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Tipping the Scales
With people generally leading more sedentary lives these days, and calorie-rich processed foods becoming increasingly central to the everyday diet, the world is getting fat. Indeed, the number of overweight and obese people in the United States alone now exceeds 180 million (according to the Centers for Disease Control), or some 60% of the general population. What’s more, the worldwide total (of overweight and obese people) is expected to reach approximately three billion by the year 2015, up from 1.7 billion or so today, or more than a third of the projected population. The sharp rise in obesity is certain to bring with it a higher incidence of weight-related health issues, including diabetes and heart disease, as well as increased strain on global healthcare budgets. That said, with great challenges come great opportunity. And the obesity epidemic truly represents a huge money-making opportunity for both the providers of weight management/reduction solutions and their shareholders.
Within The Value Line Investment Survey, Weight Watchers International (WTW) and NutriSystem (NTRI) represent compelling investment plays on rising obesity. In a nutshell, the two companies market behavior-modification programs for people struggling with “the battle of the bulge”. New York City-based Weight Watchers arguably takes a more-holistic approach, with regular (group) support meetings representing the centerpiece. NutriSystem’s bread-and-butter, meanwhile, is built around a program of prepackaged meals and snacks, comprising over 170 different portion and nutrition controlled food items.
In order to generate new business, both companies rely heavily on marketing and new diet programs that overlay their core philosophies. This is especially critical during January and February (the unofficial diet season), when people are trying to make good on their new year’s resolutions.
Aside from strong secular trends, Weight Watchers and NutriSystem benefit from the fact that, absent more radical measures on the part of dieters (such as gastric-bypass surgery), losing (or just maintaining) weight is a life-long battle for many people. As such, each prospective plan member has the potential to become a source of long-term recurring revenue and profits. On the downside, the broader weight management space is increasingly crowded with competitors, ranging from the makers of diet drugs to the marketers of exercise equipment.
With that in mind, NutriSystem and Weight Watchers have been on very different trajectories of late. Earnings at the former declined 62%, to $0.43 a share, in 2011, on 21% lower revenues of $401.3 million. In a still-tough economy (marked by high unemployment and relatively low consumer confidence), NutriSystem leaned heavily on promotions last year, figuring that low-priced deals would “optimize marketing efficiency” and lead to “higher conversion rates.” At the same time, new product messaging was virtually non-existent, as the Pennsylvania-based company sought to “maximize profitability and cash flow in a tough revenue environment.” Weight Watchers, on the other hand, posted record earnings of $4.11 a diluted share last year (up 60%, from 2010’s $2.56-a-share tally), driven by a 25% rise in overall revenues ($1.82 billion versus $1.45 billion). PointsPlus, the latest re-fresh to the company’s core weight-management program, resonated with dieters. A lighter debt load and heavy marketing support, with ads featuring the success stories of American Idol alum Jennifer Hudson and former NBA star Charles Barkley, also helped.
Going forward, a recent product re-fresh and celebrity endorsements (from the likes of pop star Janet Jackson and NFL Hall of Famer Terry Bradshaw) should help NutriSystem turn things around, lending much-needed support to flagging NTRI shares (down 44% over the past 14 months versus +110% for WTW shares). However, given, in part, the benefits of scale and Weight Watchers’ continuing success on the marketing front, WTW shares arguably remain a safer long-term selection.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.