Tivity Health, Parent of NutriSystem, Falters

Feb. 20, 2020

Tivity Health (stock symbol TVTY), the parent company that acquired NutriSystem last year, reported weak earnings and guidance and its CEO Donald Tramuto resigned, as did NutriSystem's Chief Marketing Office, Kiera Krausz. The stock price plummeted Thursday morning, falling 44%.

According to management in their conference call: "...Admittedly, the Nutrition business has not worked out as well as planned since the completion of the acquisition in March of 2019...

...We believe there are areas where we can improve our operational execution and although performing well below its potential, the Nutrition business unit remains profitable and generates free cash flow....

...As announced today, Tommy Lewis, who is currently Tivity Health's Corporate Chief Operating Officer and Investor Relations Lead, will serve as Interim Nutrition business unit."

...Fourth quarter 2019 nutrition revenues came in at $113.7 million, a 12.2% decrease compared to the same quarter last year. This decline was primarily driven by a decrease in the DTC business, which includes both the Nutrisystem and South Beach Diet brands....

The DTC business generated $105.9 million in revenue, down 10.8% from last year. Within the DTC channel, Q4 revenues from customers in their initial diet cycle were down 16.2% year-over-year, primarily due to fewer new customer starts in Q3, which resulted in lower on-program revenue in Q4. Also, we had promotional pricing implemented within the quarter.

2020 Guidance for the Nutrition unit (NutriSystem) is for revenues of $560-$590 million, essentially flat with 2018 and 2019 results.

"Nutrisystem revenue is anticipated to be up slightly year-over-year. While new customer starts are projected to be up for the first time in 3 years, they are being partially offset by lower revenue per new customer, which is comprised of average selling price, program mix, upsell rates of bars and shakes and length of stay.

Net reactivation revenue for Nutrisystem is expected to be flat in 2020, reflecting a combination of a higher customer pool size partially offset by an aging customer pool on a weighted basis, following 2 consecutive years of declines in new customer starts as well as a lower average sales price. For the full year, reactivation revenue is projected at roughly 36% of total Nutrition segment revenues."

" The Nutrition business unit generated over $600 million in revenue in 2017, '18 and '19. But while it still produced over $70 million in adjusted EBITDA in 2019, last year was a step backward. To return to growth as the Nutrition team prepare for 2020, the team's first and foremost objective was to deliver customer growth for the Nutrisystem brand."

""We are encouraged by Nutrisystem's start to diet season 2020. Through mid-February, we are up double-digit and year-over-year customer starts versus the same period of time in 2019. And based on these starts and an expected return to regular cadence of orders for the remainder of the year, we anticipate customer growth in the mid-single digits for full year 2020 versus the full year 2019. While this is certainly encouraging, a lower anticipated average selling price is expected to provide a headwind to Nutrisystem revenue and EBITDA growth in 2020."

"Our Nutrisystem's diet season 2020 is off to an encouraging start. The team and I know there's more to be done to return Nutrisystem revenue and EBITDA to growth. We will further enhance personalization and improve our innovation process. We need to raise price to improve margin. The Nutrisystem customer retention team was responsible for growing revenue per customer 30% in total over the past several years, largely through price increases, greater upsell of a la carte items and the introduction of improved product configuration. In fact, our team is testing various offers as we speak. We believe we will find ways to raise average selling price and gross margin. We will continue to grow reach to new customers and push for marketing efficiency."

"We believe that South Beach Diet has wide brand awareness and appeal in today's market. We believe its original sustainable nutritional approach was ahead of its time, and the keto-friendly adaptation is on trend. Having said that, the original hypothesis is that it would be straightforward, stand up a business, paralleled to Nutrisystem in the DTC space is not yielding acceptable EBITDA level. In order to reduce our losses, we have pulled back media spend dramatically, which lowers revenue but increases EBITDA versus 2019. We have much work to do here."

According to stock analysts: “Promotional buy-one-get-one pricing has aided the uptick in customer growth, but ongoing promotional activity is pressuring margins,” analysts said.

Tivity also plans to pull back on advertising for the South Beach Diet, which the company said will lower revenue but improve earnings before interest, taxes, depreciation and amortization (EBITDA).

Marketdata Commentary

Hate to say "I told you so", but we warned about this merger a year ago, pointing to several past acquisitions by larger healthcare companies that bought weight loss firms only to post disappointing results. The weight loss market is tricky, and healthcare organizations don't always understand what works. It happened with Nestle and Jenny Craig. It happened with Unilever and Slim-Fast. In addition, in a merger, there is always a clash of personnel and strategic visions, resulting in a loss of personnel (i.e. resignation of Kiera Krausz). Marketdata sticks by its prediction that Tivity will continue to struggle with the weight loss business and divest itself of NutriSystem with 3 years.

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