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 third quarter ended September 30, 2013.
"I am pleased to report that we met our earnings guidance for the third quarter. Our team continued to be disciplined, closely monitoring our spending while we studied the effectiveness of our marketing initiatives," commented Michael C. MacDonald, Medifast's Chairman and Chief Executive Officer. "The consumer environment proved challenging for us in the quarter, and while we believe this will continue to impact our revenue in the fourth quarter, we anticipate full year revenue growth for 2013. Our team is optimistic we will return to stronger revenue growth in 2014 by implementing new strategic initiatives to attract and retain customers through our Take Shape for Life, Medifast Direct, Medifast Weight Control Centers, and Wholesale Physicians sales channels."
Third Quarter 2013 Results
For the third quarter ended September 30, 2013, Medifast net revenue decreased 5% to $86.5 million from net revenue of $91.0 million in the third quarter of 2012.
Revenue in the direct sales channel, Take Shape for Life, increased 1% to $56.2 million in the third quarter of 2013 compared to $55.6 million in the same period last year. The Company ended the third quarter with approximately 11,700 active health coaches, an increase of 8% as compared to the same period last year. The average revenue per health coach per month decreased slightly to $1,530 compared to $1,630 in the same period last year.
The Company's Medifast Direct channel revenue decreased 19% to $17.1 million, compared to $21.2 million in the third quarter of 2012. The Company decreased spending on advertising and marketing in the third quarter while it evaluated a more challenging consumer discretionary spending environment. The Medifast Direct channel realized improved efficiencies and identified favorable revenue and spending correlations. For the remainder of 2013, the Company will continue to spend conservatively while it begins to implement advertising mix and spending adjustments for 2014 to improve demand generation and profitability for the Medifast Direct sales division.
In the third quarter, the Medifast Weight Control Centers and Wholesale Physicians channel revenue decreased 7% to $13.2 million. Despite these sales results, the Company was able to realize a $140,000 profit improvement as compared to the third quarter of 2012. The Company experienced sales declines in its corporate centers partially offset by growth in its franchise business. Same store sales for corporate centers opened greater than one year decreased 18% as compared to the third quarter 2012. This was consistent with expectations, in part due to the plan to sell certain corporate centers and subsequently convert them to the Franchise model. The Company ended the third quarter with a total of 83 corporate locations, all of which are in the comparable store base, and 36 franchise locations. The Company closed three centers in the third quarter upon lease expiration.
Gross profit for the third quarter of 2013 decreased 5% to $64.9 million, compared to $68.3 million in the third quarter of the prior year. The Company's gross profit margin decreased 10 basis points to 75.0% in the third quarter versus 75.1% in the third quarter of 2012. The decrease in gross margin during the quarter was primarily the result of higher shipping costs.
Selling, general and administrative expenses (SG&A) were $57.5 million compared to $59.4 million in the third quarter of 2012, a decrease of $1.9 million. As a percentage of revenue, SG&A increased 120 basis points to 66.5% versus 65.3%.
Operating income was $7.3 million, or 8.5% of net revenue, compared to $8.9 million, or 9.8% of net revenue in the third quarter of 2012.
The Company had an effective tax rate of 28.0% compared to 19.7% in the third quarter of 2012. The increase in the effective tax rate was primarily the result of the state tax restructuring that took place in the third quarter of 2012 which helped the Company take advantage of state apportionment methodology. Net income was $5.7 million, or $0.41 per diluted share, based on approximately 13.9 million shares outstanding compared to net income last year of $7.2 million, or $0.52 per diluted share.
Balance Sheet
The Company's balance sheet remains strong with stockholders' equity of $111.3 million and working capital of approximately $76.3 million as of September 30, 2013. Cash, cash equivalents, and investment securities as of September 30, 2013 increased $22.0 million to $82.0 million compared to $60.0 million as of December 31, 2012.
Outlook
For fiscal year 2013, the Company expects net revenue in the range of $360 million to $365 million and narrowed its earnings per share guidance to $1.70 to 1.75. The Company anticipates a full year tax rate of approximately 33% to 34% in 2013.