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Nutrisystem Inc. (NASDAQ:NTRI)

Q1 2013 Earnings Call

May 1, 2013 4:30 pm ET

Executives

Joe Crivelli – Senior Vice President

Dawn M. Zier – President and Chief Executive Officer

Keira Krausz – Chief Marketing Officer and Executive Vice President

Kathleen Simone – Senior Vice President, Chief Financial Officer and Controller

Analysts

John P. San Marco – Janney Montgomery Scott LLC

Frank A. Camma – Sidoti & Co. LLC

Operator

Good day, everyone, and welcome to the Nutrisystem First Quarter 2013 Earnings Conference. Today’s conference is being recorded.

At this time, I would like to turn things over to Mr. Joe Crivelli. Please go ahead, sir.

Joe Crivelli

Thank you. Good afternoon, everyone. Thanks for joining us to discuss Nutrisystem’s first quarter 2013 financial results. Today, we’ll hear remarks about the quarter and outlook from Dawn Zier, President and Chief Executive Officer; Keira Krausz, Chief Marketing Officer; and Kathleen Simone; Acting 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 2013 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 May 1, 2013 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

In addition to the GAAP results, Nutrisystem will provide certain non-GAAP financial measures in this conference call such as adjusted EBITDA. Nutrisystem’s earnings release for the first quarter of 2013 can be found under the “News Release” link on the “Investor Relations” page of the company’s website at www.nutrisystem.com.

The table attached to the earnings press release includes a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. We do not present in the earnings press release, the comparable GAAP financial measure and related reconciliation for forward-looking non-GAAP financial measures included in this conference call because management cannot predict with sufficient reliability certain contingencies required to estimate the comparable GAAP financial measures.

I’ll now turn the call over to Dawn Zier.

Dawn M. Zier

Good afternoon, everyone, and thank you for joining us today. I trust everyone has seen our earnings release for the first quarter which was issued right after the market close. From a big picture standpoint, we made positive strides during the first quarter and beginning to execute our turnaround plan. Importantly, since I joined in November, I’ve revamped with some leadership team combining high impact (inaudible) when I arrived with new additions to complement our expected skill set.

From the outside we brought in a new Chief Marketing Officer, Keira Krausz, a multi channel direct marketing expert who joined in February as well as a new Chief Financial Officer, Mike Monahan, who is rejoining Nutrisystem this month (inaudible) our growth phase in the mid-2000.

Additionally, we have hired new Senior Vice President for e-Commerce and a new Vice President of Creative, two critical positions that were in need of new thought leadership. I’m personally excited by the new dynamics and energy level at the company. And I’m confident in my team’s ability to drive meaningful change. As I mentioned to investors in previous calls and meetings, our turnaround plan is focused on four key steps, which are geared towards stabilizing the bottom line to enhance profitability, preserving cash flow and protecting our ability to pay the dividend while we execute growth strategies for 2014 and beyond.

Those steps are: one, a return to direct marketing fundamentals that include finding new ways to leverage our database of more than 7 million names; two, our relentless focus on margin improvement; three, our renewed focus on products and program innovation to provide consumers to be more customized and personal approach to weight loss to all phases of their journey; and four, a prioritization of our growth initiative.

The first quarter financial results which were the first under my leadership demonstrate that we are making progress on its plan. On an adjusted basis, EPS was breakeven compared to a loss of $0.16 per share one year ago, outperforming our original forecast of a loss in this $0.03 to $0.08 per share range.

And while revenues were down year-over-year, much of which was anticipated, we delivered on the first step of our turnaround plan of stabilizing the bottom line by improving customer profitability. Let me explain. As you remember, my initial priority for the turnaround plan was to focus on margin improvement and cash efficiency it will immediately increase shareholder value, strengthen our operating cash flow, and free up financial resources to invest in growth opportunities.

To that end, we successfully increased our gross margin in the first quarter by more than 500 basis points from 45.1% in Q1, 2012 to 50.3% in Q1, 2013. We did this by first rationalizing our cost of goods sold on each order being shipped to new customers in 2013 along with process reengineering.

