Don't Blame Flabby Ex-Jocks for Nutrisystem's Woes

Fat jocks don't sell diet plans and cardboard is incredibly expensive. Those are two of the conclusions investors reached after Nutrisystem (NTRI) disappointed Wall Street a couple of weeks ago with sales that were suffering from severe malnutrition.

Even though the Horsham, Pa.-based weight loss company plowed an additional $3 million into marketing efforts last quarter -- the centerpiece of which were TV spots featuring formerly flabby football legends Dan Marino, Lawrence Taylor ("LT") and Don Shula -- revenue tumbled by more than $8 million. Even worse, the stock has shed 50% since Christmas.

It's understandable that investors would be alarmed by the company's results. Between New Year's resolutions to lose weight and the return of spring, this is supposed to be the best time of year for diet companies.

The ads, one of which features LT screaming through a megaphone "Pizzas, Pastas, Burgers, Meat! Come on... Guy food's all you'll eat!" with a bevy of cheerleaders behind him, have taken some heat for Nutrisystem's flabby earnings. True, paunches and man-boobs, even slightly more svelte ones, don't look good in tight golf shirts, but blaming an aging superstar like Taylor for the disappointing results misses the mark, analysts say.

It's not the jocks who've gone to seed that are eating up Nutrisystem's sales and profits. It's the unhappy fact that folks shopping at Walgreens (WAG), the nation's biggest drugstore chain, and Wal-Mart (WMT), the world's biggest retailer, haven't shown much interest in losing weight the Nutrisystem way.

Targeting Men the Manly Way

Nutrisystem's ad campaign uses the tried and true methods that have proven successful for Jenny Craig and Weight Watchers: before-and-after shots of famous people. The one key difference has been that Nutrisystem puts a lot more emphasis on marketing to men. In one ad featuring former football stars turned sports commentators, Bob and Mike Golic, Mike exclaims: "Nutrisystem lets you eat like a man! It's real food, for real guys."

"The type of TV spots they're doing hasn't changed in years," says Colin Sebastian, an analyst with Lazard Capital Markets. "They target more male customers so they use celebrity athletes. Dan Marino has been successful for them for a long time. It wasn't a creative issue with the ads; it was a pricing issue."

If anything, Nutrisystem wishes it could have spent more on TV ads, says Sebastian, but spots were too expensive over the last quarter to justify the added cost. "Celebrities pitch products and that drives sales," Sebastian says. "Nutrisystem would have advertised more if they could have gotten better rates."

A Nutrisystem spokesperson wasn't immediately available for comment, but CEO Joe Redling recently addressed the issue during a conference call. "Higher rates drove down the frequency of our advertising and thereby impacted call volumes," he said. In other words, fewer TV spots meant fewer folks called up to join the program.

A Bad Combo of Cardboard and Consumer Apathy

The real problem with Nutrisystem's business right now, the CEO said during the call, is that its massive push into retail stores like Walgreens and Wal-Mart has cost the company dearly.Shares in Nutrisystem soared at the end of 2009 thanks to its ambitious plan to roll out in-store displays in thousands of stores such as Wal-Mart's and Walgreens.

"All the displays you see in all these retailers, all of the card inventories, and everything getting ready to put us in all those doors... that's some costs," Redling told analysts and investors. "[A] good way to think of it," he acknowledged, is that Nutrisystem blew three-million bucks on cardboard.

The only store where this massive roll out has really paid off is Costco (COST), which tends to attract a customer base that is better off financially, says Sebastian. Wal-Mart, on the other hand, appeals more to cash-strapped consumers looking to stretch every penny -- and therein lies the problem. Whether its Nutrisystem, Jenny Craig or Weight Watchers, diet plans aren't exactly a luxury, but they are a discretionary purchase, Sebastian says. When so many Americans are struggling just to put food on the table, a $400 a month diet plan can be very hard to swallow.