 and will also be available on the world’s largest retailers website. The positive reaction to the product placement has sent the stock higher, and in addition to that there are undoubtedly a number of shorts covering their positions (click chart to enlarge).

This is a huge development for the company and will get their products much wider exposure. Management said that they are not anticipating a spike to fourth quarter results because the company will not make a marketing push before the holidays. However, that would lead us to believe that NutirSystem will make their big push for the post-holiday diet period, which is always a popular time. It is amazing the effect that just announcing that your product will be placed in a Wal-Mart can have on a company.

We are reaffirming our Fairly Valued valuation as of this week’s report. There is no doubt the placement in Wal-Mart will contribute to sales growth, but we prefer not to speculate about those future sales. Our methodology is much more adept at finding securities that are priced outside of their historically normal price ranges based on current, known fundamentals. After today’s 20%-plus run-up in the stock we do not think that the price is particularly attractive. For those that hold NutriSystem shares, this is great news and should contribute to sales growth which we can always cheer, especially since the company’s sales have yet to return to their peak of 2007.

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Comments

[deinvestor:]

Obviously the community doesn't understand the nature of direct response. NTRI is making these moves to retail because of recent FTC guidance that limits their use of testimonials, removes the "*results not typical" disclaimer, and requires their testimonials to reflect a "generally expected performance".

This means no more Dan Marino or Marie Osmand saying "I lost 35 pounds!". According to the this new guidance. It would not be "generally expected" for this product. These testimonials are critical to their marketing. Those are the only spots you see, right? Because they work.

DRTV makes up for 3/4 of their customer acquisition, and the revenue streams and profitability come from their recurring subscription.

WalMart may be okay, but they aren't hooking new customers into recurring shipments and auto billing, which will stifle their growth and earnings.

Nov 25 12:45 PM