Clinton Group Calls On Nutrisystem To Sell Itself

NEW YORK, Oct. 14, 2014 /PRNewswire/ -- Clinton Group, Inc., which together with its affiliates and funds ("Clinton Group"), a long-term owner of equity interests in Nutrisystem, Inc. (Nasdaq: NTRI) ("Nutrisystem" or the "Company"), today announced that it has sent a letter to the Chief Executive Officer of Nutrisystem calling for a sale of the Company.

"We have been patient during the turnaround over the last few years and commend the management team, led by Dawn Zier, on their achievements to date," said Joseph A. De Perio, Senior Portfolio Manager of the Clinton Group. "However, the stock price fails to represent the progress to date and significant upside of Nutrisystem brand.  Over the past year, we have had several conversations with Ms. Weir regarding a larger scale stock buyback and an increase in the dividend. Given the continuation of the market's divergent view, we are now inclined to push the Board of Directors to take steps to maximize shareholder value in a sale process."

A complete copy of the Clinton Group's letter is below:

About Clinton Group, Inc.

Clinton Group, Inc. is a diversified asset management firm that is a Registered Investment Advisor. The firm has been investing in global markets since its inception in 1991 with expertise that spans a wide range of investment styles and asset classes.

[Clinton Group Letterhead]

October 14, 2014

Ms. Dawn Zier
Chief Executive Officer
Nutrisystem, Inc.
600 Office Center Drive
Fort Washington, PA  19034

                Re:         The Future of Nutrisystem, Inc.

Dear Ms. Zier:

I write on behalf of Clinton Group, Inc., the investment manager to several partnerships and funds ("Clinton Group") that collectively own a significant stake in the common stock of Nutrisystem, Inc. ("Nutrisystem" or the "Company"). We have owned the stock for more than three years and wrote you, just a little over one year ago, to express our enthusiasm for all that you are doing to turn around the business to create value for stockholders.

We are no less excited today about the opportunity to create shareholder value at Nutrisystem. You and your team are on target to grow EPS by 60% year-over-year as we understand it and customer counts, revenue, gross margin, operating margin, web conversion, marketing efficiency and renewal rates are all improving. We believe on the current pace you can achieve, as we wrote last year, more than $100 million in adjusted EBITDA for calendar 2016, which is approximately equal to the EBITDA achieved on average between 2006 and 2010.

In fact, with your promising initiatives in the retail channel (with Wal-Mart, Target and Sam's Club), with the NuMI mobile app for the do-it-yourself dieter, and with the entering into the fresh diet food program with "Simply Fresh," the Company has more legs to its stool today than it ever has had and more opportunity, therefore, to vanquish the performance of even its previous, record-setting years.

As we expressed to you in the past, we have every confidence in you and your team as operators. We note that you have rightly been pleased with the performance of the Company in each of the past three quarters. All three involved exceeding the performance of the prior year and the Company's guidance to investors.

That said, the stock price performance indicates a divergent view to the Company's progress in the past two quarters. While operating performance has been commendable, the Company has not been sufficiently attentive to its status as a public company nor provided shareholders with the information required for good investment decision making.

Thus, after two of those quarters' earnings announcements, the stock was extremely volatile, dropping more than 10% in a single day. Such volatility is the hallmark of a public company that is not setting investor expectations effectively. Such a public company can be a hazard to its owners even as fundamental performance improves; the gyrations in stock price repel some otherwise natural owners (leading to an artificially low valuation) and others are so fearful of being whipsawed that they exit early, own less than they otherwise would and are tentative buyers. As importantly, such volatile stocks are a haven for short sellers. We have no doubt that these effects are and will continue to dampen the valuation Nutrisystem receives in the public market.

In previous communications, we suggested that reducing the float in a stock buyback and maintaining the dividend on a per share basis were both neutral to annual cash flow and would be effective to create shareholder value. Following our letters on this this subject in late Q1, shareholders responding by bidding the stock higher in support of our suggestions. Furthermore, in examining equity research models for 2015, we believe there is room to increase the dividend by 10% while maintaining the same historical payout ratios.

We stand by our suggestions to do a leveraged buyback or increase the dividend today, but recognize that such transactions may not be enough to cure the valuation discount in the equity markets. We believe therefore the Board should consider carefully whether Nutrisystem should remain a public company at all. We are aware of private equity firms that are interested in discussing a buyout in which the current management team would remain in place but the Company would be privately held. 

Given the Nutrisystem's superior brand and cash flow prospects for the business, we believe such a going-private transaction could garner a substantial premium for the public market investors while affording the private equity buyer of Nutrisystem attractive returns. We have modeled that a private equity firm could pay $23 per share for Nutrisystem (a 50% premium to today's prevailing prices) and still reasonably expect to earn an IRR above 20%. 

In the meantime, we urge the Company to use its cash to buy back its own stock at these attractive prices. Obviously, the more stock that you buy at these prices, the more a private equity buyer can pay in a going-private transaction for the remainder of the outstanding stock. 

Dawn, we believe you are executing the turnaround of Nutrisystem exceedingly well and are confident a private equity buyer would be impressed by the progress you have made in a short time. As you know, all of the meaningful operating metrics are improving and doing so rapidly.

Fundamental performance, however, may not be enough to garner a fair price for the stock. Volatility matters. We believe the Company would be better owned privately by a knowledgeable and deeply involved owner who would not experience the gyrations of valuation implied by the public market stock price. 

Best regards,

//ss//

Joseph A. De Perio

Senior Portfolio Manager

cc:           Board of Directors, Nutrisystem, Inc.

SOURCE Clinton Group, Inc.