Medifast, Inc. (MED) Q3 2021 Earnings Report, Transcript and Summary

Good day and welcome to the Medifast Third Quarter 2021 Earnings Conference Call. Today, all participants will be in a listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. At this time, I would like to turn the conference over to Reed Anderson with ICR. Please go ahead.

Good afternoon and welcome to Medifast’s third quarter 2021 earnings conference call. On the call with me today are Dan Chard, Chairman and Chief Executive Officer and Jim Maloney, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended September 30, 2021 that went out this afternoon at approximately 4:05 pm Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Medifast’s website at www.medifastinc.com. This call is being webcast and a replay will be available on the company’s website. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. Actual results could differ materially from those projected in any forward-looking statements. All of the forward-looking statements contained herein speak only as of the date of this call. Medifast assumes no obligation to update any forward-looking projections that maybe made in today’s release or call. And with that, I would like to turn the call over to Medifast’s Chairman and Chief Executive Officer, Dan Chard.

Thank you, Reed and good afternoon everyone. Thank you for taking time to be with us. On the call with me today is Jim Maloney, our Chief Financial Officer. I will start with an overview of the third quarter then Jim will run through our financial results in more detail. Following our prepared remarks, we will open up the call for your questions. This has been another strong quarter for Medifast, with positive trends across our business and solid growth in both revenue and earnings. Compared to the same time period last year, revenue increased 52.3% to $413.4 million in the third quarter, while earnings per diluted share rose 22.3% to $3.56. As planned, we run our business builder promotion in August consistent with the prior 2 years. This promotion focuses on driving coach growth by incentivizing sponsorship it’s time when coach leaders are deeply engaged and focus on broadening their reach following our annual convention. The number of independent active earning OPTAVIA Coach has exceeded 61,000 at the end of the third quarter, with growth of 44.9% from the same period last year and up 3% sequentially. Both coaches and the company had to adjust to the new scale of the business and that’s caused them to be expected bottlenecks that were manifesting product delivery delays in our supply chain in the second quarter and early into the third quarter, which impacted coaches and client experience. Consequently, the sequential growth rate in active earning coaches decelerated as existing coaches spend more time supporting the record number of new clients who have entered the OPTAVIA ecosystem rather than onboarding as many new coaches. As planned, we brought new fulfillment capacity fully online at the beginning of August 2021 and this had a significant positive impact on both coach and client experience in the back half of the quarter that is expected to continue going forward. Promotional activity directed at client acquisition during the third quarter included the essential start promotion we ran in September. Last year, this program ran in the April-May timeframe and it was important catalyst with sharp acceleration we experienced starting in the summer of 2020. As this year’s event was later in the quarter, initial revenue benefit is expected to occur more in the fourth quarter, while some of the costs negatively affected margins in the third quarter. The key takeaway from our third quarter client acquisition results is that it will put us in a very strong position as we move into the final quarter of the year and moving to next year. Our coach-based model is driven by activation of new clients who then go on to be new coaches. New client numbers are up about 50% year-over-year in the month of September due to the essential start promotion and the continued strong demand for our coach supported health and wellness plan. As a result of new client acquisition, productivity hit a record high for the company, with revenue per active earning coach reaching $6,773. This is up 7% from a year ago and up 1.7% from Q2 the prior high. Coaches are continuing to leverage our infrastructure, advanced digital tools and field-led training to amplify their engagement across social media as well as other technology platforms, enabling them to support a greater number of clients. Our strategic investments in expanding supply chain and fulfillment capacity have proven invaluable in supporting our growth since 2017, when we decided to double down on the clinically proven coaching model through OPTAVIA. Thanks to outstanding execution by our team. We are now able to support a business with $2 billion in top line revenue in both manufacturing and fulfillment capacity. This was accomplished 3 to 6 months in advance of the respective target dates. Given our expected growth over the next several years, we are continuing to allocate capital and investments to this critical infrastructure and have already started work on an additional distribution center in Fort Worth, Texas in partnership with a leading third-party logistics company. This comes on the heels of the new warehouse and distribution center in Maryland that came online in Q2 and to which we continue to add capacity through Q3. Additionally, in October, we held an event with top coach leaders at Sundance, Utah to reinforce alignment and provide planning and alignment sessions around major initiatives for 2022. During the meeting, we aligned our plans for the fourth quarter, which supported their field lead training events over the final months of 2021 in preparation for Q1 of next year. Consistent with last year, we will execute our Holiday Dash program, which will begin in December and carryover into the first week of January. This promotion rewards coaches who attract new clients during the program period. We continue investing