Medifast, Inc. (NYSE:MED) Q1 2024 Earnings Call Transcript

Medifast, Inc. (NYSE:MED) Q1 2024 Earnings Call Transcript April 29, 2024

Medifast, Inc. misses on earnings expectations. Reported EPS is $0.66 EPS, expectations were $0.78. MED isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Medifast First Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, Steven Zenker, Vice President of Restoration. You may begin.

Steven Zenker: Good afternoon, and welcome to Medifast’s first quarter 2024 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 quarter ended March 31, 2024 that went out this afternoon at approximately 4.05 p.m. 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 also be available on the company’s website. Before we begin, we would like to remind everyone that today’s 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 on them. Actual results could differ materially from these 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 statements that may be made in today’s release or call. And with that, I would like to turn the call over to Medifast Chairman and Chief Executive Officer Dan Chard.

Dan Chard: Thank you, Steve, and thank you all for joining us today. With me today is Jim Maloney, Medifast’s CFO. I’ll give you an update on the progress we are making in our continued business transformation and Jim will then provide an update on our quarterly financial results. Medical innovation is empowering more people than ever before to achieve their weight loss goals and that presents a remarkable opportunity for Medifast as an organization. The expanding use of GLP-1 medications for weight loss, as well as expected further innovations in the medically supported weight loss space is creating new markets in both the care and support segments of the weight loss industry. It is anticipated that these two areas will become an integral part of the health and wellness journeys of many individuals, as more and more people begin to use medication and make the necessary lifestyle modifications to help achieve greater long-term health and wellness outcomes.

For Medifast, the focus of our business transformation is to build a set of differentiated capabilities that will allow us to be a leader in this dynamic and changing health and wellness space. Consistent with our historical focus, we will also continue to support other related health outcomes that are tied to adopting healthy lifestyle habits. With our recent moves to expand our product offerings and target supporting individuals in the medically supported weight loss market, we believe we have significantly expanded our total addressable market by broadening the scope of our consumer offer. Independent research that we commissioned shows that approximately 50% of our prospective customers would consider using GLP-1 medications to aid in their weight loss.

As such, it is clear that this high growth area offers considerable opportunity and fits well with our expertise with over 40 years of history of helping people improve their overall health and wellness. Lifestyle modifications remains as relevant and important as ever and is an important element to long-term success in the weight loss for those on medications. In fact, the medications themselves are required to be prescribed by licensed clinicians and include instructions for the user to make lifestyle modifications, and we believe our offering and network of OPTAVIA coaches make us uniquely qualified to provide the support. In a clinical study of the new generation of GLP-1 medications, people that were on a placebo instead of medications and who followed lifestyle modification guidance lost 3% to 5% of their initial body weight.

Weight loss for those who used GLP-1 medications and followed lifestyle modification guidance was 15% to 21% of their initial body weight, inclusive of both the effects of the medication, as well as the benefits from lifestyle modification. [indiscernible] of GLP-1 medications alone are projected by many to reach up to $100 billion or more by the year 2030. This opens up a huge opportunity to provide support products and services to this rapidly growing consumer base. A recent BCG study commissioned by Medifast determined that the GLP-1 support market, which includes products and services purchased by those on GLP-1 medications, excluding those medication costs, is roughly $13 billion today and could grow to $50 billion or more by the year 2030.

Individuals on GLP-1 medications are currently spending an average of around $200 a month on nutritional shakes, bars, vitamins, and other related items to aid in their efforts to improve their overall health and wellness in conjunction with the medications, according to the same BCG study. Support from nutrition products for those on weight loss and medications, however, is just part of the lifestyle modification equation. A holistic program that includes personalized support to help people learn new lifestyle habits and stay accountable on their transformation journey is another important element to helping individuals succeed in their health and wellness journeys. One of the primary goals of such a program is muscle maintenance to avoid the 20% to 50% weight loss from lean muscle mass that many GLP-1 medication users suffer as part of their experience.

