Are Dieting Stocks in Jeopardy?

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Go ahead, have that second helping of dessert. Slightly overweight individuals have a better chance at cheating death than obese or skinny people, according to a recent American Medical Association study cited in Bloomberg. The study, which is published in the Journal of the AMA, concludes that people who are heavier than their ideal weight -- not obese -- are actually at a lower risk of dying than those who have attained an ideal weight.

Don't throw out your gym membership yet -- the study, which is based on a body mass index, has its critics. Even though the study considered nearly 3 million people from around the world, it did not discriminate on major factors including age, gender and the way that fat is arranged in the body. Researchers cited in the Bloomberg article also admit that a few extra pounds may benefit people who for health reasons are in need of extra energy the most.

Not So Fast

Clearly, studies like these must make the CEOs of major dieting companies heads spin, including Dawn Zier, the newly appointed chief executive of the struggling NutriSystem (NASDAQ: NTRI). In a recent CNBC interview, Zier said that NutriSystem, which she described as a direct marketing firm, welcomes the educated consumer.

Nonetheless, in addition to sluggish shareholders returns, NutriSystem's fundamentals, including cash from operations, earnings and sales, have been on the decline.

NutriSystem's Plight

<table> <tbody> <tr> <td> </td> <td><strong>2009</strong></td> <td><strong>2010</strong></td> <td><strong>2011</strong></td> </tr> <tr> <td><strong>Revenue</strong></td> <td>$524.6m</td> <td>$509.5m</td> <td>$401.3m</td> </tr> <tr> <td><strong>EPS</strong></td> <td>$0.92</td> <td>$1.12</td> <td>$0.43</td> </tr> <tr> <td><strong>Net Cash from Operations</strong></td> <td>$58.6m</td> <td>$66.9m</td> <td>$47.3m</td> </tr> </tbody> </table>

Turnaround Chops

Clearly Zier has to be a master turnaround artist to help NutriSystem's sagging bottom line. It's reminicent of the challenge ahead at another company, although it's not a weight loss business. In April 2012, Avon Products (NYSE: AVP) hired Johnson & Johnson gem Sherilyn McCoy, who in her new role had to stave off a takeover attempt from Coty and who is looked upon to turnaround the consumer product company's declining financials. 

McCoy has the chops for that type of assignment. At J&J, she was part of a business segment that generated nearly $40 billion in revenues and is credited for helping the company's pharmaceutical business introduce new drugs to the market while enduring some product recalls, as well.

Nonetheless, at NutriSystem, Zier, a two-decade Readers Digest veteran, has her work cut out for her. In 2012, for instance, the company expects that revenues will either be flat or lower than 2011 results.

Zier, who took the helm at NutriSystem two months ago, is no stranger to sinking ships. She was with Readers Digest when the company filed for bankruptcy protection in 2009 and saw her position eliminated when the company emerged from Chapter 11. Readers Digest found a place for Zier after the bankruptcy, but it's not surprising that she set her sights elsewhere.

Zier has initiated a turnaround strategy. Her four-point gameplan, which she outlined in the CNBC interview, includes 1.) delivering on fundamentals; 2.) focusing on improving profit margins; 3.) evaluating the marketing budget; 4.) and forming more long-term relationships with customers. Don't expect NutriSystem to lose its celebrity endorsements -- such as Janet Jackson -- but it won't keep spokespeople at the expense of relating to the average individual, she says.

Sitting Pretty

Zier's hope to form longer-term relationships with clients as opposed to simply selling them meals sounds a lot like the approach taken by rival Weight Watchers (NYSE: WTW). For Weight Watchers, customer turnover is the enemy. The company may attract clients based on its ability to help them shed pounds but Weight Watchers wants its customers to become sticky clients who stay with the company while creating a sustainable lifestyle trend. Weight Watchers had a banner year for profits in 2011 although in its 3Q 2012 earnings report the company narrowed its 2012 earnings guidance amid the impact from Hurricane Sandy.

<img src="/media/images/user_13739/mf-nutrisystem_large.png" />

Despite the AMA's recent findings about carrying some extra weight, more than 50% of Americans will attempt to shed some pounds in 2013. If NutriSystem or Weight Watchers can turn those dieters into life-long customers, it will be good news for shareholders. Meanwhile, Weight Watchers' 50-year track record seems like a safer bet for investors.


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