What Does Nutrisystem Tell You About the Weight Management Industry?

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The obesity epidemic is growing almost as fast as the number of companies trying to capitalize on it. As an investor, how can you pick which ones will be successful at trimming waistlines instead of trimming your wallet? Following the results from Nutrisystem , Herbalife , and Weight Watchers International , the answer may be those that make money from selling consumable products rather than selling ideas. Nutrisystem and Herbalife reported results that satisfied the cravings of investors, while Weight Watchers left them hungry for more.

Nutrisystem reported results on Oct. 28. Following the results, its stock soared to new two-year highs. Revenue was up 5% to $85.4 million. Adjusted operating income rose 36% to $6.5 million. Adjusted net income jumped 48% to $4.3 million, or $0.15 per share. CEO Dawn Zier said about the rise in revenue and customer count, "across all channels for the quarter is a strong sign that our strategy is beginning to take hold."

Any time you see a company growing in all areas, it suggests the quarter wasn't just a fluke. Expect to see more growth in the quarters ahead. Zier also mentioned the improvement in Nutrisystem's costs. This explains why the bottom line blew up so much more than the top line. Even minor cost improvements on revenue tend to allow that revenue to drop straight to the bottom line as net profit. Zier sees the positive momentum picking up over the long term. This suggests that Nutrisystem, which mostly sells food to help people lose weight, will continue to slim bellies and fatten investor wallets.

Herbalife reported results on Oct 28. Though the stock was met with a lukewarm response for other legal, non-product related reasons, its sales and profits were excellent. Revenue was up 19% to $1.2 billion, and operating income rose 19% to $192 million. This resulted in adjusted net income of $152.1 million, or $1.41 per share, up 36% compared to 2012. Not as good as Nutrisystem's income growth percentage, but very good nonetheless.

CEO Michael Johnson said it was the company's 16th consecutive quarter of double-digit revenue growth. The company guided for around a 17% increase in sales for 2013 and around another 10% for 2014. The No. 1 reason Johnson provided for this was increased demand for the company's products due to increased worldwide obesity.

It's important to keep in mind that although the financial results of Herbalife appear very good, there's significant legal risk associated with the company. The 10-Q filed with the SEC warns that it's possible the FTC could bring enact an enforcement action against Herbalife for the "testimonials in the advertising and promotion of our products, including but not limited to our weight management products and our income opportunity." Herbalife believes it is in compliance with its own marketing materials, but it obviously cannot control the actions of every single one of its distributors. Their actions could come back to haunt Herbalife and could negatively affect the business. Herbalife firmly believes it hasn't done anything wrong, but it has not discounted the possibility that the FTC may see things differently, stating the risk is the "ambiguity surrounding these laws." In other words, it believes the FTC may enforce an action Herbalife believes it doesn't deserve, but it would still hurt its business.  

Weight Watchers International
Weight Watchers reported on Oct. 30. Following the results, the stock got kicked in the gut, falling as much as 21.1%. Revenue dropped 8.5% to $393.9 million, operating income dropped 5.7% to $124.5 million, and net income dropped 10.5% to $60.3 million, or $1.07 per share.

While Weight Watchers' operating margins improved a bit, this could not make up for its sales or outlook. In addition, Weight Watchers elected to suspend its dividend. This sent a strong message that management expects things to get worse. CEO Jim Chambers warned, "2014 will be a very challenging year." The rest of its earnings release said little to nothing about why things are going from bad to worse.

In its conference call, however, Chambers explained that the problem was a wave of "free apps" that was hurting its ability to recruit new members. Apparently a growing number of customers don't want to pay for diet plans or advice to help them with weight management but are more than willing to pay for diet-related food or drinks. Chambers confessed, "The consumer has changed and we haven't kept pace."

Final foolish thoughts
The battle of the belly is starting to win over consumer dollars from food sales rather than just plans. Nutrisystem remains an enticing investment idea as it has very strong growth in all metrics without the legal drama (and risk) of Herbalife. Watch Nutrisystem's earnings and listen to management's comments in future releases to make sure company optimism continues to bear fruit.

The article What Does Nutrisystem Tell You About the Weight Management Industry? originally appeared on Fool.com.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool owns shares of Weight Watchers International and has the following options: long January 2015 $50 calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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