Medifast, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the same periods in 2018. Medifast operates as a single reportable segment, OPTA VIA, selling health and weight-management products primarily through independent wellness coaches. Product sales were 98% of revenue in the nine-month periods. In July 2019, the company began operations in Hong Kong and Singapore. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $190.1 (+36.5%) | $139.2 | $543.0 (+52.9%) | $355.2 |
| Gross profit | $142.9 | $107.2 | $408.8 | $270.8 |
| Gross margin | 75.2% | 77.0% | 75.3% | 76.2% |
| SG&A | $122.7 | $89.7 | $336.5 | $221.5 |
| Operating income / margin | $20.3 / 10.7% | $17.5 / 12.5% | $72.3 / 13.3% | $49.3 / 13.9% |
| Net income | $15.9 | $13.8 | $58.0 | $40.1 |
| Diluted EPS | $1.32 | $1.14 | $4.77 | $3.31 |
Growth reflected more coach conversions and new clients, as well as a shift toward higher-priced OPTA VIA products. Active earning OPTA VIA coaches rose 42.5% year over year to 32,200 in Q3, while quarterly revenue per coach declined 1.1% to $5,715. OPTA VIA products were 78% of consumable units sold in Q3, versus 70% a year earlier.
Margins weakened despite higher sales. Gross margin fell 180 basis points in Q3 and 90 basis points year to date, primarily due to higher shipping costs and product returns associated with disruptions to normal operations. SG&A rose with sales-related commissions and payment-processing costs, IT consulting, and the July convention. Operating margin declined 180 basis points in Q3 and 60 basis points year to date.
Cash flow, balance sheet and capital allocation
- Cash generation: Nine-month operating cash flow was $65.1, up from $45.5 in 2018, primarily reflecting higher net income. Investing cash outflow was $5.5, including $9.2 of capital expenditures; financing cash outflow was $59.8.
- Liquidity: At September 30, cash and cash equivalents were $81.2 and investment securities were $15.7, totaling $96.9. Working capital was $80.8, down from $85.2 at December 31, 2018. Inventory increased to $51.9 from $38.9.
- Debt and leases: The balance sheet reports no conventional borrowings. Adoption of lease accounting resulted in $12.4 of lease liabilities at September 30 ($2.5 current and $9.9 long term); operating lease expense was $2.1 for the nine-month period.
- Shareholder returns: The company repurchased $33.1 of stock and paid $26.7 in dividends during the first nine months. It declared a further $0.75 per share dividend in September, payable in Q4. The repurchase plan had 368,587 shares remaining at September 30.
Outlook, risks and unusual items
- Management anticipated a full-year 2019 tax rate of 21%–22%, excluding any discrete tax benefits from share-based compensation awards vesting in Q4. The filing provides no specific revenue or earnings guidance.
- Q3 SG&A included $3.2 of costs related to an organized scheme using stolen identities and credit cards to place e-commerce orders. The company said the related expenses were $2.8, or $0.18 per share, higher than the prior-year quarter, primarily from increased bad-debt and credit-card fees; transactions had been approved by the payment processor before shipment.
- Management said it intended to continue the dividend program but gave no assurance that dividends would continue. It also noted that future cash needs may be funded from operating cash flow and financing activities.
- Ordinary-course litigation was not expected by management to have a material adverse effect, but outcomes cannot be predicted with certainty. The company reported no material changes to the risk factors in its 2018 Form 10-K and no material changes in market-risk exposure. Management assessed disclosure controls as effective.
Important facts for investors to verify
- Whether the coach and client growth, including new Asia-Pacific operations, can be sustained and translated into revenue per coach growth.
- Whether elevated shipping expenses, product returns, and the payment-card fraud losses persist or affect future margins and cash conversion.
- How working-capital needs evolve, particularly inventory growth and the associated cash investment.
- Whether the 21%–22% tax-rate outlook, dividend program, and buybacks remain consistent with operating results and liquidity.
- The future cost and cash-payment profile of operating leases; lease liabilities were recognized following adoption of ASC 842 in 2019, with prior-period balance-sheet figures not adjusted.