Medifast, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Medifast operates the OPTAVIA health and wellness business through a direct-to-consumer model supported by independent coaches. About 91% of revenue came from subscription-based meal-plan orders.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $340.7 | $178.5 | +90.9% |
| Gross profit / gross margin | $248.5 / 73.0% | $135.2 / 75.8% | Margin down 2.8 pts |
| SG&A / share of revenue | $195.7 / 57.5% | $111.7 / 62.6% | Expense +75.2% |
| Operating income / margin | $52.8 / 15.5% | $23.5 / 13.2% | +124.4% |
| Net income | $41.1 | $18.5 | +122.2% |
| Diluted EPS | $3.46 | $1.56 | — |
| Operating cash flow | $65.3 | $26.7 | +$38.6 |
Higher revenue reflected more clients on the Optimal Weight 5 & 1 Plan and greater productivity per active earning coach, driven by more clients served and higher average client spending. Active earning OPTAVIA Coaches rose 61% to 52,500; revenue per active earning coach increased to $6,454 from $5,333.
Gross margin declined due to higher product and shipping costs and inventory write-offs associated with discontinuing the Medifast-branded product line. SG&A rose, primarily from higher OPTAVIA commissions, employee compensation, and credit-card fees, but declined as a share of revenue. OPTAVIA commissions increased 96.7% to $146.2 million. The effective tax rate was 22.3%, versus 21.8%.
Cash, liquidity, and capital
- Cash and cash equivalents were $206.0 million at March 31, 2021; cash, cash equivalents, and investment securities totaled $212.9 million, up from $174.5 million at December 31, 2020.
- Working capital was $137.0 million, compared with $123.0 million at year-end. Total current assets were $281.9 million and current liabilities were $144.9 million.
- Operating cash flow was $65.3 million. Investing activities used $0.9 million, including $4.6 million of property and equipment purchases; financing activities used $22.2 million, including $13.4 million of dividends paid and $7.5 million of stock repurchases.
- The balance sheet showed no borrowings; lease obligations totaled $10.3 million, including $3.7 million current. A $125 million secured revolving credit facility was entered into on April 13, 2021, after quarter-end; it was undrawn as of the report date and includes a potential $100 million incremental facility, subject to conditions.
- The company declared a $1.42-per-share quarterly dividend on March 18, payable in Q2. Management said it intended to continue the dividend but gave no assurance it could do so.
Outlook, risks, and notable developments
- The filing provides no specific revenue, earnings, or other quantitative guidance. Management described its differentiated coach-based model and international expansion as parts of its long-term growth strategy.
- Management reported that manufacturing and distribution remained operational and that it had experienced no meaningful supply-chain disruption to date. It cautioned that COVID-19’s duration, severity, effects on consumer behavior, and impact on operations and financial results remained uncertain.
- The company planned to sunset the Medifast-branded product line by the end of Q2 2021; related obsolescence and inventory write-offs contributed to lower gross margin.
- The new credit agreement has customary covenants, including a maximum total net leverage ratio of 3.00 to 1.00 and minimum interest coverage ratio of 3.50 to 1.00. The agreement is secured by liens on substantially all company and guarantor assets, subject to exceptions.
- Ordinary-course litigation was not expected by management to have a material adverse effect, though outcomes cannot be predicted. The company reported no material changes to the risk factors in its 2020 Form 10-K. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether unusually rapid sales growth and coach productivity are sustainable, and how client and coach trends develop in subsequent quarters.
- Whether product, shipping, and fulfillment costs normalize and whether the Medifast line exit creates further inventory or margin effects.
- Cash conversion and working-capital movements, particularly the inventory increase and growth in accounts payable and accrued expenses.
- Dividend and repurchase cash requirements relative to future operating results, and any borrowing or covenant developments under the post-quarter credit facility.
- How COVID-19, supply availability, consumer behavior, and international expansion affect future operating performance; the filing does not quantify these potential impacts.