in our digital lab in Utah to pioneer exciting growth and productivity tools for existing coaches as well as developing additional pathways for attracting new clients and encouraging engaging new coaches. Deployment of the two proprietary apps we have been developing is advancing and the early metrics are encouraging. The OPTAVIA app targets clients and features healthy recipes self-service options related to the OPTAVIA premier orders and other key information to stay engaged. It’s broadly available in the U.S., while select users have access now in our Asia markets, where it is on track to go live within the next few weeks. Through mid-October, there have been over 217,000 unique downloads and daily average usage has averaged approximately 50,000 over the past month. Our Connect app is designed for OPTAVIA Coaches to provide a powerful tool to help them efficiently manage and grow their business with instant access to key data and insights. And that’s recently went live with approximately 2,000 business leaders and business coaches and will be rolled out across the broader coach population of 61,000 plus OPTAVIA Coaches during the fourth quarter. For some time now, many people have been looking at their health more holistically with a specific focus on developing healthy habits in every area of their life. Our latest survey findings revealed the large majority of U.S. adults have guidance of someone who has had similar experiences in helping them not only to reach their goals, but also to develop healthy habits. We found that 66% of adults say having support helped them throughout their health and wellness journey and that more than 4 and 5 or 81% of U.S. adults believe that they would be more successful in creating healthy habits if they had support from someone who had been in their shoes. This is true of our clients who were supported by independent OPTAVIA Coaches, the majority of whom have undergone their own transformation on program and therefore understand the clients – what clients are going through. Coach support continues to be a critical component of the OPTAVIA program and a key differentiator of our unique model. Our competitive position has never been stronger. OPTAVIA’s unique model and holistic approach, incorporating coach and community to support, helps people achieve their individual goals around health and wellness. About 91.9% of our revenue is subscription-based and a 100% of our orders are DTC shipped directly to consumers. We now support over 1 million clients on an annual basis and the number of people who we consider as part of our client community is increasing at a rapid rate. Investments in technology and infrastructure have made us more efficient and created a more powerful, scalable platform. The strong consistent growth in revenue and profits that we have delivered in the third quarter as well as over the past several years is a testament to the strength of our business and continues to reinforce our confidence in the future. In 2019, I shared the goal with our investment community of Medifast generating a $1 billion in revenue by the end of 2021. In Q3, we are pleased to announce we surpassed that full year revenue goal 3 months ahead of the original projection, allowing OPTAVIA to join an elite group of brands as it exceeded $1 billion in annual revenue. According to a study by the Boston Consulting Group around $290 billion FMCG brands with U.S. sales and only around 20 of those brands were introduced after the year 2000. Less than 5 years ago, we partnered with our coach community to introduce the lifestyle brand, OPTAVIA. Today, OPTAVIA joins that select group of $1 billion brands. It’s a rare achievement that only a handful of brands can claim and further demonstrates the power of our unique coach model. However, our proudest achievement lies in the human aspect. It’s the countless personal stories we hear from our OPTAVIA community each day and the 2 million lives we have impacted to-date that underscores our mission of lifelong transformation, one healthy habit at a time. We remain confident in our ability to continue to drive long-term sustainable growth. Demand for health and wellness products and services is strong, with a particularly high addressable market for approaches that favor healthy habit building over dieting or other weight loss approaches. This achievement is a reflection of the strength of our independent coaches and the team that supports our community on a daily basis. I am extremely proud of what we have accomplished. And I look forward to achieving many more growth milestones ahead. Lastly, I will close my remarks with an update on our initiatives around corporate social responsibility, which is a key priority for the entire Medifast organization and closely aligned with our overall mission. Last month, we hosted our third annual Healthy Habits For All Week, a week dedicated to helping underserved communities around the globe adopt healthy habits through improved education and expanded access to resources. We then kicked off newer headquarters in Baltimore, Maryland, where employees assembled back-to-school bags for after school students at the Living Classroom Foundation. We closed the day by distributing those bags to the community and donated Chromebooks to the kids providing critical access to technology that will allow them to adapt to changing environments throughout the school year. We concluded the week with a virtual cooking class for our OPTAVIA community benefiting our non-profit partner, No Kid Hungry. The class was led by celebrity chef Fabio Viviani and our own OPTAVIA Co-Founder and independent OPTAVIA Coach, Dr. Wayne Anderson. Together, they taught attendees how to create two restaurant inspired lean and green dishes. We are proud of the impact we have made through Healthy Habits for All thus far, but we are just getting started. Our community has a clear passion for making a difference and has demonstrated an impressive commitment to transforming communities around the world. Let me now turn the call over Jim Maloney who will walk you through the financial results. Jim?

