NutriSystem stock hitting the skids

The Heard on the Street section of today’s Wall Street Journal discusses the meteoric rise of NutriSystems stock and the rapid cratering of same over the past few days. The stock has dropped about $20 per share to $44.05 over just the last few days. But don’t feel too bad for the majority stockholders–they bought in for 62 cents a share a few years back. From 62 cents in 2002 to $44.05 yesterday ain’t too shabby. (NutriSystem has been around for a long time, but went into bankruptcy in the early 1990’s–this new version is a retread.)
What’s NutriSystem? For those of you who haven’t seen the ads featuring MD’s hero Dan Marino pimping for it, NutriSystem is a weight loss program that sells prepackaged meals.

Unlike many rivals who work through franchisees, NutriSystem makes the bulk of its money through direct marketing, selling over the telephone, through the Internet and on the QVC Shopping Network.

Its customers typically buy monthly food packages containing a 28-day supply of breakfasts, lunches, dinners and desserts to which customers then add their own milk, fruit and vegetables. The monthly package costs roughly $300, depending on the program chosen.

NutriSystem’s typical customer, according to the company, is a middle-age woman weighing 210 pounds. The company also has been pushing to attract men and senior citizens. On average, the company says, its customers want to lose about 60 pounds. Most don’t. NutriSystem says its typical customer stays on its program for 10 to 11 weeks, including the one free week most get with their initial order, and lose between 1½ and two pounds a week.

Before I get into investment analysis mode, let’s evaluate the effectiveness of NutriSystem from a weight-loss perspective. It costs $300 per month for the prepackaged food. The typical customer stays on the program for 10-11 weeks, meaning that this typical customer purchases three month’s worth of food for $900. The average weight loss is 1.75 pounds per week (the average of 1.5 to 2). So the typical client loses 1.75 pounds times 10.5 weeks or 18.4 pounds. 18.4 pounds divided into $900 means that the it costs the typical client $49 per each pound shed. And you thought a low-carb diet was expensive!

Here comes the investment advice. When you follow it and get rich beyond your wildest dreams, remember ol’ Doc Eades and send a few bucks to his account at the old folks home.

Always invest in a new weight loss program that comes on the scene, watch your money grow for a couple of years, then sell out.

After taking care of thousands of people over the past 25 years I’ve come to understand the psyche of overweight people well. I got my first clue when I noticed that the dietary histories of the overweight people coming to see me had a commonality. On the medical and dietary history questionnaire I had all the patients fill out was a section asking about previous diets. When I looked these over, I recognized a pattern. The average patient coming to see me had lost significant weight two or three times before. Most would put something like this: 1991 Jenny Craig, lost 50 lbs., 1993 NutriSystem, lost 38 lbs., 1996 Physician’s Weight Loss Center, lost 55 lbs.

The thing I found remarkable about this is that almost no one ever went back to the same place twice. I virtually never saw: 1991 Jenny Craig, lost 55 lbs., 1994 Jenny Craig, lost 60 lbs. It was always a different place each time.

Now, if I had a complicated legal issue and I went to an attorney who solved my problem for me, then I got in the same legal problem a few years later, I would go back to the same lawyer who had solved the same problem successfully.

It’s obvious that overweight people don’t think that way about weight loss. Despite successfully losing a lot of weight at NutriSystem, Jenny Craig, Physician’s Weight Loss or where ever, they never went back to lose again. Why not?, I always asked. I would say, You lost a lot of weight at Jenny Craig a few years back, why didn’t you go back there? I always got the same answer: It didn’t work; I gained it all back.

It dawned on me that all these people couldn’t separate the weight loss part of a program from the maintenance that they had to do themselves. They didn’t realize that whatever weight loss regimen they signed up for was simply a tool to get their weight down to where the real work began. When all this finally sank in to me, I changed my approach.

I told everyone at the first visit that the reason they are overweight is that they eat too much of the wrong stuff. I told them that if I had a magic wand that I could tap them with and make them instantly their ideal body weight, they would be back in my office in a year, overweight as ever, if they didn’t change the way they ate. I’m sure my patients got tired of my constant harping on the idea of maintenance. I told them over and over and over that if their metabolic problem was straightened out with a low-carb diet, it would go back in the tank if they went back to their old eating ways.

How does this convert into investment advice? Easy. Most overweight people don’t want to be overweight. They know (or at least think) that it is hard to lose weight without some kind of structured program. They will flock to whatever the new program is, and since whatever the new program is it will be better than the standard American diet they’ve been on, they will lose weight. Once they’ve lost the weight, they will go back to their old way of eating and regain the weight. Then they will be prey for a new program. So, any new program will grow rapidly as all the overweight people cycle through, then once they’ve cycled through, that same program – which has expended its overhead to accommodate the flood of overweight people – will collapse. Why? Because they won’t cycle through again.

So, once more, my advice is buy the stock of any new weight loss programs that come along, then sell in three or four years at the point at which the program seems to be busting out at the seams with business. You can’t lose.

If you’re not interested in making money, and you don’t want to spend $50 to lose a pound that you’ll probably gain back, go on a whole-food low-carb diet and stay on it. That’s my best advice of the day.