The skinny on eDiets.com
At first glance, eDiets.com Inc. (Nasdaq: DIET), an $88 million online diet and healthy lifestyle company, appears superbly positioned to capitalize on the trend of trying to lose weight using innovative diet programs in the digital age.
After all, there’s no shortage of potential customers: roughly two-thirds of Americans are overweight (30% of U.S. adults, or some 60 million people, are categorized as obese). At any given time, about a third of the U.S. population—over 70 million individuals—are on diets of one form or another.
The company has aggressively pursued Internet advertising and other traffic-generating methodologies, such as Web-based publications and video programs. Among its offerings: a dozen eNewsletters, an online magazine, Glee, which has articles by health, fitness and nutrition experts, and a library of videos featuring healthy food recipes. The company has also begun a push to pursue corporate licensing opportunities with its content and technology.
One thorn in the company's side is the fact that competition from large players with substantial marketing firepower like weight management company Jenny Craig, Weight Watchers International, Inc. (NYSE: WTW), NutriSystem Inc. (Nasdaq: NTRI) and Herbalife Ltd. (NYSE: HLF) is intensifying as these companies find more innovative ways to add to increase their revenues.
At the same time, the commercial weight loss sector as a whole has been feeling the pinch and having their ratings cut by analysts lately, largely due to pharmaceutical behemoth GlaxoSmithKline Inc. (NYSE: GSK) rolling out a formidable competitor: its highly-anticipated drug, Alli (pronounced AL-eye), the only FDA-approved weight loss medication available over-the-counter. (The drug began selling in retail stores in June.)
On July 25, Lehman Brothers analyst Michael Lasser, upon slashing rival Nutrisystem's rating to "Equal Weight" from "Overweight," said the new drug would consistently lure customers away from weight loss companies over the next few quarters.
That's not good news for EDiets.com, which derives more than three-quarters of its revenues from subscription-based monthly memberships. Even with offerings of strong, established brands like Unilever NV's (NYSE: UN) Slim•Fast and Atkins Diet, the company has already struggled with a dwindling customer base, losing 41% of its paying members since last year.
Even with a customer windfall from having the "top diet meal delivery service" accolade given its low-priced Deliciously Yours program—which includes personalized chef-created offerings—by the well-respected food website Epicurious.com (home to Gourmet and Bon Appetit magazines), eDiets.com would still face serious challenges.
A significant component to the company's turnaround plan is continued customer acquisition, rather than customer retention. Why? Since the typical dieter stays with any given plan for less than a year, EDiets.com will have to continually launch programs to find new members (at a time when ad revenues are soaring), a tall order for a cash-strapped little guy.
After a disappointing first quarter, which saw revenues fall to $8.4 million, compared with $13.5 million for the same period last year, Steve Rattner, president, said in a news release, "We are focused on expanding and better monetizing our marketing investment as we diversify and streamline our overall operations." He added: "Increased competition for online advertising from other players in the diet market remains a challenge, particularly for our core subscription business, but we remain committed to our multi-pronged revenue model. We believe the subscription business will continue to benefit from ongoing improvements in our technology and marketing approach."
Investors and others won’t have to wait long to see how the company’s strategy is playing out. eDiets will release after the close of trading today its earnings for the second quarter ended June 30. The company’s earnings conference call will take place Wednesday morning (to listen to an online simulcast, to go biz.yahoo.com/cc/7/84587.html.)
To its credit, eDiets.com has recently brought in an infusion of outside talent, including executives with backgrounds at Kraft Foods Inc. (NYSE: KFT) and Goya Foods, Inc. as key members of the marketing, sales, and e-commerce team.
But, given the multitude of online and offline weight-control options available to potential customers, it's a tough business to grow. Ultimately, the diet specialists may be forced to compensate for the shortfall in membership revenues by seeking out new avenues for income. How eDiets.com can pull that off is anyone's guess.
While the analysts who cover the company have remained eerily silent since last year, other Wall Street watchers have not. Back in March, author, market expert and Motley Fool contributor Tom Taulli noted, "While eDiets has some interesting initiatives, it's hard to see how they'll make enough of an impact to recoup its shortfall in membership revenues...take a pass on this stock."
Online investment newsletter Bullmarket.com in a June 12 report analyzing companies in the weight loss and fitness industries said, "Investing in eDiets would represent a leap of faith that the company will be able to profitably grow the food delivery business. That is unlikely to happen without a sizable marketing investment, something management says it is willing to do. Increasing marketing is one thing, but it is important to spend the dollars on effective advertising, so we’d want to see how the company actually goes about marketing the program." The newsletter concluded: "Gamblers might be inclined to role the dice on eDiets, given the focus on weight loss by most adults, but you’ll need a strong stomach at this stage in our view."
While shares staged an impressive one-day jump of more than 10% on August 9 (in the midst of the Dow's second-worst loss of the year), closing at $3.48, over the last 18 months the stock has shed considerable heft: shares of eDiets.com have fallen over 60% since early 2006. The stock has traded between $2.67 and $4.33 in the past 52 weeks.
Like many a dieter, the company's fortunes are likely to yo-yo for some time to come.
