| Tivity's customers are large, corporate insurance companies. As noted above, two large customers comprise a significant portion of its revenue. Keeping two customers happy requires some work but does not include a massive sales force to sell or maintain this service.
Tivity is basically a broker for fitness club memberships. It's a great business with 23% profit margins and robust cash flow. After all, it requires very little capital outlay because it's reselling a service.
Nutrisystem provides low-calorie foods to customers. Its weight loss kits typically include a full menu of pre-packaged meals for a certain period. A typical package is a 5-day program promising 7 pounds of weight loss in two weeks. While Nutrisystem avoids the capital cost of manufacturing plants by outsourcing food production to a third party, its advertising and selling costs are enormous. In fact, Nutrisystem spends 40% of its revenue on selling expense versus just 6% by Tivity.
Tivity's customers are loyal, typically sticking around for years and allowing data to accumulate to prove how well the service works at keeping its seniors healthy. Nutrisystem's customers are fickle and generally short-lived. It must continuously refresh its customer list to keep revenue growing. And while someone might choose working out as a permanent lifestyle change, it is highly unlikely one would wish to incorporate Nutrisystem foods into their daily diet.
Most unpalatable for investors is the fat price paid for Nutrisystem. Before the melting of its stock price, Tivity sold for a multiple of 12 times profits (EBITDA used as this profit measure). It offered 16 times that same measure for Nutrisystem.
And that premium paid can't be explained by growth, as it often is. Tivity is growing profits faster than Nutrisystem, which saw profits fall 13% in the first nine months of the year. I can see how inedible this deal is for holders of Tivity stock.
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