In 2012, we gave a way for free and on an ongoing basis, high cost items like shakes, shaker bottles and Chef’s Table frozen entrees (inaudible) not drive the requisite increase in sales volumes to cover the additional cost investment. We do not repeat this costly approach in 2013 knowingly walking away from unprofitable revenue. It’s also important to note that while we guarded savings by reengineering our processes in both a fulfillment and distribution perspective, we continue to invest heavily in food development, quality, and driving.

Second, we’re maintaining our stringent pricing discipline in our acquisition promotions, resulting in a low single-digit increase in our new customer average selling price year-over-year, while we still continue to leverage promotions that future percentage savings to the customer. We did so with a higher starting price point across our program. This approach did not (inaudible) profile as customers experience the efficacy of our weight loss program and recognize our strong value proposition.

As a result, we also saw a similar single-digit increase in revenue per customer versus Q1 2012 from these efforts along with increased cross-selling of products to our base. Finally, we managed our overall marketing spend including all media and non-media expenses to align with our customer profitability targets for the year, which resulted in better marketing efficiency growth of Q1 2012 despite the year-over-year revenue pressure.

We will continue to maintain our focus on each of these market impacting metrics during the remainder of 2013. The revenue pressure that we experienced in Q1 2013 was primarily attributable to two factors; one, walking away from unprofitable revenues as previously explained, two, weak consumer response to our diet season trade was continued to work heavily on commercial discounting language rather than establishing value in our product and an emotional (inaudible) with consumers. I do wish either by sooner than late November that we would have been able to impact our creative approach.

We also experienced year-over-year commercial declines to our e-commerce channel as we deployed untested sales funnel changes to the diet season that does not drive performance improvement. This is being addressed as we return to an analytics driven decision-making process.

As we work our way through 2013, we will be focusing on several key initiates to address this pressure in the near-term, while also preparing for the 2014 diet season. Keira will discuss our marketing initiatives in more detail in a moment, but at a high level, we are pursuing multiple tax to improve web conversion through a series of near-term (inaudible) based on best practices and longer-term initiatives that include enhancing our overall customer experience in sales funnel flow.

We’ve hired outside e-commerce agencies and are bringing in new leadership to address that. We developed and are executing against an offer and creative testing metrics for the remainder of 2013 to firmly establish our controlled performance moving forward versus deploying untested material as we’ve done in the past.

We are conducting price elasticity tests across our portfolio of products; identify the optimal margin/volume relationship. And very importantly, we are investing in new creative approaches and channels to introduce new customers to our brand.

Net-net, the first quarter demonstrated our commitment and ability to stabilize profitability across our business as we implement our strategy to address the route causes of the revenue pressure that has been facing the company for over five years.

Shifting gears, a renewed focus on products and program innovation that will provide customers with a more personal and customized approach to weight loss during each phase of (inaudible) journey is critical. As you’ve heard me say before, I believe that we’ve been too narrow in our product offering since losing weight is not a one size fits all proposition.

In my opinion, while our current program works extremely well for a certain segment of the population, it remains an important component of our go forward strategy, there are many other individuals seeking to lose weight that we can attract by offering more varied options that can increase revenues while protecting margin.

Further, people need to change throughout their weight loss journey and we need to be able to successfully adapt with them along the way. Also, as I had maintained, there is a sizable opportunity to cross-sell and upsell additional products to our customers and I am pleased hat we were able to prove that out in our Q1 testing. More to come as we go to market with new ideas over the next few quarters, but let me briefly touch on one of our early successes. One our first new product innovations is the 5-Day Jumpstart Your Weight Loss Kit, which is available exclusively at Walmart and represents a significant departure from our traditional 28-day program. We are experiencing very positive results from our Walmart retail lines that expanded our footprint in their stores.

As mentioned on our last call, we launched in January our (inaudible) 500 Walmart stores around the country, because of our initial success; we’ve now expanded the program to 2,000 stores and expect to continue to expand throughout 2013.

In addition to our core 5-Day Kit, our D kit targeted to individuals with or without Type 2 diabetes is also performing well. This partnership with Walmart provides us with great brand exposure, offering consumers who may not be aware of our program and opportunity to sample Nutrisystem at an attractive price point. We’re seeing repeat business at Walmart as well as multiple kit purchases indicating that customers are seeing good results and listing other family members to diet with them. This is an early win for us in 2013. We are actively developing our retail product line and we expect to have additional product and kit to launch in retail for the 2014 diet season.

