These are not the calmest of times for weight-loss leaders Weight Watchers International and NutriSystem.
Despite steady financial growth that should continue at least through 2008, shares of both companies have taken a recent beating.

Weight Watchers' (NYSE:WTW - News) stock fell more than 7% on Feb. 14 when the operator of weight-loss centers forecast 2007 profit below analyst expectations. Shares have declined about 13% since reaching a 52-week high on Feb. 6.

Shares of diet-food supplier NutriSystem (NasdaqGS:NTRI - News) dipped more than 29% over a six-day period ending Feb. 2. The big hit came on Jan. 30, when shares retreated 10% after analysts slashed price targets due to mixed earnings guidance.

NutriSystem regained some value last week on robust fourth-quarter returns, though the stock is still down about 22% for the year.

It's not as though the two firms are struggling financially. Weight Watchers has reported two straight quarters of double-digit sales growth. Though it logged only one quarter of double-digit profit growth last year, First Call analysts see earnings rising at least 14% each of the next four quarters.

Weight Watchers reported fourth-quarter profit of 39 cents a share, up 3% from a year earlier and in line with views. Full-year earnings gained 6% to $2.06 a share, while sales moved up 7% to $1.2 billion.

"(Weight Watchers) made excellent progress on several fronts in 2006 and continues to lay critical groundwork for 2007 and beyond," Chief Executive David Kirchhoff said in a statement.

But a day later, investors scrammed after Weight Watchers projected 2007 earnings of $2.33 to $2.47 a share, below the $2.49 analysts had expected.

Some company watchers speculated that the guidance came in below expectations because Kirchhoff, who took over as CEO on Dec. 31, prefers a conservative outlook while he gets used to the job.

Low-Carb Fading?

Citigroup analyst Gregory Badishkanian lowered his estimates for Weight Watchers by 10 cents a share in 2007 and 12 cents in 2008.

Though he rates the company high risk -- partly because of its high debt-to-capital ratio, which reached 108% at the end of last year -- Badishkanian notes that there are reasons for optimism.

One is a "significant turnaround" in the recent decline in the number of people who attend Weight Watchers meetings in North America, he said. It also helps that people have begun to turn away from rival diet programs.

"The low-carb diet phenomenon is subsiding," Badishkanian wrote in a Feb. 13 report. "There's a potential consumer trend of less reliance on online or stay-at-home diets vs. the classroom meeting method. Attendance trends should improve due in part to easy comparisons and moderating low-carb trends."

Badishkanian's employer does business with Weight Watchers.

Meanwhile, NutriSystem has been on a financial roll. The company's sales have increased at least 88% each of the last nine quarters. In seven of those quarters NutriSystem has advanced the top line in triple digits.

Profit has grown at an even higher rate. On Feb. 14, NutriSystem posted fourth-quarter earnings of 53 cents a share, more than triple the prior year's result and 2 cents above First Call estimates. Sales nearly doubled to $133.6 million.

Full-year profit nearly quadrupled to $2.29 a share, while sales gained 167% to $568 million.

The company's weight-loss program for men, the focus of an aggressive marketing campaign featuring former NFL great Dan Marino, was a particular success during the quarter, officials said.

"We proved that the men's weight-loss market, long neglected by commercial weight-loss companies, can become a large opportunity for NutriSystem," Chief Executive Michael Hagan said in a statement.

In a Feb. 15 report, analyst William Sutherland of Boenning & Scattergood noted that the men's program reached 31% of total direct customers by the end of the fourth quarter, up from 13% the prior year.

"(This implies) a fivefold increase in new men customers," Sutherland wrote.

He also pointed out that fourth-quarter reactivation revenue -- which comes from signing up ex-customers -- rose 319% from the prior year to $13.4 million.

"This is a key dynamic as accelerating reactivation revenue will dramatically lower customer acquisition costs and improve operating margins in future periods," Sutherland wrote.

Gross margins for the quarter improved by 560 basis points, he noted. He credits lower food, freight and fulfillment costs, better pricing and fewer customer returns.

Cost Concerns

Analysts expect NutriSystem to boost annual earnings 32% this year and 20% in 2008. While those numbers seem solid, the company took a hit three weeks ago when it said it would fall short of its first-quarter projections.

NutriSystem blamed high rates for advertising that have pushed up customer acquisition costs. Costs are up in part because of the company's program to attract more seniors.

Those setbacks aside, NutriSystem and Weight Watchers each should benefit from favorable demographic trends.

"Market growth drivers include the expanding population of overweight Americans ... and health concerns such as diabetes, certain cancers and various forms of heart disease," Sutherland wrote.