The weight management industry is both large and competitive. Over the years companies have battled to take advantage of an overweight country by offering nutritional services to assist in losing weight. Below is a look at 4 companies that operate in the weight management industry and my outlook for the future of each company.
Weight Watchers (WTW) has experienced success because of its incredible advertising, its points plus program, and its services. The Weight Watcher system can be used on virtually any food product purchased at the grocery store. It uses a point system on each meal, which gives the member a variety of choices. If a member wants McDonald's (MCD) he or she can have it, however it may cost more points limiting the member's remaining intake for that particular day. The plan is based on nutrition, more so than calories, which promotes healthy eating habits along with losing weight. The company's choice to use Jennifer Hudson, a person Americans identify with, has helped the company seperate itself from the competition. She was a person that people could identify with as having a weight issue but worked the program and experienced amazing results. In my opinion this had a psychological affect on the consumer that knew of her appearance before Weight Watchers and as a result created an interest among consumers regarding the program. The choice to use a celebrity has been a success for the company that has become a trend in the weight loss industry.
NutriSystem (NTRI) experienced similar levels of success with strong advertising from athletes such as Mike Golic and Dan Marino. Yet, the two companies have split over the last 2 years as NTRI lost 46% of its value and WTW gained nearly 100% during the same period. The two companies were trading in similar patterns up until this time with similar advertising and a strong customer base. One reason for the difference in success for these two companies, I believe, is the access of the product for the potential customer.
It's hard to order pre-cooked meals from NutriSystem when I can buy anything I want from Kroger and it will probably be included in the Weight Watcher's point program. Weight Watcher is a more used program because most like variety, we don't want frozen food for every meal. And although NutriSystem offers variety the program itself revolves around its food with very little "cheating" involved. I am bearish on NutriSystem over the next five years. Competition is increasing and the consumer prefers the quick fix that is not reliant on a microwave at all times.
I believe there are two additional companies in this industry that present strong competition to NutriSystem. Medifast (MED) and eDiets.com (OTC:DIET) are both companies within the industry that operate with a similar concept as NutriSystem. Medifast offers science (pdf) behind the program with its plans heavily endorsed by physicians and health professionals because of its emphasis on Vegetarians, Diabetics, Seniors, and expecting mothers. EDiets.com is a much smaller company that is placing a new found emphasis on advertising through TV commercials and social media. The company offers incentives such as free meals for a week, provides a large support system, and is relatively cheap in comparison with the food bought in a grocery store. Over the last 2 years each company has experienced different levels of success and have a different future ahead.
Weight Watchers is continuing to place an emphasis on women, its point system, and technology, but is now placing more emphasis on men. The majority of Weight Watcher customers traditionally have been women. The company has launched new advertising, that is sure to be a success, that targets men. I believe this action along with its program being convenient will provide the company with even a greater level of success. The company is on pace to outperform in revenue, earnings, and profit margins year-over-year. The only issue I foresee with WTW is its high level of debt. The company has more debt than it does assets, and although it has improved, its debt-to-assets ratio is still far too high for an uncertain economy, which could leave the company vulnerable in the event of another recession.
NutriSystem appears to have found a trading range in $11-$13. It's also paid a dividend for each of the last 3 years with a yield of 6.05. However, I wonder how long the company will continue paying a dividend with its revenue and income experiencing such a steep decline over the last 4 years. I believe the strongest area of this company is its balance sheet with only $30 million in total debt. The company has the ability to change its focus or add to its business model to expand. I believe a change is necessary because there are too many companies that offer services similar to NutriSystem.
Medifast has a perfect model for long-term success with its emphasis on special needs. For people who have special needs it's difficult to find a variety of food that meets nutritional requirements. Medifast is the solution for many of these problems and the company is constantly changing plans and creating new ones that meet the needs of potential customers. With a market cap of $256 million the company shows every indication that it's growing for long-term success. The company has increased revenue, income, assets each of the last five years while maintaining a low level of debt. The company has been operational for more than 20 years but its success is recent and does not appear to be slowing down. I don't know that it will become the next WTW but there is a high demand for its service and I don't believe the potential has been reached.
There isn't anything particularly special in regards to eDiets that other companies on this list do not offer. But as a small company with a market cap under $20 million, I believe the company has potential. I do not believe it will grow and become WTW or even MED but I expect it to grow much larger that its current value. The company has consistently increased revenue over the last 2 years and is on pace to out perform in 2011, which means the company is earning more money, or more customers. The company has been in a transitional period for the last several years, and as a result its shareholders have suffered a loss of more than 90% during the last 5 years. The company's focus is now on meal delivery, which has been a transition from its online meal plans in the past. So far, the shift has experienced some levels of success with recent quarters of slightly negative EBITDA including positive EBITDA in Q1 which I believe shows a high level of progress. The company has increased revenue and is now placing an emphasis on advertising. I watched the company's new commercial and I was impressed; it offered success stories, the benefits of joining, and 1 week of free meals. In addition to advertising through commercials the company has been actively involved with the Biggest Loser television show, which I believe could have some affect on future members. As I said I don't expect this company to become WTW but with a $20 million cap I believe it's very likely that the company could experience a consistent EBITDA in positive territory with a market cap above $100 million in the near future. Therefore, I expect the company to grow as it has shown progress. Yet investors are tired of the company asking for a rights offering and always being told "one more quarter till success." As a result the stock has traded very low and is trading in a range between $1.40 and $1.50 where it fluctuates on a daily basis.
With competition at high levels a company in this industry needs more than just meal delivery programs. It needs to have a product or service that separates it from the competition. Weight Watchers has been successful because of its willingness and ability to change with great advertising and a service that is easy to use. I expect the company to continue growing as it places more emphasis on men and weight loss programs to meet their specific needs. Medifast, eDiets, and NutriSystem each offer a meal delivery program, yet over the next several years I expect different levels of success for each company because of the reasons listed above. However, the industry is growing and evolving and with more people placing an emphasis on their health I believe there is a platform large enough for each company to succeed. Yet if all these companies continue to place an emphasis on meal delivery, long-term success will not be achieved. The companies could possibly maintain but growth is unlikely. We live in a fast paced world where we eat our meals on the go more often than we sit down. The potential customer wants a product that meets this need and with the industry growing and demand increasing these companies must learn how to evolve and offer a product or service that separates it from the competition. WTW and MED are positioned for long-term success because of unique services. DIET is positioned for immediate success, and NTRI has reached its limit and needs to evolve or change for long-term success. These four companies each have a strong platform and the potential for success but each must continue, or begin, to innovate and adapt to the consumer's needs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.