The fact is, that since we launched OPTAVIA just under eight years ago, we’ve gleaned some important insights. We know that people do better in their health and weight loss when they have a coach, and they also do better when they’re able to plug into a community of like-minded people. It’s also abundantly clear that people do better when they learn healthy habits and can leverage them into the creation of a healthier lifestyle. A clinical study sponsored by Medifast showed that those on the optimal weight five-in-one plan with support of an OPTAVIA coach successfully lost 10 times more weight and 17 times more fat than those who try to lose weight on their own. While the health and wellness environment may now have changed due to the weight loss medications, these insights have helped drive our strategic focus as we continue to transform our business.

Coaches and now clinicians are integral to success. So we will offer a holistic solution that puts support from them at the heart of people’s health and weight loss journey. We will integrate customers into a welcoming and engaging community that is on the same journey as each of these individuals. By plugging into what we already do best and adjusting to meet the nature of today’s medical innovation, we can offer integrated solutions that align with customer demand and behaviors. In collaboration with LifeMD, a leading telehealth provider, we are now able to deliver a unique, holistic offer for consumers who want to use GLP-1 medications that helps them achieve their personal health and weight loss goals. With OPTAVIA coaches and LifeMD clinicians working together, we provide consumers with the nutrition, education, and support necessary to help make living a healthy lifestyle second nature.

An integrated solution is more efficient, targets a much broader market opportunity, and should increase the lifetime value of our customers. That will be important in helping to offset an expected decline in our average monthly revenue per new customer that signs up for a medically supported weight loss solution, which will be offered at a lower monthly cost than our historical program. While we recognize that GLP-1 usage is accelerating rapidly and should continue to do so for many years, we remain completely customer-focused as an organization rather than the single solution oriented. In other words, we listen closely to the unique circumstances of each individual and then work to find the weight loss and health transformation approach that is right for each of them.

Sometimes that could mean using a medication. Other times that might mean learning to adopt healthy habits. And sometimes it might mean utilizing support products to help make the wellness journey easier. Regardless of each unique pathway, the presence of a coach and a community creates a platform that helps drive positive end outcomes and that has helped positively impact the lives of more than 3 million people to date. Turning to our first quarter results, they came in largely as expected with continued headwinds, impacting customer acquisition, primarily from the macro factors, including the growing popularity of GLP-1 medications. We ran a promotion from March, which extended into early April. And this did provide a small lift, but we believe that right now a much more effective way to grow our business is to focus our resources on building out new channels for customer acquisition through both a LifeMD collaboration and company-led marketing.

Jim will go more into the quarterly details shortly. Regarding our collaboration with LifeMD, we are pleased with our execution to date and we continue to make progress on rolling out our integrated offer. Next month, we intend to take a key interim step in that rollout as we begin offering a GLP-1 support nutrition package in conjunction with LifeMD at a price point of as low as $282 per month plus the cost of any medication for a six-month commitment. The package will include a lifestyle program with a dedicated OPTAVIA coach, balanced nutrition options with our GLP-1 nutrition support kit, and, through LifeMD, access to a medical provider and blood work, and prescription and insurance support. Over the upcoming months, we will continue to refine the model and evaluate and test the effectiveness and adoption rates of the offer.

We expect to add further improvements to the care and support process as we move through the second half of the year, including enhancing the website and the apps utilized by our customers and coaches. We are working diligently on developing the technology to allow for an enhanced customer experience and expects to roll out incremental improvements throughout the rest of the year. These are expected to create a more cohesive way for customers to sign up and remit payments for the holistic offer, as well as additional functionality to make the user experience easier and more integrated with LifeMD’s capabilities. We are also working to develop new products specifically for those on GLP-1 medications, which are currently expected to be ready late in the year.

