Medifast, Inc. (NYSE: MED), a leading manufacturer and distributor of clinically proven, healthy living products and programs, today reported financial results for the third quarter ended September 30, 2018.
Third Quarter 2018 Highlights:
- Revenue of $139.2 million, an increase of 80.3% year-over-year
- Active earning Coaches of 22,600, an increase of 59.2% year-over-year
- Net income of $13.8 million, an increase of 106.1% year-over-year
- Earnings per diluted share (‘EPS’) of $1.14, an increase of 107.3% year-over-year
‘We are very pleased with our record third quarter revenue and profitability which reflects an accelerated rate of growth in our total active earnings OPTAVIA coaches and coach productivity,’ commented Dan Chard, Medifast’s Chief Executive Officer.
‘We continued to successfully align our corporate and field leader activities behind a repeatable business rhythm focused on our long-term purpose and mission to offer the world lifelong transformation, one healthy habit at a time. We believe we are well positioned to deliver long-term sustainable growth and value for our shareholders.’
Third Quarter 2018 Results
For the third quarter of 2018, revenue increased 80.3% to $139.2 millionfrom revenue of $77.2 millionfor the third quarter last year. OPTAVIA-branded products represented 70% of consumable units sold for the third quarter of 2018 compared to 43% for the third quarter of last year.
The total number of active earning OPTAVIA Coaches for the third quarter of 2018 increased to 22,600, compared to 14,200 for the third quarter of 2017. The average revenue per active earning Coach for the third quarter of 2018 increased 23.2% to $5,781compared to $4,693for the third quarter last year.Gross profit for the third quarter of 2018 increased to $107.2 millionfrom $58.2 millionfor the third quarter of 2017.
The Company’s gross profit as a percentage of revenue increased 160 basis points to 77.0% from 75.4% for the third quarter last year. The increase in gross margin percentage was driven by higher production volumes, yielding favorable manufacturing absorption as the Company increased inventory to meet expected consumer demand. The Company anticipates this absorption benefit to be temporary and gross profit as a percentage of revenue is expected to return to normalized rates as inventory levels normalize.
In addition, the increase in the gross margin percentage resulted in part from reduced inventory obsolescence and lower shipping expense.Selling, general and administrative expenses (‘SG&A’) for the third quarter of 2018 increased $41.7 millionto $89.7 millioncompared to $48.0 millionfor the third quarter of 2017, primarily as a result of higher OPTAVIA commissions expense and investments the Company is making in an upcoming International Leadership Advancement Trip which is designed to reward qualifying business leaders with exclusive training and development opportunities.
The trip expense is recorded in the third and fourth quarters of 2018. The International Leadership Advancement Trip is expected to drive strong growth in the back half of 2018 and into 2019.Operating income increased $7.3 millionto $17.5 millionfrom $10.2 millionfor the third quarter of 2017 primarily as a result of increased gross profit, partially offset by increased SG&A expenses.
Operating income as a percentage of revenue decreased 70 basis points to 12.5% compared to 13.2% in the third quarter of 2017.The third quarter 2018 effective tax rate was 22.7%, compared to 35.5% for the third quarter of 2017. This decrease was primarily a result of the decrease in the Federal statutory rate pursuant to the Tax Cuts & Jobs Act as well as a decrease in the state rate of 1.7%. The decrease in the effective rate was partially offset by a 2.1% increase in the effective tax rate due to the elimination of the Domestic Manufacturer Deduction.Net income for the third quarter of 2018 was $13.8 million, or $1.14per diluted share, based on approximately 12.1 million shares outstanding. Third quarter 2017 net income was $6.7 million, or $0.55per diluted share based on approximately 12.1 million shares outstanding.
The Company’s balance sheet remains strong with stockholders’ equity of $111.6 millionand working capital of $89.1 millionas of September 30, 2018. Cash, cash equivalents, and investment securities increased $4.4 millionto $103.2 millionas of September 30, 2018compared to $98.8 millionat December 31, 2017. The Company remains free of interest bearing debt. Inventory increased $24.6 millionto $43.9 millionas of September 30, 2018compared to $19.3 millionas the Company increased inventory levels to meet current and future demand.The Company declared a quarterly cash dividend of $6.0 million, or $0.48per share, during the third quarter of 2018.
Adoption of Accounting Standard Update 2014-09, Revenue from Contracts with Customers (‘ASC 606’):
As announced in the first quarter of 2018, the Company adopted ASC 606 on a modified retrospective basis. As a result, the Company did not restate financial information for the three months ended September 30, 2017. The results of ASU 606 primarily impact the Company’s timing of revenue recognition for product shipments, as product revenue will be recognized upon customer receipt in lieu of at the time of shipment.
The following are the impacts to the financial results for the three months ended September 30, 2018from the implementation of ASC 606. For the quarter ended September 30, 2018, revenue decreased $0.3 million, or 0.2%, which resulted in decreased gross profit of $0.3 million, or 0.3%. Gross profit as a percentage of revenue was consistent for quarter ended September 30, 2018at 77.0%. Income from operations was negatively impacted by $0.2 million, or 1.2%, resulting in decreased net income and diluted earnings per share of $0.2 million, or $0.01per share, respectively.As of September 30, 2018, working capital decreased $3.3 millionand stockholders’ equity de;creased $2.6 millionas a result of the impact ASC 606.
The Company expects fourth quarter revenue to be in the range of $137.3 millionto $142.3 millionand earnings per diluted share to be in the range of $1.15to $1.20. The Company is raising its guidance for the full year 2018, expecting revenue of $492.5 millionto $497.5 millionand earnings per diluted share of $4.45to $4.50. This compares to the Company’s previous annual guidance for revenue of $460 millionto $470 millionand earnings per diluted share of $4.35to $4.45. The full year 2018 earnings guidance continues to assume a 21% to 23% effective tax rate.
Medifast (NYSE: MED) is a leading manufacturer and distributor of clinically proven, healthy living products and programs. The brand has been recommended by more than 20,000 doctors since its founding. Its integrated coach model leverages nearly 40 years of experience from medical, franchise, e-commerce, and direct selling channels. Medifast and its community of independent OPTAVIA Coaches embrace the future of wellness with a shared vision to offer the world lifelong transformation, one healthy habit at a time™. OPTAVIA is represented by a community of OPTAVIA Coaches who teach Clients healthy habits, while offering support and guidance on their transformation journey. In 2018, Medifast announced it will expand into the Asia-Pacificmarkets of Hong Kongand Singaporein 2019 with its integrated coach model. Medifast is traded on the New York Stock Exchange and was named to Forbes’ 100 Most Trustworthy Companies in America Listin 2016 and 2017.