NutriSystem's CEO Discusses Q2 2012 Results - Earnings Call Transcript

NutriSystem Inc. (NTRI)

Q2 2012 Earnings Call

July 26, 2012 4:30 PM ET

Executives

Joe Crivelli – IR

Joe Redling – President and CEO

Mike Amburgey – Chief Marketing Officer

David Clark – CFO

Analysts

Greg Badishkanian – Citigroup

Frank Camma – Sidoti

Mitch Pinheiro – Janney Capital Markets

Presentation

Operator

Good day and welcome to the Nutrisystem’s Second Quarter 2012 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Crivelli. Please go ahead sir.

Joe Crivelli

Thank you. Good afternoon, everyone, and thanks you for joining us to discuss Nutrisystem’s second quarter 2012 financial results. Today, we’ll hear remarks about the quarter and outlook from Joe Redling, President and Chief Executive Officer; Mike Amburgey, Chief Marketing Officer; and David Clark, Chief Financial Officer.

Before we begin, I’d like to remind everyone that during this conference call Nutrisystem management will make certain forward-looking statements about its outlook for 2012 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, expects, anticipates 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’s filings with the SEC. Nutrisystem is making these statements as of July 26, 2012 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

I’ll now turn the call over to Joe Redling. Joe?

Joe Redling

Thanks Joe. Good afternoon everyone. There are few things I want to update you on relative to second quarter. First, I’ll touch on our revenue. Second, I’ll give you a summary of the introduction of our new rate card. Third, I’ll update you on the retail initiative and finally provide an update on the CEO search.

We are encouraged to post a quarter of solid revenue growth. While the growth was below our original forecast for the quarter, with the first quarter we posted a year-over-year increase in Q2 2010. This was largely a function of the strong momentum we experienced in the first five weeks of the quarter. In April, the early Easter caused a spike in demand during the second wave of dieting season. This was amplified by the powerful buzz created by the Janet Jackson reveal of her impressed weight loss results as well as the continuing impact of our 40th Anniversary promotional pricing strategy.

In our last call we shared plans regarding the end of our 40th Anniversary promotion and the rollout of our new rate card which is designed to allow us to continue to promote aggressively, offer customers different options and value at various price points while still allowing the company to generate sufficient margins. Over the past 18 months, as we’re by necessity have to heavily discount to spur consumer response conversion, we’ve seen a continued erosion of gross profit margins which we’ve counterbalanced by carefully managing our marketing spend.

While this strategy has allowed us to maintain profitability and cash flow, during our rough consumer spending macro environment in the long run we have to get back to investing in the brand. The new rate card allows us to do that. It provides a basic option for consumers who want the lowest price, allows Nutrisystem to establish the value of services we used to provide for free, that is shipping and customization and it enables us to achieve gross margins in line with our historical norms.

In fact, we saw gross margins ratchet up each month of the second quarter, a very good early indicator that our strategy is sound. We anticipated that there would be a learning period for both customers and Nutrisystem alike once we flip the switch on the new rate card. Since we were introducing a new pricing strategy that customers had not seen before, it has taken us some time to optimize conversion.

In fact web conversion has been a challenge all year. We are seeing fairly good response across the board to our marketing efforts but conversion has been challenged as we educate new customers about the internal [ph] of the Nutrisystem program and now educate all of our customers new and returning about our new three-tiered pricing program. Mike Amburgey will talk in a moment about some steps we have taken to optimize conversion and how we expect to further leverage the new rate card in an upcoming new third quarter promotion.

You may have seen that we recently debut our enhanced Nutrisystem D for people with diabetes. There were a number of significant announcements that supported this initiative including the disclosure of promising new clinical data from a 2011 clinical study at Temple University and the University of Pennsylvania. As well as the announcement that Nutrisystem has been recognized as a National Strategic Partner of the American Diabetes Association.

We have also added certified diabetes educators in our contact center. So customers can consult with them at no charge if they have specific questions regarding our program. Although we plan to ramp up these efforts in conjunction with back to school messaging later this summer, we’re already seeing some impact with the nice uptick in Nutrisystem D sales in the month of July.

As we discussed with you last quarter, we are also excited about our expansion into the retail channel this quarter. Nutrisystem Everyday is now on the shelves of all 2,200 Kroger stores all throughout United States with 12 individuals SKUs of healthy snack, shakes and breakfast items. The revenue contribution in the second quarter was in line with expectations and now that we have fully stocking our Kroger stores we are beginning to invest in product promotional efforts. We are finalizing placements with a number of other retail outlets and we plan to provide additional update on our next call.

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