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The third quarter proved mixed for diet companies. Nutrisystem (NASDAQ: NTRI ) bumped up 12% after hours Monday. Weight Watchers (NYSE: WTW ) fell 15% after market close Wednesday following a report so bad the dividend was suspended. The companies remain optimistic with diet season kicking off in two months.
The first couple of months in the year prove lucrative for diet companies thanks to all of the New Year's weight-loss resolutions. While both companies stand to gain, only one has a turnaround plan with potential.
Nutrisystem brought on a new CEO last year who implemented a four-point turnaround plan for the company, which suffered from the post-recession wariness about spending money on diet plans. Point one focuses on product innovations.
The company specializes in home-delivered meal packages that mostly focus on shelf-stable breakfasts, lunches, dinners, and desserts. Customers supplement the meals with fresh fruit, vegetables, dairy, and meat. Specific meal plans are available for men, women, and diabetics. They start at $230 for a 28-day supply. Previously, customers were limited to predesigned plans with set menus. Nutrisystem now includes a customized plan that allows customers to select items from the renovated menu.
Nutrisystem has also continued to move further into brick-and-mortar retail sales. Retail currently accounts for less than 5% of revenues, but this could double next year. And the retail presence offers a valuable opportunity to get products directly into customer hands.
Earlier this year, the company launched the Nutrisystem 5-Day Jumpstart Weight Loss Kit -- a $45 package of meals and snacks that serves as a sneak peek into the company's system. A diabetic-tailored version of Jumpstart received certification by the American Diabetes Association. The Jumpstarts fueled Nutrisystem's spring partnership with Wal-Mart, which would put the products in more than 2,000 stores.
The Jumpstart kits could prove a boon to Nutrisystem's 2014 diet season because they offer an impulse-buy option for shoppers who have diet resolutions but no specific game plan in mind.
Nutrisystem earns money from the sale of products. That's why these two companies had decent third quarters. Weight Watchers makes most of its money from memberships that provide access to its online plan tools, which basically help users track food based on a points system, and from its in-person support meetings. hat's proving an outdated model with the proliferation of free online tracking sites such as MyFitnessPal that offer easy-to-follow nutrition tools and social networking.
Weight Watchers does sell a wide range of food products in stores, but those products only accounted for about 18% of third-quarter revenues.
What about Herbalife?
Hedge fund manager Bill Ackman famously called Herbalife (NYSE: HLF ) a pyramid scheme and has called on regulators to shut it down. Herbalife is a multilevel marketing company in the vein of Amway. Products are sold by independent distributors who can make more money through recruiting other sellers.
Regardless of whether Herbalife is a pyramid scheme, the MLM model oozes volatility. If regulators did decide on a crackdown, Herbalife's tower of nutrition shakes could come tumbling down.
Foolish final thoughts
Consumer confidence -- or the lack thereof -- will continue to put pressure on the weight-loss companies. However, Nutrisystem's turnaround plans make it easier for customers to get a taste of what the company offers. Would I invest in Nutrisystem tomorrow? No. But I am putting the company on my watchlist.
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