Q3 2021 Medifast Inc Earnings Call
Good day and welcome to the Medifast third quarter 2021 earnings conference call today, all participants will be in a listen only mode.
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At this time I would like to turn the conference over to Reid Anderson with ICR. Please go ahead.
Good afternoon, and welcome to Medifast 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 32021 went out this afternoon at approximately four O five P M Eastern time.
Not received the release it is available on the Investor Relations portion of Medifast website at Www Dot Medifast, Inc. Dot com this call is being webcast.
Play will be available on the Companys website.
Before we begin I'd 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 really.
<unk> should not be placed on 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 may be made in today's release or call and with that I would like to turn the call over to manifest 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'll start with an overview of the third quarter and 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% or $3 50 success.
As planned we ran our business still or promotion in August consistent with the prior two years.
This promotion focuses on driving coach growth by incentivizing sponsorship time with coach leaders are deeply engaged and focused on broadening their reach following our annual convention.
The number of independent active earning off the via coaches exceeded 61000 at the end of the third quarter.
With growth of 44, 9% from the same period last year and up 3% sequentially.
Both coaches as the company had to adjust to the new scale of the business and that's caused them to be expected bottlenecks, where manifest in product delivery delays and our supply chain in the second quarter and early in the third quarter, which impacted coach and client 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 well then it will be after the 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 is expected to continue going forward.
Promotional activity directed a 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.
What's important there was an important catalyst the sharp acceleration, we experienced auditing starting in the summer of 2020.
As this year's event was later in the quarter. The initial revenue benefit is expected to occur more in the fourth quarter, while some of the costs negatively affected margins in the first quarter.
The key takeaway from our first 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 moving into 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 the health and wellness.
As a result of new client acquisition productivity hit a record high for the company with revenue per active earning coach reaching $6773. This is up 7% from a year ago and up one 7% from Q2 the fireeye.
Coaches are continuing to leverage our infrastructure advanced digital tools and still 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 our clinically proven coaching model through after via.
Thanks to outstanding execution by our team we are now able to support our business with $2 billion in topline revenue in both manufacturing and fulfillment capacity.
This was accomplished three to six months in advance of their respective target dates.
Given our expected growth over the next several years, we are continuing to allocate capital and investments as critical infrastructure and have already started work on an additional distribution center in Fort worth, Texas, The 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 continued 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 there Phil let a training events over the final months of 2021 in preparation for Q1 of next year.
Consistent with last year, we will we will execute our holiday Dash program, which will begin in December and carryover into the first week of January this promotion 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 tool for existing coaches as well as developing additional pathways for attracting new clients and encouraging engaging approaches.
Deployment of the two proprietary apps, we've been developing is advancing and the early metrics are encouraging the.
He also via App targets clients and features healthy recipes self service options related to the off of your career from air orders and other key information to stay engaged.
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 217000 unique downloads daily average usage has averaged approximately 50000 over the past month.
Our connect App is designed for off the via 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 2000 and business leaders and business coaches and will be rolled out across the broader coach population of 61000, plus after the of 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 reveal the large majority of U S. Adults have guidance someone who has had similar experiences and helping them not only to reach their goals, but also to develop healthy habits.
We found that 66% of adults.
Say, having support help them throughout their health and wellness journey.
And the more than four and five or 81% of U S. Adults will leave that there 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.
Ported by independent after via coaches, the majority of whom have undergone their own transformational program and therefore understand the clients what clients are going through.
Oh support continues to be a critical component of the ought to be a program and a key differentiator of our unique model.
Our competitive position has never been stronger after views unique model and holistic approach incorporating coaching community to support helps people achieve their individual goals around health and wellness.
About 91, 9% of our revenue is subscription based and 100% of our orders our DTC ships directly to consumers.
We now support over 1 million clients on an annual basis, the number of people, who we consider as part of our client community is increasing at a rapid rate.
Vestments in technology and infrastructure have made us more efficient and has created a more powerful scalable platform.
The strong consistent growth in revenue and profits we have delivered in the third quarter as well as over the past several years is a testament to the strength of our business.
To reinforce our confidence in the future.
In 2019, I shared the goal with our investment community of Medifast generating $1 billion in revenue by the end of 2021.
In Q3, we are pleased to announce we surpassed our full year revenue goal three months ahead of the original projection, allowing after have yet to join an elite group of brands as it exceeded $1 billion in annual revenue.
According to a study by the Boston consulting group to around $290 billion F. M. C. G brands with U S sales and only around 20 of those brands were introduced after the year 2000 less.
Less than five years ago, we partnered with our coach community to introduce the lifestyle brand after the.
Today after via joins that select group of billions all brands. It's a rare achievement in 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 offer via community each day and the 2 million lives. We have impacted states that underscores our mission of lifelong transformation, one healthy habit at insight.
