NutriSystem Warns, Blames Glaxo's New Diet Pill

NutriSystem late Wednesday warned that it expected quarterly earnings of 62 cents to 66 cents a share, down from an earlier estimate of 77 to 82 cents a share and well below Wall Street's consensus forecast of 82 cents. The company put sales at $188 million, a 19% increase from a year ago but less than earlier guidance of $200 million to $208 million.

Based in Horsham, Pa., NutriSystem said it expected 218,000 new customers for its prepackaged dietary foods business in the third quarter, a 7% decline from last year and below an earlier estimate of 245,000.

"We continue to be satisfied with our success in reactivating former customers, but our performance with new customers we believe was affected by shorter-term competitive pressures which caused our marketing dollars to become less efficient, resulting in fewer new direct business customers than anticipated and customer acquisition costs to be higher than anticipated," Chairman and Chief Executive Michael Hagan said in the company's preannouncement.

The direct business, which ships dietary foods to customers, came under pressure from Alli, an over-the-counter diet pill sold by GlaxoSmithKline (GSK) that came on the market in June. The drug blocks the absorption of fat and is taken at meal times. Alli is a form of Orlistat, Glaxo's prescription weight-loss aid.

The earnings warning generated a spate of downgrades to the stock. Analysts at Lazard Capital dropped NutriSystem to Hold from Buy, Broadpoint Capital cut it to Buy from Strong Buy, Canaccord Adams to Hold from Buy, and Kaufman Brothers to Hold from Buy.

Nationally, there's plenty of demand for weight-loss products. About a third of American adults are obese, according to researchers at Emory University's Rollins School of Public Health in Atlanta, who on Tuesday published their findings online in the policy journal Health Affairs.

Analyst Bill Sutherland, at Philadelphia-area investment firm Boenning & Scattergood, says NutriSystem did very effective marketing using retired professional athletes such as the Miami Dolphins' Dan Marino and the Philadelphia Phillies' John Kruk. The latter, a portly ex-baseball player, cheerfully proclaimed that his wife told him "since I've started losing weight on NutriSystem, I'm not as disgusting as I used to be, and that I'm not half-bad looking anymore."

When Alli hit the shelves in June, NutriSystem seemed ready, Sutherland says.

"Based on the company's commentary when they reported in the second quarter, it seemed that they had calibrated things pretty carefully for Alli's arrival," he says. "They'd seen it hit the market, they'd seen it have some impact — and they also believed that impact would lessen over time after the initial marketing effort."

Nope.

"Clearly, we had underappreciated the competitive impact of Alli, whose target market coincides significantly with that of NTRI," Kaufman analyst Sameet Sinha wrote Thursday. "Since new customer acquisition is an integral part of NTRI's business model, we feel the impact from Alli will continue to take its toll on the company. While it was once easy to acquire customers, it may become increasingly difficult to do so now."