Legion Partners Asset Management late Thursday disclosed a 5.22% stake in Nutrisystem (NTRI), representing over 1.5M shares. The filing allows for activism. Legion believes the current market price of the shares does not reflect Legion’s intrinsic value.
In the firm’s view, one of the key areas that does not appear to be well understood or fully appreciated by the market is the opportunity for the company to improve the efficiency of its approximately $200M annual marketing expense. Historically, Nutrisystem has relied primarily on short form television marketing, Legion writes in a regulatory filing. Further, Nutrisystem’s cost of acquiring an individual customer has increased annually from approximately $184 in 2007 to over $300 in 2017, the firm contends, citing its own estimate.
Legion Partners believes the company can lower customer acquisition costs “materially” over the next several years by shifting its media mix to more effective digital marketing channels and initiatives. In addition, the firm believes improvements to the company’s digital product portfolio “can substantially increase customer lifetime value.” The “impact of gaining marketing efficiencies through digital advertising and upgrading the digital product portfolio should be reflected in a rapid expansion in the profitability” of Nutrisystem, contends Legion.
It estimates that if the company can improve its overall digital strategy and marketing efficiency, the resulting decline in customer acquisition costs and reacceleration in customer growth could double reported earnings per share from $1.90 in fiscal 2017 to almost $4.00 in fiscal 2020, causing the valuation of the stock “to move from current prices to approximately $90 per share.” Nutrisystem closed Friday up 10%, or $4.10, to $43.50. Legions says it is “highly focused on collaborating” with Nutrisystem’s management and the board of directors to “significantly accelerate and improve” the company’s digital strategy efforts in order to “drive a substantial increase” in profitability. Legions added that it may seek to add certain digital marketing and product development expertise to the company’s board.