I’ll now turn the call over to Keira, our Chief Marketing Officer to talk about the marketing initiatives underway to restore the fundamentals of our business and to drive our turnaround.

Keira Krausz

Thanks, Dawn. Good afternoon. I appreciate having the time to review the marketing plans that we believe will over time drive our returns to revenue and profit growth. One consistent thing we’ve heard from Dawn is our immediate returns to direct marketing and ecommerce best practices as we focus on rebuilding and getting the fundamentals of our business right.

Across our activities from television creators to choosing with cross-sell products to offer from product range to product configuration, from offer to home case design, we have already eliminated right risk gambles and instituted a stock-based testing approach, so that we constantly learn and improve.

Dawn and I had each led turnaround and this task has proven to be the one for sustainable, dependable growth. Our core (inaudible) the marketing team is moving as quickly as possible to improve results, results built upon a solid foundation of testing.

Let me share with you our key areas of focus and some early results that show we are headed in the right direction. We plan to continue to optimize these events, so that we neither buy on profitable orders nor leading orders unstable by under spending, use data analytics across the businesses by revenues and efficiency identify the best prospects and target products and offers at the customer level. Improve acquisition be created, offer and a more effective online experience.

The length and the time customer stay on the program and increase purchases meanwhile on program and improve reactivation rate. I will go into more detail now on some of these actions. We are leveraging data in everything we do. Using data, knowing which customers has the highest long-term value, so that we design, creative, online tools and call center script directed events. Using data means using statistical methods to predict behavior, so that we lower marketing spend and increase orders. And using data means accessing transactional, demographic, affinity, financial, and other data as a customer level in real-time, so that we make the most relevant appealing offers to each customer.

In Q1, we saw proof-of-concept of just how powerful even low test target offers can be. In the lead conversion e-mail campaign, we simply ask each customer who quietly want to loose weight and we provided reasons to choose them. They found that response we showed a landing phase that has messaging targets to that reason. We double purchases generate from that e-mail.

On the acquisition front, we include almost every part of what makes up our acquisition effort. That means reworking creative from start to finish, developing a number of exciting and compelling offers, and enhancing the online and mobile experiences to increase online conversion.

We are not expecting improvement based on enthusiasm and hope, but rather based on a solid foundation of testing. On the creative front, we have taken three important steps to ensure progress; one, we have rebuilt the team. Jennifer Hartnett is our new Creative Director. Jennifer served as Creative Director at Nutrisystem during the period between 2005 and 2009, a period of great success on the Creative front.

Most recently, she was Chief Marketing Officer of eDiet. She is a creative expert across all of our channels and she has long and deep experience in the weight loss category. We’ve begun to work and pass the end market in June and beyond and are working with a number of best-in-class direct response agencies. Two, we have reengineered our process. We have already started to work on 2014 spot with base testing spends for the remainder of 2013.

In addition, we have the entire acquisitions in working immunity; the media buyers are very closely involved in the creative process. This is a very different approach from prior years and one that allows us to reach research and home unless it is not 2014 diet season.

We’ve also revamped the way we developed our all important before and after materials, not only are we returning to the proven way to get evacuators, emotional and benefit oriented plays, but also we are getting more of it.

Three, we are taking our productions sites more regularly throughout the year, so that we’re more nimble. If this part is not working, we can act immediately and if we see a hit, we can leverage that with Q2.

Next to improve acquisition; we need to build the stable offers to drive customers to call us and to visit our online and mobile sites. In the past couple of years, we have pivoted from one offer to another without testing them against each other. In addition, most offers we use recently have employed a sizable discount off of the basic price by primary promotional hook. Overtime, our offers became understandably less exciting to the viewer. We have developed a number of new offers and have begun offer testing against our current control in the second quarter.

We’re currently seeing a renaissance in our QVC channel thanks largely to new Walkers. Behind the power of those new offers, we sought out in our April appearance the first time that has happened since 2010 and had been invited to enter more shows in 2013 than in 2012.