Thank you, Dan. Good afternoon, everyone. Revenue in the third quarter of 2021 increased 52.3% to $413.4 million from $271.5 million in the third quarter of 2020, reflecting continued growth in the number of active earning OPTAVIA Coaches and higher per coach productivity. We ended the quarter with over 61,000 active earning OPTAVIA Coaches, another new record, up 3% sequentially compared to Q2 and an increase of 44.9% from last year’s third quarter. Average revenue per active earning OPTAVIA Coach for the third quarter was $6,773, also a new record and a 1.7% higher than the previous record set in Q2 of 2021. Versus a year ago, revenue per active earning OPTAVIA Coach was up 7%. Gains in productivity per active earning OPTAVIA Coach for the quarter continued to be driven by an increase in both the number of clients supported by each coach as well as an increase in average client spend. Gross profit for the third quarter of 2021 increased 50.5% to $307.1 million compared to $204 million in the prior year period, primarily as a result of increased revenue partially offset by increased cost of sales. Gross profit margin was 74.3%, down 90 basis points compared to 75.2% in the third quarter of 2020. The primary reason for the year-over-year decline in gross margin was due to the essential start promotional activity in higher product and shipping costs. We continue to expect pressure on gross profit margin through the remainder of 2021 due to planned higher use of co-manufacturers to keep up with demand along with inflation in raw ingredients, freight and labor costs and investments in supply chain and technology to achieve our growth objectives in 2022 and thereafter. We believe gross profit as a percentage of revenue will improve in the longer term as we develop pricing strategies, enhance and reduce costs in our distribution network, and gain productivity improvements in our procurement and manufacturing processes. SG&A expenses for the third quarter of 2021 increased 57.9% to $251.9 million compared to $159.5 million for the third quarter of 2020. SG&A as a percentage of revenue increased 220 basis points year-over-year to 60.9% versus 58.7% in the third quarter of 2020. The increase was primarily due to higher OPTAVIA commissions expense increased salaries and benefits related expenses for employees, incremental consulting costs related to information technology, increased credit card fees resulting from higher sales as well as cost associated with our annual convention held at the end of July 2021 as the OPTAVIA convention in July 2020 was the virtual event. In response to the COVID-19 pandemic, the costs were significantly lower. Income from operations increased $10.6 million to $55.2 million from $44.6 million in the prior year period, reflecting higher gross profit partially offset by increased SG&A expenses. Income from operations as a percentage of revenue was 13.3% for the quarter compared to 16.4% in the same period last year. The effective tax rate was 23.9% for the third quarter of 2021 compared to 22.8% in last year’s third quarter, reflecting higher state income tax rates and limitations on deductibility of officer compensation along with the tax benefit of stock compensation. Net income in the third quarter of 2021 was $42 million or $3.56 per diluted share. Based on approximately 11.8 million shares of common stock outstanding, this compares to net income of $34.5 million or $2.91 per diluted share based on approximately 11.9 million shares of common stock outstanding in last year’s third quarter. With approximately $160 million of cash, cash equivalents and investment securities and no interest bearing debt, our balance sheet remained strong. We have substantial capital and liquidity to continue executing our strategy, including prioritizing growth investments focused on technology and capacity expansion. It’s also important to note that we have been steadily increasing our share buyback activity, including repurchasing $26.3 million of stock in the third quarter, bringing the total for the first 9 months of 2021 to approximately $46 million. Given our expected trajectory for revenue and earnings growth over the next several years, we believe share repurchase remains a compelling way to enhance stockholder value. Finally, in September 2021, our Board of Directors declared a quarterly cash dividend of $16.6 million or $1.42 per share, which is payable on November 8, 2021 to stockholders of record as of September 21, 2021. Turning to our guidance, for the full year 2021, we expect revenue to be in the range of $1.51 billion to $1.53 billion and diluted EPS to be in the range of $13.27 to $13.96. Our guidance also assumes a 23.25% to 24.25% effective tax rate. We have been able to increase our guidance multiple times this year due to the strength of our business. Our revised earnings guidance from our last earnings call reflects strong revenue gains as well as increase investment in key growth initiatives focused in supply chain and technology, which support us achieving our long-term objective in 2022 and thereafter. In closing, third quarter results were strong and we remain confident in our business model as we move into the fourth quarter and get ready for 2022. We continue to target 15% top line growth and 15% operating income margin in the long-term. And we remain confident in our ability to deliver long-term sustainable growth at those levels. With that, let me turn the call over for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Stephanie Wissink with Jefferies. Please proceed.

