NutriSystem (NTRI): Citi comments ahead of Q3 report

From Notable Calls:

Citigroup is out on NutriSystem (NASDAQ: NTRI) saying their channel checks indicate deteriorating trends have stabilized during the first few weeks of 4Q07. Firm is forecasting approximately 7% sales growth in 4Q.

Citi believes NTRI mgmt will provide conservative 4Q sales guidance about 5-10 points below what they are on track to achieve. The firm therefore expects flat 4Q revenue growth guidance vs. consensus of up 8%. This translates to about a 20% decline in new customers (consistent with trends at end of 3Q) and mid 30c range EPS for 4Q07 vs. consensus of 47c

They are not lowering their 4Q07 sales (up 7%) and 39c EPS estimate as they think the company will ultimately be able to achieve their forecasts.

Citi believes sentiment on the stock is already very negative considering that the stock is down 38% since preannouncingand has a 43% short interest. Additionally, based on their conversations with investors, current holders appear to expect conservative guidance and are waiting on 1Q08 trends (start of diet season).

1Q08 will be far more important than 2H07 as NTRI launches its new ad campaign and food products, and enters the Canadian market. Given its turnaround potential with 1Q08 initiatives and relatively low valuation, they view NTRI as attractive for investors with a long-term horizon. Maintains Buy and $55 tgt.

Notablecalls: Not sure how traders should play this one. Buy it now and sell ahead of tonight's earnings/guidance release? Or hope it will gap down on weaker than consensus guidance and then buy it for a bounce?

Q4 is the weakest quarter for NTRI and I would not be surprised to see initial management guidance below current consensus.

By the way, Broadpoint is out this morning on NTRI saying they think investors would likely leave nothing on the table by waiting to hear management's explanation of how 3Q:07 varied materially from their original outlook. They also can't say with any degree of confidence that there is not another shoe to drop. Firm continues to believe that NTRI is a real service from a real company, and not the passing fad bears make it out to be. Therefore, it's worth investor time to do the work on NTRI, in their view, but they see no reason to buy ahead of today's 3Q earnings report.

Go figure...

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