Now, we are taking those offers from QVC and monetize them for a short form TV channel and getting them into test. In addition to improving trade and building a number of proven and compelling offers, we will focus on conversions via our online sales funnels to drive acquisition. Here too, we had moved away from testing new approaches since 2012 and we are making too many bets.

In late first quarter of 2013, we started testing ways to improve conversion with much more into work as we entered second quarter. In addition, we hired external ecommerce expertise to revamp our conversion experience for the third quarter. And we are now redesigning our mobile experience in recognition that more prospects use their mobile devices when responding to TD spots and for exploring diet alternatives.

So (inaudible) yeah tested improvements to create an offer in our online experience, we are optimistic that we’ll be able to successfully sign up new customers to the brand as we roll out our wins in the latter part of the year at 2014. The next area to work on is retention or length of stay. Certainly, acquisition is the major leverage point in any direct response business. However, historically, we paid attention primarily to getting customers and then re-promoting them once they told us they want to be best.

We know most of our customers needed to stay with us five to six months to reach their wait go and since the average length on program is three months. We know there is opportunity. We have focused our statistical model and work here and we’d launch test to improve customer experience to increase pay rate.

Since retention testing takes at least four to five months to get results that we will know the impact on these initial tests, in the second half of 2013. And then we will test more with cross-selling. This presents upside for us, because we weren’t doing much prior cross-selling tax above here and we can get moving tax. We have already done concept based (inaudible) customers with a broader array of products they might need as they travel through their weight loss journey.

Based on new science, we are quickly sourcing new products to bring something up in 2013. We are also developing our technology, our infrastructure to fully support cross-selling across all of our touch points with customers. In the mean time, we are already selling cross-sell products, we currently have – and they did well in that research. For example, we had success in the first quarter selling our protein shake online and via the call center.

Further, we adjust dinner to price tag to demonstrate we can charge significantly more for those shakes each month and we expect incremental price increases this week. While we are always focused on reactivation, there is still opportunity. Right now, we are developing models to increase results and then in the third quarter, we’ll be testing new creative in direct mail as well. We’ve already experienced some success in this area in the first quarter with some basic, but good data base segmentation, we reduced mailing cost by approximately 30%, yet still increased order from direct mail by 20%.

We are now able to reinvest those savings to do more campaigns throughout the year. It might be more exciting to talk to you about the newest idea for an ad campaign or about our much appreciated celebrity ambassadors like Melissa Joan Hart, Dan Marino, Marie Osmond, Jillian Barberie, Terry Bradshaw and others to come. And certainly we do plan on talking about them as we have successes, but the day in, day out focus on the customer, media spend optimization, analytics and marketing one-on-one that moved the needle materially. We look forward to talking to you in the future about our progress. Kathy Simone will now cover the financials.

Kathleen Simone

Thanks, Keira. I trust everyone has seen the financial statements in the press release that was issued before the call started, so I’ll discuss a few key highlights before turning the call back to Dawn. The first quarter revenue was a $105.4 million compared to $128.5 million in the first quarter of 2012 due to various factors including a planned reduction of unprofitable revenue, (inaudible) response to our 2013 diet season advertisement, lower on-program customers entering here and a continued weak consumer environment.

Despite the revenue pressure, net reactivation revenue for the quarter was $34 million and represented 32% of total revenue and is up 3% year-over-year. Gross margin for the first quarter was 50.3% compared to 45.1% last year. A number of factors drove this considerable improvement. Our efforts to increase new customer average selling price, renegotiation of contracts with food suppliers, and more cost effective 28-day package that do not include premium item like shakes and shaker bottles and frozen foods that we included last year for free.

Marketing expense was $36.3 million in the first quarter compared to $45.7 million last year. Marketing efficiency 34.5% in first quarter compared to 35.5% last year. As shareholders now, we have a cross-selling marketing launch last year that included a flashy new celebrity that accounted for a significant percentage of last year’s first quarter spend. As Keira mentioned, we had a more rationale marketing spend for 2013 but relative to spends, more consistently throughout the year. General and administrative expenses were $15.3 million, down from $16.3 million in 2012. This reflects our overall cost control efforts. On time charges this quarter were $1.4 million reflecting a reduction that we’ve executed moving it off the quarter.

