Thursday, October 04, 2007

NutriSystems Not Enough Calories

NutriSystems (NTRI)served up some very low fat financials and informed everyone that results will be much worse than expected. The official results are not out yet; this is just a preliminary release. Something like Chinese water torture drip drip drip. The stock is dropping like a stone.

Too much of the press release deals with the stock buyback program. Its as if the executives are playing against the shareholders. They have found a bank to give them $200 million. The loan facility has an accordion feature which takes it to $300 million. Its priced at LIBOR plus an undisclosed spread tied to leverage. The company has total book equity of approximately $150 million so the leverage will be high. (Banks will look at book equity) What other covenants are there?

The old client acquisition costs excuse seems to be the primary culprit. NutriSystems has been extensively advertising (CNBC of all places got a lot of the ad business) So the investment community sees the sin in the marketplace and pretty well misses it.

Management's first mistake was to not let the market know these ads were going to cost a lot. Now investors are all surprised. Management's second mistake is to focus exclusively on the stock buy back and levering the company to a crazy gearing ratio just to prop up the share value.

Management was spooked by the short interest ratio which is about 47%. To the point where its probably all they can think about. One thing you have to think about is the CFO James D Brown who was selling while he was negotiating with the banks to put the fancy LIBOR deal into place.

These guys are playing roulette and are not minding the store.