NutriSystem Inc. (NTRI)
NutriSystem (NTRI) pre-announced that the third quarter would fail to meet expectations. The press release was issued after the close on Wednesday and immediately the stock dropped nearly 25% in after hours trading. While sales were likely up 21% to $188m, the company expects EPS to fall between $0.62 and $0.66. This compares $0.63 in the same quarter last year and basically represents no growth over the last year. The street consensus was for earnings of $0.82 this quarter so it is understandable that investors are very disappointed with the announcement.
Last time I covered NTRI, I discussed that the cost of acquiring new customers was increasing and that this was causing concern across the street. The most recent announcement now has customer acquisition costs (CAC) increasing from $182 per new customer last quarter to a range of $212-216 for the most recent quarter. At the same time, the number of new customers in the quarter were 218,000 which is 7% less than the same quarter last year. Thomas Weisel says that this statistic proves that we have reached a level of diminishing returns on marketing spending. Management stated that they were satisfied with the number of previous customers that they convinced to reactivate, but were disappointed with new customer adds.
It appears that the story with NTRI is now moving from a growth story to a mature company. This means that even though the firm is profitable and cash flow positive, its stock should receive a lower multiple because the earnings side of the figure is not expected to grow. Thomas Weisel has revised its 2007 estimates to $3.05 which represents a 33% growth rate from 2006. It also revised its 2008 estimate to $2.78 which actually represents a contraction in earnings. If this estimate is correct, investors can expect a very different valuation on the company.
Management stated that the board has increased the existing stock repurchase program which may provide a bit of support to the stock but will not have very meaningful effect. There is also a decent amount of short interest (myself included) in the stock that will likely cover at some point. This will also provide some support so I do not think this is the proper current environment to short into. However, just as last quarter, many voiced their belief to me that the stock had sold off too hard, it is possible that this new level near $35 could become “normal” for the stock and we could see additional selling below this level. At this point, I am thankful that the short has worked, I will trade around the position a bit, and I think the company will continue to have significant challenges.
FD: Author has short position in NTRI
I purchased this stock at $50. As of Oct 4, I am down 42% of my investment. Please suggest if I should sell the shares at current price, hold them or buy more to lower down my average. Response will be greatly appreciated.
Thanks.
October 4th, 2007 at 12:25 pmWhile I’m not giving advice… if it were me I would DEFINITELY NOT BUY MORE. You should write on a card in big red letters and paste it on the wall next to your computer “DO NOT AVERAGE DOWN”. That is a dangerous habit to get into. If a position is not trading the way you expect, it means your analasys was incorrect or your timing is wrong. The best thing to do is to liquidate the position to give you a clear head… Then after a day or two, go back to the drawing board and decide if you would like to make a brand new investment in the stock based on the information you have today…
Good luck with the stock and your investing. Its ok to be wrong - it happens to everyone. The true winners are wrong, but they are not willing to STAY wrong.
ZDS
October 4th, 2007 at 12:32 pmin the same category, retail distribution of nutrition and diet, Whole Foods Markets. wfmi. what is your perception of
October 4th, 2007 at 5:59 pm12 month bounce potential if any. wfmi. ?
Zach, grats on a great short! In this market it has been hard to be short anything the past few weeks so kudos to ya.
When you say trade around do you have an ultimate target for the stock lower? Are you taking any off the table here or just going full bore? I’d expect some dead cat bounce within a week at least, but you definitely caught the meat of the move!
October 5th, 2007 at 2:50 pmany new bright short ideas?
October 8th, 2007 at 9:54 pmThanks Mark, I’ve been out of town so just now getting back into the swing…
To walk you through my trading on NTRI, I shorted 3,500 shares on 8/17 and then another 2,500 on 8/30. on 9/14 as we touched the declining 50 day, I bought 75 of the Oct 65 puts. on 9/20 after we sold down near the previous low, I covered my stock, leaving the puts on the table. Then after the announcement, I bought in 2,500 shares (1/3 of my put position) to lock in some of the gains. I ended up selling that stock yesterday and will likely either turn out the puts before expiration, or buy in the stock soon to have the puts exercised against.
Borris - good to year from you… WFMI looking good off the low. I should do a little more digging as its been a while since I’ve traded this one. I don’t have any great new short ideas. There just don’t seem to be too many attractive set ups. But you will be the first to know when I get more short exposure.
Thanks for your comments guys and for reading!
October 10th, 2007 at 8:45 amZDS