Medifast, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Amounts below are in U.S. dollars. The company sells weight-loss, weight-management, and nutrition products through Take Shape For Life (now OPTAVIA-branded offerings), Medifast Direct, franchised centers, and wholesale channels.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $70.6 million | $72.3 million | Down 2.4% |
| Gross profit / margin | $52.9 million / 74.9% | $53.2 million / 73.5% | Margin up 1.4 percentage points |
| SG&A | $44.3 million / 62.7% of revenue | $46.9 million / 64.9% | Down $2.6 million |
| Operating income / margin | $8.6 million / 12.2% | $6.3 million / 8.7% | Up 37% |
| Net income | $6.1 million | $4.3 million | Up 44% |
| Diluted EPS | $0.51 | $0.36 | Up $0.15 |
| Operating cash flow | $6.7 million | $7.6 million | Down $0.9 million |
Gross-margin improvement reflected the April 2016 price increase and supply-chain efficiencies. SG&A fell primarily on lower, more targeted Medifast Direct advertising and the absence of $1.2 million in prior-year restructuring costs. Excluding restructuring, prior-year SG&A was $45.8 million and adjusted operating income was $7.4 million; adjusted net income was $5.0 million, or $0.42 per diluted share.
Revenue mix and material changes
- Take Shape For Life revenue rose 2.3% to $58.0 million, its sixth consecutive quarter of year-over-year growth. Active earning Health Coaches increased 3.2% to 13,000; quarterly revenue per coach declined 0.6% to $4,463.
- Medifast Direct revenue fell 18.3% to $8.9 million, as customer acquisition remained challenging; advertising declined 43.9% to $2.3 million.
- MWCC revenue fell 16.7% to $3.5 million, reflecting fewer franchise centers and lower center activity. The company reported 37 franchised centers and 19 reseller locations, versus 58 centers a year earlier.
- Wholesale revenue declined to $0.3 million from $0.5 million, partly due to lost accounts following enforcement of partner distribution requirements. The company terminated its Medix licensing agreement in Q1 to refocus on core businesses.
Overall revenue declined despite Take Shape For Life growth. Revenue to total advertising spend increased to 29.5-to-1 from 17.5-to-1; total advertising spend was $2.4 million versus $4.1 million.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $54.0 million at March 31, 2017; investment securities were $25.0 million. Combined cash and investments were $79.0 million, up from $76.8 million at year-end 2016.
- Working capital was $80.5 million; stockholders’ equity was $99.2 million. Total liabilities were $23.8 million, primarily accounts payable/accruals and deferred tax liabilities. The balance sheet reports no borrowings or interest-bearing debt.
- Operating cash flow was $6.7 million; investing activities used $1.0 million and financing activities used $4.1 million. Cash increased $1.5 million during the quarter. Higher inventory and lower accounts payable/accruals weighed on working capital cash flow.
- The company declared a $0.32-per-share dividend, totaling approximately $3.9 million, payable in Q2. It intends to continue dividends but gave no assurance of future declarations or payments. No common shares were repurchased in the quarter.
Outlook, risks, and unusual items
- Management anticipated a 2017 full-year effective tax rate of 33%–34%; the Q1 rate was 29.5%, versus 33.0% a year earlier. Adoption of stock-compensation accounting guidance produced a $309,000 discrete tax benefit in Q1.
- No formal revenue or earnings guidance is provided in the filing. Management says future cash requirements, if any, are expected to be funded from operating cash flow and financing activities.
- The company cites risks described in its 2016 Form 10-K and future SEC filings, and cautions that quarterly results are not necessarily indicative of full-year results. It reported no material change to previously disclosed risk factors.
- Management said routine litigation and claims were not expected to materially affect results, financial position, or liquidity. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Investment securities are exposed to interest-rate and market-price risk; management estimated a hypothetical 10% uniform adverse market move would have an immaterial fair-value impact.
Important facts for investors to verify
- Whether Take Shape For Life growth and coach productivity can offset continued weakness in Direct, franchise, and wholesale channels.
- Whether lower advertising spend can sustain customer acquisition and growth, and whether the reported advertising-efficiency ratio is maintained.
- Inventory growth and the increased obsolete-inventory reserve, which rose to $1.1 million from $0.8 million at year-end.
- The sustainability of operating cash generation and the $0.32-per-share dividend, particularly given working-capital use.
- The effect of the Q1 discrete share-based compensation tax benefit on comparability with the stated 33%–34% full-year tax-rate outlook.