Medifast, Inc. (NYSE: MED), a leading United States manufacturer and provider of clinically proven, portion-controlled weight-loss products and programs, today reported financial results for the first quarter ended March 31, 2012.
"We are very pleased with strong sales momentum across each of our sales channels in the first quarter, however, we remain focused on increased improvement in profitability and believe we took a positive step forward by realigning our Medifast Weight Control Center personnel cost structure late in the quarter," stated Michael C. MacDonald, Medifast's Executive Chairman and Chief Executive Officer. "These efforts should result in annual cost savings of approximately $3.0 million as we continue to drive operational excellence throughout our Take Shape for Life, Medifast Direct, and Medifast Weight Control Center and Wholesale Physicians sales channels to maximum profitability long-term."
First Quarter 2012 Results For the first quarter ended March 31, 2012, Medifast net revenue increased 20% to $88.9 million from net revenue of $74.3 million in the first quarter of the prior year. Each of the Company's three primary distribution channels, Take Shape for Life, Direct Response Marketing, Medifast Weight Control Centers and Wholesale Physicians, contributed to this year-over-year revenue increase.
Revenue in the direct sales channel, Take Shape for Life, increased 12% to $53.0 million in the first quarter of 2012 compared to $47.1 million in the same period last year. Growth in revenue for Take Shape for Life was driven by an increase in the number of active health coaches, clients and client product sales. The Company ended the quarter with approximately 10,200 active health coaches, a sequential increase of 6% compared to 9,600 in fourth quarter of 2011. The average revenue per health coach per month for the first quarter was $1,650 compared to $1,600 in first quarter of 2011. The increase is primarily due to an increase in usage of our newly streamlined Trilogy Training website that was launched at the Take Shape for Life annual conference in late July 2011, offering easier to access training material. In addition, Take Shape for Life launched incentives in the months of February and March 2012 that drove client and coach acquisition and resulted in monthly revenue per health coach increase.
The Company's direct response marketing channel revenue increased 19% to $22.5 million, compared to $19.0 million in first quarter of 2011. Marketing and advertising expenses increased approximately 15% to $7.9 million in the first quarter of 2012 compared to the same period last year. The Company reported a more efficient revenue-to-spend ratio, or return-on-advertising, of 2.9-to-1 during the first quarter of 2012, compared to 2.8-to-1 in the same period last year. The Company continues to achieve a more effective advertising message, more targeted advertising through extensive analytical analysis, and additional public relations success in large national publications.
In the first quarter, the Medifast Weight Control Centers and Wholesale Physicians channel revenue increased 63% to $13.4 million, primarily due to strong organic growth from the opening of new corporate and franchise locations and a year-over-year improvement in comparable store sales of 21% for centers open greater than one year. The Company had 40 Medifast Weight Control Centers in the comparable store base at March 31, 2012. The Company opened five new centers in the first quarter for a total of 75 corporate and 32 franchise centers.
The Company's key focuses across the Medifast Weight Control Centers for the remainder of 2012 are continuing to enhance the customer experience through additional offerings such as metabolic testing, additional dietitian support and medical review of labs to show members the impact of weight loss on their overall health. In order to improve profitability the Company is focused on reducing advertising spend as a percentage of sales for each corporate center, and focusing on the four-wall staffing strategy of each Corporate Center and the amount of corporate support required to support the Medifast Weight Control Centers.
Gross profit for the first quarter of 2012 increased 18% to $66.8 million, compared to $56.7 million in the first quarter of the prior year. The Company's gross profit margin decreased 120 basis points to 75.1% in the first quarter versus 76.3% in the first quarter of 2011. The gross profit margin decrease was primarily the result of increasing commodity and shipping costs that occurred throughout 2011. The Company's reported gross profit margin for fiscal year 2011 was 75.3%.
Selling, general and administrative expenses increased $14.0 million to $60.6 million in the first quarter of 2012 versus $46.6 million last year. As a percent of net sales, selling, general and administrative expenses were 68.2% compared to 62.8% in the first quarter of 2011. The largest increases in selling, general and administrative expenses were primarily related to increased expansion of the Medifast Weight Control Center model with five corporate centers opening in the first quarter and 31 new corporate centers in 2011 which led to additional expenses with minimal sales during the new centers ramp up phase. The Company also spent $1.2 million in the quarter on a Medifast branding test including video production, television and web advertising in three of the markets that all the Company's distribution channels are active. In addition, in the first quarter of 2012 the Company recorded a $0.7 million severance charge as part of a workforce reduction and re-alignment in the corporate centers to enhance profitability long-term. The Company expects these actions to result in approximately $3.0 million in annualized cost savings.
Operating income for the first quarter of 2012 was $6.1 million compared to $10.1 million in the same period a year ago. The operating margin decreased to 6.9% compared to 13.6% last year. The decrease in operating income is due to the previously described decrease in gross profit and the increase in selling, general and administrative expenses. The Company realized a pre-tax earnings decline in the Medifast Weight Control Centers and Wholesale Physicians sales channel of $2.2 million in the first quarter of 2012 compared to pre-tax earnings of $1.1 million in the same period last year, a $3.4 million profit decline year-over-year. In the fourth quarter of 2011 the Company reported a pre-tax decline of $4.5 million. The decrease in net profitability is primarily due to the hiring of expertise in key areas to build the internal infrastructure to open new Medifast Weight Control Center and support existing centers as well as 35 stores being open for less than one year as of March 31, 2012. The decrease in profitability is also due the Medifast branding test and severance charge previously discussed in selling, general and administrative expenses for the first quarter of 2012.
The Company had an effective tax rate of 37.0% compared to 38.2% in the first quarter of 2011. The decline in the effective tax rate was a result of extensive tax planning performed by the Company. As part of its tax planning process, the Company amended several returns filed in prior years. As a manufacturing entity based in Maryland, the Company adopted the single sales factor apportionment method in addition to claiming new state job credits, reducing the Company's overall effective tax rate compared to the prior year. The Company anticipates a tax rate of approximately 36% to 37% in fiscal 2012.
Net income for the first quarter of 2012 was $4.0 million, or $0.29 per diluted share, compared to net income of $6.4 million, or $0.44 per diluted share, for the comparable period last year. The decrease in profitability for the first quarter of 2012 is primarily a result of the expansion of the corporate Medifast Weight Control Center model. Excluding the net effect of any unusual items realized in the first quarter of fiscal 2012 that do not reflect the ongoing operating activities of the Company, net income would have been $4.5 million, or $0.32 per diluted share.
Balance SheetThe Company's balance sheet remains strong with stockholders' equity of $78.1 million and working capital of $48.3 million as of March 31, 2012. Cash, cash equivalents, and investment securities for the first quarter of 2012 increased $18.2 million to $52.0 million compared to $33.8 million at December 31, 2011.
Outlook The Company expects second quarter 2012 net revenue to increase in the range of 15% to 19% or $90.0 to $93.0 million.
Earnings per diluted share are expected to be in the range of $0.37 to $0.41 based on an average weighted diluted share count of 13.8 to 13.9 million.
In the second quarter of 2012, the Company plans to open 11 to 13 new Medifast Weight Control Centers in new and existing markets with expectations to open 25 to 30 new corporate centers by year end. In 2012, the Company is focused on improving operational effectiveness and efficiency in both new and existing corporate centers as they balance sales growth and profitability. The Company will continue to review their annual store growth rate, based on their view of internal and external opportunities and challenges in the marketplace.