Adjusted EBITDA was a positive $3.9 million in the first quarter of 2013 compared to adjusted EBITDA loss of $1.9 million in the first quarter of 2012 as that portion of adjusted EBITDA as well our reconciliations GAAP, we’ve included in this table in the press release, which is available on our Investor Relations website at www.nutrisystem.com.

Depreciation was $2.5 million during the quarter and non-cash compensation expense was $1.5 million. Cash, cash equivalents and short-term investments were $35.1 million at quarter end with no debt outstanding under our $40 million solid revolving line of credit.

Cash flow provided by operating activities was $22.4 million for the quarter, CapEx was $1.6 million and we’ve returned $4.9 million to shareholders in dividend payments. We remain committed to payment of our quarterly dividend as a means to compensate shareholders while we execute our turnaround. Accordingly, our Board of Directors authorized a payment a quarterly dividend of $0.175 per share May 23, 2013 to stockholders of record as of May 13, 2013.

Our full year EPS forecast for 2013 is in the range of $0.23 to $0.33 per share. This anticipates continued year-over-year revenue pressures in the second quarter 2013 as we have a top comp against a very strong second quarter 2012. If you remember in last year’s second quarter, we started the quarter with higher on program customers due to the aggressive promotions we bought in the first quarter 2012, include shakers and the like. We were also running our full rate and anniversary commission and heavily buying media to support that. In addition, second quarter 2012 partially improved our efforts to retouch the gross margin.

As we move into the third and fourth quarters in 2013, year-over-year comps would be on a more apples-to-apples basis as well as rationale marketing spending plan that cares to discuss in place. We expect maintenance of gross margins in the low 50% range as we continued to focus on price and supply chain management through the year. Our marketing efficiency will be comparable to up slightly versus 2012 as we leverage our gross margin improvement in that dedicated media in fact ones that offer and creative in the second half of the year. Most of the (inaudible) initiative and support of the 2014 direct season.

We expect 2013 G&A spend to be quite up slightly versus adjusted 2012. Although we had targeting cost initiatives expected to save approximately $11 million on an annualized basis across all spends lined at the P&L, a portion of those savings will be reinvested in G&A in support of our growth initiatives.

(Inaudible) program will continue to make valuable contributions to both our top and bottom lines. Our expansions at Walmart will be accretive to 2013 that we’ll be partially offset by our exit cost in the grocery channel of our (inaudible) products and then we’re expecting a more normalized tax rate in 2013.

In the second quarter, we are forecasting EPS of $0.15 to $0.20 per share, while this is down from last year’s adjusted second quarter results of forecasted EPS for the six-month period will be up from the same period in 2012.

Finally, as noted in the last quarter’s call, we expect CapEx in the range of $11 million to $13 million for the year in support of new initiatives and to support our direct business for future growth. We are forecasting adjusted EBITDA growth and based on our projected positive cash flow from operations, including working capital and cash benefits, we expect to strengthen our balance sheet and build cash balances in 2013 after paying CapEx and dividend.

We do not anticipate borrowings under our $40 million revolving line of credit during 2013.

I’ll now turn the call back to Dawn.

Dawn M. Zier

Thank you, Kathy. Also, we’re encouraged that just five months into the new leadership team initiatives and we’re beginning to see some good results. Obviously this starts with a stronger than expected first quarter performance, which demonstrates our financial discipline and the [management’s] focus on costs throughout the business, but it is also indicated by a number of high level wins during the quarter such as additions made to both management and our Board of Directors to put in place a team that can effectively be a turnaround, the ability to increase the average selling price for new customer, revenue per customer and revenue from cross-selling.

The early success at Walmart, which is a result of our new innovation pipeline to drive products and program improvement and create new products to address specific consumer segments as well as enhance customized options for consumers throughout each phase of their weight loss journey.

(Inaudible) licensing company to support our brands for licensing on complementary third-party products, Beyonce and Melissa Joan Hart as a celebrity spokesperson, which provides us with a new brand ambassador that our customers will be able to relate to a small test at Hearst Corporation, one of the nation’s largest, diversified media and information companies to market and distribute an anti-aging weight-management plan based on the New York Times Best Selling book, 7 Years Younger.