We remain confident in our ability to continue to drive long term sustainable growth.
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'm extremely proud of what we've accomplished.
And I look forward to achieving many more growth milestones ahead.
Lastly, I'll close my remarks, with an update on our initiatives around corporate social responsibility, which is a key priority for the entire Medisoft 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 up.
Healthy habits through improved education and expanded access resources is that kicked off near our headquarters in Baltimore, Maryland, where employees assembled back to school bags, where after school students at the living classrooms Foundation.
We closed the day by distributing those bags to the community and donated.
Chromebooks to the kids, providing critical access to technologies that will allow them to adapt to changing environments throughout the school year.
We concluded the week with a virtual cooking class for our off to be a community benefiting our nonprofit partners no Kid hungry. The class was led by celebrity chef I'll be able to be on it and our own after the a cofounder and then you've got of course after the Oh.
Dr Wayne Anderson.
Together they taught attendees how to create two restaurant as far as lean and green dishes.
We're proud of the impact we've made through healthy habits for all thus far.
But we're 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 to Jim Maloney, who will walk you through the financial results Jeff.
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.
Selecting continued growth in the number of active earning after via coaches and higher per coach productivity.
We ended the quarter with over 61000 active earning ought to be a coaches and other 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 after via coach.
The third quarter was $6773.
So a new record and a one 7% higher than the previous record set in Q2 of 2021.
Versus a year ago.
Revenue per active earning after via coach was up 7%.
Gains in productivity per active earning off debuted 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 55.
5% to $307 $1 million compared to $204 million in the prior year period.
Merely as a result of increased revenue, partially offset by increased cost of sales.
Gross profit margin was 74, 3% down 90 basis points.
<unk> 275, 2% in the third quarter of 2020.
Primary reason for the year over year decline in gross margin was due to the essential start from promotional activity and 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 <unk>.
22 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 cost in our distribution network and gain productivity improvements in our procurement and manufacturing processes and SG&A expenses for the third quarter of 2021 increased.
57, 9%.
Two $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 69%.
<unk> was 58, 7% in the third quarter of 2020.
The increase was primarily due to higher after via 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 costs associated with our annual convention.
Held at the end of July 2021, as they ought to be a convention in July 2020 was the virtual events 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 eight.
8% in last year's third quarter.
<unk> 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 remains 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 nine 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 eight 2021.
To stockholders of record as as though.
September 21 2021.
Turning to our guidance.
For the full year 2021, we expect revenue to be in the range of $1 five 1 billion to $1 $5 $3 billion.
And diluted EPS to be in the range of $13 27 to $13 96.
Our guidance also assumes a $23 two 5% to $24 two 5% effective tax rate.
We've been able to increase our guidance multiple times this year due to the strength of our business.
<unk> earnings guidance from our last earnings call reflects strong revenue gains as well as increased 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% topline 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.
Okay.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw it. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Stephanie.
Wissink with Jefferies. Please proceed.
Correct me, if I'm honest noninterest stuff congrats on the quarter, Dan and Jim.
And then if you didn't.
I'm interested interesting coach growth can you talk about what you saw.
As far as coach growth business build their program, how did that trend compared to your expectations and the flip side of that can you talk about what you saw as far as any indication of churn among coaches in the quarter.
Sure on the.
The coast growth.
We felt like it did performed within expectations.
You mentioned on the call.
One of the things that we recognized as we moved in to 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.
And the transition created longer than expected.
Livery times, so that had a little bit of a hit it was a little bit of a headwind for us.
Our coach sponsoring activities. So we felt that the business build a promotion was helpful and successful and giving.
The additional energy to continue the growth we've seen.
On the.
On the 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 any way to quantify that.
The churn number there at least do you feel there's an opportunity to reactivate those coaches.
Yeah, we don't we don't typically provide a law.
Walk us around the churn number we feel like what we're seeing.
Terms of coaches are staying with us is consistent with what we've seen in the past I think the the bright spot in the quarter.
In addition to our sequential coach growth was the impact of the Central Star 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.
Confidence in our coaches abilities both to.
Bring in new clients and their ability to transition.
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're moving into this this is back at the last quarter in the new year.
That's helpful and then just one on the guidance.
Get the seasonality anything else you would point to other than just consumer behavior in the fourth quarter.
Yes, the only thing other thing to point to and in Q4, we're going to be.
Continuing to.
To invest in.
In our supply chain and technology.
So those those additional spend.
Is to continue to continue the growth.
That we're having.
So we're getting ready for that.
What I will call investment dollars are those investment dollars will hit the P&L, though in Q4, but it is getting ready for 2022 and beyond.
Got it thanks.
And this an argument against our mission of offering the world lifelong transformation won't help you have a good time and with that we'll close the call. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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