Nutrisystem, Inc. (

NTRI

)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Joe Crivelli - IR

Joe Redling - Chairman and CEO

David Clark - CFO

Analysts

Alvin Concepcion - Citi

Gary Albanese - Capstone Investments

Mitch Pinheiro - Janney Capital Markets

Kurt Frederick - Wedbush Securities

Presentation

Operator

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Previous Statements by NTRI
» Nutrisystem CEO Discusses Q1 2011 Results - Earnings Call Transcript
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» NutriSystem Inc. Q2 2010 Earnings Call Transcript

Good day and welcome to the Nutrisystem, Incorporated second quarter 2011 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Joe Crivelli, Investor Relations for Nutrisystem.

Joe Crivelli

Good afternoon, everyone. And thanks you for joining us to discuss Nutrisystem's second quarter 2011 financial results. With us today from management are Joe Redling, Chairman and Chief Executive Officer; and David Clark, Chief Financial Officer.

Before we begin, I'd like to remind everyone that during the conference call, Nutrisystem management will make certain forward-looking statements about its outlook for 2011 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as, believes, plans, intend, expect, anticipate or similar expressions.

Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in Nutrisystem filings with the SEC. Nutrisystem is making these statements as of July 28, 2011, and assumes no obligation to publicly update or revise any of the forward-looking information.

I'll now turn the call over to Joe Redling, Nutrisystem's Chairman and Chief Executive Officer.

Joe Redling

Good afternoon and thank you for joining us on today's call. I will review the company's second quarter financial results; and provide some key performance highlights for Q2 and an update on expectation and plans for the balance of the year. Then, David will provide more detail on the financials.

Our plan for 2011 and year that we expected to be challenging from the revenue standpoint is to optimize the Nutrisystem business models maximize profitability and cash flow, strengthen our balance sheet, return cash to shareholder, and investing growth initiatives for 2012 and beyond.

We'll emphasize this plan with shareholders throughout the year. And we believe our second quarter results demonstrate that this plan is working. Also we had a good second quarter. Net income was $10.8 million, and diluted EPS was $0.38, down $0.02 from last year second quarter, while the top-line is still challenged.

We are continuing to prove that Nutrisystem's business model can drive profit and cash flow, create customer excitement and inspire customers to lose weight with Nutrisystem even when the competitive environment is intense, and the economy, and consumer sentiment remains less than ideal. As a result of our strong second, we are increasing full-year guidance, as David will detail momentarily.

Revenues were down 18% in the quarter due to a number of factors including Q2 promotional strategies and a late Easter that delayed the start of spring diet season. As we discussed with you in our last conference call the top January, we experienced also met, we achieve on program customers exiting the first quarter.

The second quarter is our toughest comparable quarter for the year. In the second quarter of 2010, we launched Rollback for the first time, which resulted in very strong customer demand. In addition last April, Easter was on the first weekend of the month. And as a result, this the spring diet season benefited at the entire quarter last year.

Considering the top comp, we were able makeup ground. News customers edge were down year-over-year, but improved marketing efficiency driven by higher conversion on lower spend. Significantly offset the top-line pressure. The majority of the Q2 first time order decline occurred in April due to the late Easter holiday. The strong finish to the first quarter and excitement of the first quarter roll back promotion may also have shifted some first time orders from Q2 to Q1.

However, we made up a lot of ground in May and June. We are up again to our two top comparable month of the year. And with a 25% reduction in marketing expense, first time orders were only down in the single digits. This time fact what we told investors in February, when we set expectations for 2011. We knew it would be a tough year, the economy was still not cooperating and competitive pressure was intense. But in the face of those headwinds we have worked hard to optimize our business model and strike the right balance between promotion and marketing.

We've always carefully monitored return on investment of our media spend, but with the discounting strategy we deployed in 2011 we are being even more disciplined as evidenced by our 20% marketing efficiency during the quarter. We are also encouraged that our order delivery rates for customers that signed up during our promotional offers are currently in the low 90% range. These are record levels for the company.

To be eligible the discount price, customers must sign up for order ship. We've also equipped the hardworking employees in our call center with the right scripts and training to extend customers stay. As a result, we're also seeing record second month peek rates and our average customer length of stay is increasing from historical notes.

As expected, the gross margin decline at approximately 600 basis points with directly attributable to the success of our promotional strategy. At first glance, this may seem like a dramatic increase, while we effectively complemented is the strong marketing efficiency, as our marketing efficiency ratio improved by over 600 basis points year-over-year just over 20%, a level that we have not seen since the first quarter of 2006.

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