As we have previously disclosed, we will be making a significant investment in marketing at the company level. Medifast is committed to driving growth and enhancing brand visibility through a $30 million investment in company-led marketing efforts throughout 2024. This high-profile national campaign, led by Dentsu Creative, a renowned global marketing and advertising firm, and [Ice Prospect] (ph), a leader in performance digital marketing, aims to drive customer conversion, elevate brand awareness, and foster engagement with new and existing customers. With an omnichannel approach, the Digital First campaign is expected to introduce new branding and elevate the website and digital experience. These investments will ramp up later in the second quarter and even more so in the second half of the year, helping form the foundation of the company’s strategy to return to growth and in broadening and deepening our acquisition channels to focus on three key pillars, our marketing initiatives, the expansion of our coaching network, and our strategic collaboration with LifeMD to collectively drive forward our mission to empower individuals on their journey to optimal health and well-being.

Importantly, our company-led marketing efforts and our collaboration with LifeMD gives us two new channels for acquiring customers, in addition to the traditional channel where our coaches source customers via their own word-of-mouth campaigns in their local communities and in social media. I’ve talked about our coaches and how they are the center of everything we do. This is a clear differentiator for Medifast versus others in our industry. The vast majority of our coaches started as OPTAVIA customers and therefore understand the mindset and needs of someone looking to better their overall health. Efforts have been underway for a while regarding the coaches learning about the GLP-1 market and the specific needs and challenges faced by those utilizing the medications.

With a more complete offer to take to their prospective customers, including access to weight loss medications through a LifeMD clinician in addition to our line of nutrition products and support from a coach and a community that is on a similar journey, the value that the coaches can bring to their customers has never been more compelling. There can be little doubt that the weight loss market has seen seismic changes over the past 18 months as medically supported weight loss adoption has accelerated more rapidly than perhaps anyone could have expected. But with that uptick in consumer focus comes significant opportunity. With a comprehensive holistic approach that brings together customers, coaches, and clinicians, Medifast is uniquely positioned to provide the nutritional and healthy lifestyle support that GLP-1 users need to achieve their lifelong transformation that they’re seeking.

We believe that Medifast has the financial strength and strategic flexibility to invest in our ongoing operational and marketing effectiveness, and the scientific and medical heritage that provides us with the credibility to play in this rapidly developing space. Most importantly, we have an experienced team that has shown a consistent ability to pivot and take advantage of the opportunities as they emerge, and a strategy in place working alongside world-class partners to help deliver on the exciting possibilities ahead. We look forward to sharing more on our progress on future calls. Now, I’ll turn it over to Jim to review the quarter.

James Maloney: Thank you, Dan. Good afternoon, everyone. 2024 first quarter results were in line with our guidance as we continued to execute our business transformation initiatives that we believe are integral to our success. Revenue for the first quarter of $175 million was at the upper end of our guidance range of $155 million to $175 million, a 49.9% decrease versus the year earlier period, primarily driven by continued pressure on customer acquisition amid the growth in popularity of weight loss medications, which has led to a decline in the number of active earning OPTAVIA coaches and lower productivity per active earning OPTAVIA coach. We ended the first quarter with approximately 37,800 active earning OPTAVIA coaches, a decrease of 35.6% from the first quarter of 2024, average revenue per active earning OPTAVIA coach for the first quarter was $4,623, a year-over-year decline of 22.2% reflecting the continued headwinds to customer acquisition.

Gross profit decreased 48.3% to $127.3 million for the first quarter of 2024, driven by lower revenue. Gross profit margin improved 220 basis points to 72.8%, positively impacted by efficiencies in inventory management and cost savings from the Fuel for the Future initiatives, partially offset by increased shipping costs. SG&A expense was down 38.1% to $119.4 million for the first quarter of 2024, primarily due to fewer active earning coaches and decreased coach compensation on lower volumes, partially offset by the start of company-led advertising expenses, which continues to be in the early stages, as well as market research and investment costs related to medically supported weight loss. SG&A as a percentage of revenue increased 1,300 basis points to 68.3%, primarily as a result of the loss of leverage of fixed cost due to lower sales volumes, as well as factors I just mentioned.