Hey, it’s Chris Neamonitis on for Steph. Congrats on the quarter, Dan and Jim. I missed…

Thanks, Chris.

I mean, I think coach growth, can you talk about what you saw as far as coach growth and business builder program. How did that trend compared to your expectations? And on the flipside of that, can you talk about what you saw as far as any indications of churn among coaches in the quarter?

Sure. On the coach growth, we felt like it did perform within expectations. I mentioned on the call that one of the things that we recognized as we moved into the quarter from last quarter and we talked about this last time is that our transition from a supply – our supply chain to allow us to reach this new capacity of $2 billion in the transition created longer than expected delivery times. So, that had a little bit of a headwind for our coach-sponsoring activities. So, we felt that the business builder promotion was helpful and successful in giving the additional energy to continue the growth we have seen on the coach sponsorship activity. And what was the second part of your question?

I think that about hit on it. But I guess my follow-up would be is there anyway to quantify the churn number there at least? Do you feel there is an opportunity to reactivate those coaches?

Yes, we don’t typically provide a forecast around the churn number. We feel like what we are seeing in terms of coaches staying with us is consistent with what we have seen in the past. I think the bright spot in the quarter, in addition to our sequential coach growth, was the impact of the essential start program, which brought in a significant number of clients up 50% in September, which is what creates momentum as we move into the back half of the year or actually not the back half of the final quarter of the year and then through the – into next year. So we are confident in our coach’s abilities both to bring in new clients and in their ability to transition a portion of those clients to become active earning coaches, so both in terms of continued growth in our active earning coaches as well as continued robustness in the growth of our clients. We feel confident as we are moving into this business back last quarter in the new year.

That’s helpful. And then just one on the guidance, I get the seasonality anything else you would point to other than just continue behavior in the fourth quarter?

Yes. The only thing – other thing to point to in Q4 we are going to be continuing to invest in our supply chain and technology. So, those additional spend is to continue the growth that we are having. So we are getting ready for that, what I will call investment dollars, those investment dollars will hit the P&L though in Q4, but it’s getting ready for 2022 and beyond.

Got it. Thanks.

At this time, we are showing no further questioners in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Dan Chard for any closing remarks.

Thank you. We would like to thank everyone for joining and reiterate some of the main points of the quarter one. We remain confident that our differentiated health and wellness offering, along with our large and growing addressable market, will allow us to continue to deliver on our long-term growth rate and profit margins of expectations around 15% top line growth and 15% operating margin growth. We also – are feel confident in where we are and building out and scaling our operations both from a supply chain standpoint as well as our digital offering to support our coaches and our growing business. We are also – want to further – we maintained the confidence in our OPTAVIA Coach community and their ability to deliver in this – against our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time. And with that, we will close the call. Thank you.

The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.