Scott Devitt: NutriSystem's Market Cap Doesn't Reflect Competitive Threats (NTRI)

| About: Nutrisystem Inc (NTRI)
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Stifel Nicolaus analyst Scott Devitt on NutriSystem's Q4 2005 earnings:

• We continue to rate shares of Nutrisystem Hold, and do not recommend purchase at current levels. We believe the company faces longer-term competitive threats which are not appropriately reflected in its current market capitalization.

• NutriSystem reported fourth quarter revenues of $69.6 million, an increase of 783% compared to $7.88 million in 4Q04. Net income increased to $6.3 million or $0.17 per share. We had expected revenues of $70.0 million and EPS of $0.16.

• The company added 110,200 direct channel new customers, an 828% increase from the 13,300 new customers added in 4Q04.

• The company reduced its new customer acquisition cost from $179 in the year-ago quarter to $143 in the fourth quarter of 2005.

• For full year 2006, we expect revenues of $422.6 million and EPS of $1.41. For 2007, we estimate revenues of $541 million and $1.64 in EPS.

Results

NutriSystem reported fourth quarter revenues of $69.6 million, an increase of 783% compared to $7.88 million in 4Q04. Operating income grew significantly to $9.66 million in 4Q05 from a loss of $1.2 million in 4Q04. Net income increased to $6.3 million or $0.17 per share in 4Q05 from a loss of $605,000 and a loss of $0.02 in 4Q04. We had expected revenues of $70.0 million and EPS of $0.16. The company ended the quarter with $45.97 million in cash and cash equivalents and spent approximately $3.2 million in capex during the quarter.

Direct channel revenues were $65.3 million in 4Q05, up by 828% over 4Q04. The company added 110,200 direct channel new customers, a 725% increase from the 13,300 new customers added in 4Q04. Gross margin increased to 49.1% in the quarter from 43.8% in 4Q04. Direct channel gross margin was 51.6%. Operating income was 13.9% of revenue compared to an operating loss in 4Q04.

The company reduced its new customer acquisition cost from $179 in 4Q04 to $143 in the fourth quarter of 2005, though up from $129 sequentially. Non-media spending in marketing accounted for about $900,000, down from about $1.5 million in 3Q. Marketing as a percentage of revenues decreased from 23.9% in the third quarter to 22.9% in the fourth.

On a per customer basis, revenues per direct customer has averaged approximately $605 over the course of the last nine months of 2005. In the last nine months of 2004 this averaged approximately $520. This represents an increase in dollars per customer of about 16%.

Outlook and Conclusion

For 1Q06, the company guided to a revenue range of $122 million to $127 million and EPS between $0.40 and $0.42. For 2006, the company guided to a revenue range of $415 million to $425 million and EPS between $1.36 and $1.46.

We estimate 1Q06 revenues of $12.35 million with operating income of $24.1 million and EPS of $0.42. For full year 2006, we expect revenues of $422.6 million and EPS of $1.41. For 2007, we estimate revenues of $541 million and $1.64 in EPS.

We continue to rate shares of Nutrisystem Hold, and do not recommend purchase at current levels. We believe the company faces longer-term competitive threats which are not appropriately reflected in its current market capitalization.


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