Medifast, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited; comparisons are with the three months ended March 31, 2013 unless noted.
Business context and results
Medifast sells weight-management products and services through Take Shape For Life, Medifast Direct, and its Medifast Weight Control Centers and wholesale businesses. Product sales accounted for 97% of revenue.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $86.5 million | $96.0 million | -9.9% |
| Gross profit / margin | $63.9 million / 73.9% | $72.4 million / 75.4% | Margin -1.5 percentage points |
| Operating income / margin | $8.7 million / 10.0% | $8.6 million / 8.9% | Operating income +1% |
| Net income | $6.0 million | $5.9 million | +1% |
| Diluted EPS | $0.45 | $0.43 | +$0.02 |
| Operating cash flow | $10.6 million | $14.8 million | -$4.2 million |
Financial position and liquidity
- At March 31, 2014, cash and cash equivalents were $41.4 million; investment securities were $36.0 million. Current assets were $99.8 million and current liabilities $27.1 million, yielding working capital of approximately $72.8 million.
- Total assets were $139.2 million and stockholders’ equity $105.2 million. Capital lease obligations totaled $641,000; the company reported no outstanding debt after paying off debt in Q1 2013.
- Investing activities used $5.6 million, primarily reflecting net purchases of investment securities and $1.2 million in property and equipment. Financing activities used $48,000.
- An unsecured, undrawn $5 million revolving credit line was due to expire June 2, 2014; the company expected to seek an extension or other financing.
Material changes and management commentary
- Revenue fell across the principal channels. Take Shape For Life revenue declined 4% to $57.0 million; active Health Coaches decreased 2% to 11,100, and monthly revenue per coach fell to $1,626 from $1,720. Medifast Direct revenue decreased 26% to $17.1 million, primarily reflecting lower marketing spend. MWCC and Wholesale revenue decreased 9% to $12.4 million.
- Same-store sales at centers open more than one year declined 14%. At quarter-end, Medifast operated 75 corporate and 49 franchise centers, versus 86 and 36, respectively, a year earlier. Management attributed lower center revenue partly to closures and operational changes.
- Advertising expense fell 30% to $6.9 million, while the revenue-to-advertising-spend ratio improved to 12.5-to-1 from 9.6-to-1. Management said it planned to increase marketing investment during the rest of 2014 while emphasizing spending efficiency.
- Lower SG&A more than offset lower gross profit, supporting slightly higher operating and net income despite reduced sales. Gross margin declined because of higher shipping and manufacturing costs and weaker channel mix and volume.
Outlook, contingencies, and other items
- Management anticipated a 2014 full-year effective tax rate of approximately 33%–34%. The filing gives no specific revenue or earnings guidance.
- In April 2014, a subsidiary agreed to sell assets of 11 corporate centers; an amendment dated May 5 increased the number to 12. After closing, the centers were expected to operate under franchise agreements. The transaction had not yet closed as of the filing.
- A 2010 lawsuit alleging defamation, market manipulation, and unfair business practices seeks $270 million plus other relief. Appeals were pending, and the filing reported no appellate decision. The company said other routine proceedings were not expected to have a material adverse effect.
- Clinic closures in December 2013 generated $2.1 million of closure costs. At March 31, 2014, accrued severance was $36,000 and the accrued net lease liability was $654,000.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting. The company reported no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- Whether the 12-center sale closed, its financial impact, and the resulting franchise economics.
- Trends in Take Shape For Life coach counts and sales per coach, Medifast Direct customer acquisition, and center same-store sales.
- Whether the $5 million credit line was extended or replaced before its June 2, 2014 expiration.
- Progress and potential financial implications of the pending appeals in the $270 million lawsuit.
- The extent to which planned marketing increases improve revenue without reversing Q1 spending-efficiency gains.