On a non-GAAP adjusted basis, which excludes one-time costs to initiate and operationalize the LifeMD collaboration, SG&A decreased 38.8% to $118 million and moved 1,220 basis points higher as a percent of revenue to 67.5%. Income from operations was $7.9 million in the first quarter of 2024, down 85.2% versus the year earlier period, driven by lower gross profit, partially offset by lower SG&A. As a percentage of revenue, income from operations was 4.5% in the first quarter, a 1,080 basis point decline versus the year earlier level. On a non-GAAP adjusted basis, which excludes the one-time expenses described previously, income from operations decreased 82.7% to $9.3 million, as a percentage of revenue non-GAAP adjusted income from operations was 5.3%, a decrease of 1,000 basis points from the year ago period.

The effective tax rate was 28.2%, was higher than the 25.1% recorded in the prior year’s first quarter due to an increase in the tax shortfall for stock compensation and the rate impact of research and development tax credits, partially offset by the decrease in the limitation for executive compensation and various other miscellaneous items. On a non-GAAP adjusted basis, the effective tax rate in the first quarter was 28.7%. Net income in the first quarter of 2024 was $8.3 million or $0.76 per diluted share compared to $40 million or $3.67 per diluted share in the year earlier period. On a non-GAAP adjusted basis net income in the first quarter of 2024, which excludes the mark to market adjustment of our LifeMD stock holdings, as well as the one-time cost to initiate the LifeMD collaboration was $7.2 million or $0.66 per diluted share.

Turning to our balance sheet, we ended the quarter with $156.4 million in cash, cash equivalents, and investments and no interest-sparing debt. This is up from $150 million as of December 31, 2023. Now I’ll turn to our guidance. We are expecting second quarter revenue to range from $150 million to $170 million, reflecting continued near-term challenges to customer acquisition as a result of the growth of GLP-1 medications in the marketplace. We expect our EPS for the quarter to range from $0.05 to $0.40. The EPS range excludes the cost related to the initiation of LifeMD collaboration and any gains and losses from changes in the market price of our LifeMD common stock. While the operating environment remains challenging, we continue to believe that meaningful spending on driving customer acquisition from two additional sources, company-led marketing and customer flow from LifeMD and the ability to offer access to clinicians will lead to an improvement in customer acquisition trends beginning late in the year.

To foster that improvement, we expect to spend around $30 million this year on advertising and other marketing initiatives to increase the visibility and customer engagement around our OPTAVIA brand and its offerings. An elevated level of spending is expected to continue into 2025 as we believe it will be effective in bringing in new customers that will help us grow in the future. These investments in customer acquisition initiatives, as well as the negative impact of lower volumes on operating leverage are expected to continue to pressure profitability over the remainder of 2024. In summary, we are steadfast in continuing our transformation journey, focusing on our integrated offering in the medically supported weight loss space, while also making strategic investments to grow the business in the future.

Our strong balance sheet and continued expense reduction efforts help mitigate the short-term weakness in our results. And we expect the actions we are undertaking to drive improvement as we move into 2025 and beyond. With that, let me turn the call back to the operator for questions.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of James Salera with Stephens Inc. Please proceed with your question.

James Salera: Hi, guys. Thanks for taking our question. I wanted to start with the 2Q revenue guide. If I just take the midpoint, it looks like it’s down around 46%, which isn’t much different than 1Q, but I would think between the easing comp in 2Q and then the ramp up of the company-led marketing that there would be a more significant improvement there? Is there something I’m overlooking, or any color you could offer on that would be helpful?

Dan Chard: Sure, Jim, this is Dan. I’ll let Jim answer that question, but just wanted to make a couple points that will kind of help inform how we’re thinking about that guidance. As you know, we’ve made some significant progress that started at the end of last year with the collaboration agreement. Importantly, as we’re looking at how we look forward at the new market, we’re specifically focused on the support market, which for the first time, we’re measuring. And we’re doing this through a study that was commissioned by us with BCG that has the support market, GLP-1 support market at $13 billion this year, growing to $50 billion. Again importantly, we’ve now launched a new product bundle, which is now bundled with what is offered by LifeMD.

