NutriSystem Pulls Its Weight

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The overall cost isn’t much more than what people spend on normal food, plus customers like the convenience of having the meals dropped at their doorstep once a month. People also appreciate the anonymity, as opposed to having to go to a location and waiting in line to weigh in and check points, he says.

On the downside, however, “Some of [the food] is not too tasty and you get tired of it,” despite the appearance of variety, he adds.

NutriSystem hopes to address that by introducing a premium-priced line of frozen entrees that will supplement the existing shelf-stable meal plan. The company is now testing those products and plans to roll them out later this year.

“That should help stir some interest [among consumers] and help retention [so that] people won’t give up so easily” on the weight-loss program, Sutherland says.

There are other new initiatives underway at the NutriSystem that could eventually add to its profitability, too.

There are a number of ideas that Redling plans to put in place to make the online model more central to the company’s sales strategy, says Sutherland. It plans to improve the customer experience by offering counseling to customers, which would strengthen the communal aspect of the diet products.

In an Apr. 8 research note, Sutherland mentioned a two-week-free promotion that NutriSystem is posting on its web site that offers customers who stay on the Nourish plan for a second month an additional other free week of food. Since the only incremental cost of this program is food and shipping, the company’s earnings before interest and taxes would go from slightly negative in the first month to a direct EBIT margin of 45% in the second month, he wrote in the note.

But gross margins will likely fall by more than 2% to 51% on higher food and freight costs, he said. After a spike in the first quarter, marketing costs as a percent of revenue should average 22% to 23% for the balance of 2008, he said.

The company has also invested in a water filtration system called ZeroWater aimed at the consumer market, which will be marketed through NutriSystem and will be its first effort to diversify its products, according to Sutherland’s note. Management believes ZeroWater will turn profitable toward the end of 2008.

NutriSystem also has its eye on international markets, with plans to launch in the United Kingdom in 2009 and in Germany, probably with the help of a local partner, sometime later, Sutherland wrote.

Bogoslaw is a reporter for BusinessWeek's Investing channel .