Medifast, Inc. (NYSE: MED), a leading United States manufacturer and provider of clinically proven weight-loss and healthy living products and programs, today reported financial results for the first quarter ended March 31, 2015.
“We are pleased to get off to a good start this year by exceeding our first quarter top and bottom line guidance,” said Michael C. MacDonald, Medifast Chairman and Chief Executive Officer. “We continue to execute well operationally while putting the plans in place to advance our three key strategic priorities; to grow and simplify Take Shape For Life, optimize Medifast Direct revenues and deliver product and program innovation. We are very focused on returning to a growth trajectory in 2015 while we continue to drive improvements in shareholder value.”
First Quarter 2015 Results
Results from Continuing Operations
Income from continuing operations was $4.4 million, or $0.36 per diluted share, compared to $6.5 million, or $0.49 per diluted share, for the first quarter of 2014. Income from continuing operations excluding extraordinary legal and advisory expenses resulting from recent 13D filings would have been $5.6 million, or $0.46 per diluted share.
For the first quarter, Medifast net revenue from continuing operations decreased 7% to $73.4 million from net revenue of $79.2 million in the first quarter of 2014.
Revenue in the direct sales channel, Take Shape for Life, decreased 9% to $52.1 million in the first quarter of 2015 compared to $57.0 million in the same period last year. The Company ended the first quarter with approximately 10,500 active Health Coaches and the average revenue per Health Coach per month for the quarter was $1,564 compared to $1,626 in the first quarter of 2014. Active Health Coaches have historically been defined as Health Coaches earning income in the last month of the quarter. In order to provide a more accurate depiction of the number of health coaches contributing to Take Shape For Life revenues, we will be changing the way we report active Health Coaches and average revenue per active Health Coach going forward. The active Health Coach count will be reported as the number of earning coaches during the quarter instead of the number of earning Health Coaches in the last month of the quarter. The average revenue per Health Coach will now be calculated on a quarterly basis instead of an average month within the quarter. These new quarterly measurements provide a more consistent metric for quarterly comparison. The total number of active earning Health Coaches in the first quarter was 12,100 as compared to 12,700 in the first quarter of 2014. The average revenue per active earning Health Coach for the quarter was $4,316 as compared to $4,488 in the first quarter of 2014. We will provide a historical perspective on these new measurements in our 10Q to be filed in a few days.
The Company’s Medifast Direct channel revenue decreased 16% to $14.4 million, compared to $17.1 million in the first quarter of 2014. This marks the third consecutive quarterly improvement in the rate of decline and results were in-line with the Company’s expectations as it continued to focus on efficiently managing marketing investments.
Revenue in the Franchise Medifast Weight Control Centers channel increased 31% to $4.7 million from $3.6 million in the first quarter of last year. The increase in revenue was driven by the conversion of corporate centers to franchise centers, partially offset by franchise center closures as well as a decrease in sales of franchise centers open greater than one year. There were 70 franchise centers in operation at the end of first quarter 2015 compared to 49 centers at the end of the same period last year.
In the first quarter, the Wholesale channel revenue increased to $2.2 million, compared to $1.5 million in the same period last year. The increase in this channel was driven by an increase in activity within a few specific accounts for the quarter.
Gross profit for the first quarter of 2015 was $53.8 million, compared to $57.9 million in the first quarter of 2014. The Company’s gross profit as a percentage of net revenue increased 20 basis points to 73.3% versus 73.1% in the first quarter of 2014 resulting from a combination of an increase in price and an efficient supply chain process.
Selling, general and administrative expenses (“SG&A”) decreased $1.0 million to $47.3 million compared to $48.3 million in the first quarter of 2014. As a percentage of net revenue, SG&A expense was 64.4% versus 61.0% in the first quarter of 2014. SG&A expenses as a percent of net revenue, excluding the aforementioned items related to the 13D filings in the first quarter of 2015, was 61.9%.
Sales and marketing expense decreased $0.2 million in the first quarter of 2015 compared to the first quarter of 2014, primarily driven by a decrease in Take Shape For Life event expense, partially offset by an increase in advertising production expense. The Company continues to focus on efficiency improvements and balancing sales and marketing expense in an effort to drive profitability.
The first quarter 2015 effective tax rate was 35.0% compared to 34.1% in the first quarter of 2014, a slight increase primarily relating to changes in the allowable domestic manufacturing deduction year over year.
Discontinued Operations
As previously disclosed, the Company exited the Medifast Weight Control Center corporate model by selling 41 centers to existing franchise partners (24 centers were sold in June 2014 and the remaining 17 centers were sold in December 2014) and closing the remaining 34 corporate centers. For the first quarter of 2015, corporate-owned Medifast Weight Control Centers had income from discontinued operations, net of tax, of $28 thousand.
Balance Sheet
The Company’s balance sheet remains strong with stockholders’ equity of $84.8 million and working capital of approximately $59.5 million as of March 31, 2015. Cash, cash equivalents, and investment securities increased $8.8 million to $61.4 million compared to $52.6 million at December 31, 2014. The Company remains free of interest bearing debt.
The Company has authorization to repurchase a total of 1.2 million shares.
Outlook
The Company expects second quarter 2015 net revenue from continuing operations to be in the range of approximately $72.0 to $74.0 million and earnings per diluted share from continuing operations in the range of $0.47 to $0.50 per diluted share.
For fiscal year 2015, the Company reiterated its previous guidance of revenue from continuing operations to be in the range of $285 to $300 million and earnings per diluted share from continuing operations in the range of $1.85 to $1.95 per diluted share. The fiscal year 2015 guidance assumes a 34% to 35% effective tax rate.
Fiscal year guidance excludes expenses resulting from 13D filings.
Conference Call Information
The conference call is scheduled to begin at 4:30 p.m. ET on May 7, 2015. The call will be broadcast live over the Internet hosted at the Investor Relations section of Medifast’s website at www.MedifastNow.com, and will be archived online through May 21, 2015. In addition, listeners may dial (877) 870-4263.
A telephonic playback will be available from 7:30 p.m. ET, May 7, 2015, through May 21, 2015. Participants can dial (877) 344-7529 to hear the playback and enter passcode 10064409.