And that bundle is going to be selling for now $282. It includes both the clinician prescription, blood work, and insurance support, as well as our traditional support of the coach community, nutrition support which is the nutrition dense fuelings, our OPTAVIA app and the habits of health. So that number, $282, is roughly — well, it compares to $400 of what we used to offers our introductory bundle for our five-in-one plan. So you can see there’s a pretty significant change in that. We also are going to be launching a new set of products by the end of the year. And also, we’ll be announcing in Q3 and Q4 some additional integration that will create a seamless payment and ordering system for the two platforms. So we expect — what we expect in the back half of the year is to start to see the impacts of these initiatives.

So Q3, Q4, first with improved coach productivity, so driven by client acquisition and revenue per coach. And then going beyond that to improved client retention as we’re able to keep particularly GLP-1 clients for a longer period of time. With that I’ll turn to Jim to answer your question about guidance.

James Maloney: Yes, so when you consider our guidance for Q2, Jim, we’re assuming the current headwinds on customer acquisition continue in the near term. The rollout of the advertising will not happen until the very — the latter part of Q2. So our guidance does not show that impact and the amount of spend that will happen is really tilted towards Q3. So there will be a little bit higher level of advertising versus Q1 and Q2, but really the spend is going to occur more rapidly in Q3. So that’s what you’re seeing there. Regarding — we’re making headway with LifeMD, we are seeing, and we’re happy with the level of support that we’ve been able to do with LifeMD. So the number of customers that are going and using the LifeMD solutions is increasing, but we do believe it’s going to take continued time. And we’re hopeful that we’re going to see that into Q3 and beyond as we have the integrated solution fully up and running in Q3. So hopefully that helps.

James Salera: Yes, I appreciate the color guys. Jim, if I can maybe ask you a follow-up just on the cadence of the marketing. If I read the slide deck right, you guys spent about $2.5 million in 1Q, which means you have $27.5 million for the rest of the year. Can you just give us a sense of how steep the ramp is in the back half? Like, whether dollars or percentage, how much of that 3Q to 4Q?

James Maloney: Yes, so the — it is very steep. We’re expecting that the level will be a little bit higher in Q2, and that’s why you’re not seeing the benefit of that happen in Q2 versus our guidance. So it’s slightly higher, but it’s not to any degree that that would be meaningful. So we’re still in the learning phase of this, and I tried to indicate that in my part of the script, that we’re in the early stages of this. We are going to launch new messaging in Q2, but it’s going to be at the very end of Q2. And the ramp of it is going to happen into Q3. So the majority –to answer your question specifically, the majority of the $30 million of spend will happen in Q3.

James Salera: Okay, perfect. Thanks, guys. I’ll hop back into queue.

Operator: Thank you. Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Linda Bolton-Weiser: Yes, hi. Can you please talk about — so in terms of the pricing for the new integrated program, my understanding is, LifeMD charges very low for the drug itself. So the $282 per month is sort of all inclusive, right? I mean, it’s the coaching, the RX, [grip] (ph), the blood work, and really most of the drug cost. Am I understanding that correctly? And also, can you explain how is the revenue going to be booked? Are you going to record a portion of that $282 in revenue or are they or is it split or how is their revenue split going to work?

Dan Chard: Yes, let me answer the first part of your question and then I’ll let Jim answer the revenue question. So the $282 is inclusive of both of the services from our OPTAVIA program, as well as LifeMD, it does not include the cost of medication. And you pointed out Linda that there are some different very price competitive options through LifeMD that are both branded and compounded. But the $282 does not include the cost of the medication. And the split between the two is roughly $217 for the product and coaching bundle, and roughly $65 for a six month commitment to LifeMD.

James Maloney: Yes. So Linda, we’re not going to be recording the $65 that Dan is referring to for LifeMD’s portion of this. So they would record the $65 and we would record the $217. The $65 for LifeMD requires a six-month commitment. So that’s the commitment that you have to make for LifeMD. The $217, there is no commitment for that number from a customer.

Linda Bolton-Weiser: Sure. And then the $217 includes some food products, some fuelings, or clarify what that [indiscernible].