While this is only a test, it is indicative of our ability to bring two strong brands from different industries together in partnership as well as our accountability to re-imagine our brand and develop new product offering targeted to niche segment, USA TODAY announcing Nutrisystem as the best convenient diet in its March 2013 special issue, and continued momentum on the development of an online and mobile business that’s targets the largest diet segment, the do-it-yourself on schedule to launch in early 2014.

This represents a market expansion opportunity for us as well as an opportunity to offer current customers a more sophisticated transition and maintenance experience. So while there are some significant and fundamental issues that we are actively addressing to change for the trajectory of our business, there are also many opportunities that we are excited about. I am confident that the new leadership team that I’ve put into place can deliver.

Many of us have significant turnaround and marketing expertise while others have significant industry and product knowledge, and together following a disciplined and analytical approach coupled with the revitalization of our product innovation and created effort, we have a plan that should lead to stabilization and growth, but it will take some time, as we look after the balance of the year advances that expectations appropriately.

We expect to see continued revenue pressure into the second quarter for all the same reasons we’ve discussed while we’ll take time to test all that Keira was speaking of, the company does expect year-over-year revenue pressure to begin to abate in the second half of the year through the ongoing efforts to improve response, conversion and customer length of stay as well as year-over-year strengthen our Walmart and QVC channel.

With that, I thank you for listening to our opening remarks. and we’ll now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll hear first from John San Marco of Janney Capital.

John P. San Marco – Janney Montgomery Scott LLC

Thanks. Good afternoon.

Dawn M. Zier

Hi, John. How are you?

John P. San Marco – Janney Montgomery Scott LLC

Good. Thank you. Can you specify what the end profitable revenue streams were that you removed?

Dawn M. Zier

Sure, John. A lot of that was last year where we gave away a lot of free products with regular offer that we have and historically down before. So we had free shakes, free shaker bottle and some free frozen entrée. So essentially, we were giving away a lot of freebies without literally marketing them and without getting credit for them in terms of customer response. So we walked away from that.

John P. San Marco – Janney Montgomery Scott LLC

Got it. So the big impact from a revenue perspective of not having those freebies again this year, the big impact was in the first quarter, will there be holdover impact in subsequent quarters?

Dawn M. Zier

Yeah. First and second quarters primarily with some flow through to Q3?

John P. San Marco – Janney Montgomery Scott LLC

Okay. Great, thanks. And then on Kroger, were there any significant costs associated with ramping that up last year that go away this year and will be a comparison benefit for you?

Dawn M. Zier

No, not really. There are some costs to exhibit channel and that obviously is something that is offsetting some of the positive momentum that we’re seeing from Walmart.

John P. San Marco – Janney Montgomery Scott LLC

Okay.

Dawn M. Zier

But again, I also want to reiterate that Kroger itself was not a bad channel for us to be in. The issue is that we won some market in Kroger with the wrong product, doing the maintenance and within weight management products where we’re obviously finding our strength in the weight loss kit, which is more (inaudible) competency of weight loss.

John P. San Marco – Janney Montgomery Scott LLC

Got it. And to those exit costs you just named, those – those are what we have already absorbed that getting last year?

Dawn M. Zier

No, we’re getting out of that business this year. So that will be in year-over-year minus getting out of those costs, getting out…

Keira Krausz

It was absorbed in Q1.

John P. San Marco – Janney Montgomery Scott LLC

Okay. Thank you. And then lastly, just your thoughts on how the revenue decline compared to your own expectations going into the quarter?

Keira Krausz

I would say that most of it I did anticipate due to our planned media spend as well as eliminating those products that I referred to it, I knew it was dropped revenues, but I knew would drive profitability because those extra incentives, are not paying for themselves. So most of it was expected obviously as we’ve also referenced the trader did not do as well as we had anticipated which given that the approach, was – what we had done in the prior year is exactly the same thing of it’s heavy discounting. That itself was not a surprise and we believe that we can again by focusing on more of an evocative message and by focusing on true program benefit, and a true direct response approach that is not like similarly on discounting that we’ll begin to improve that. But it was in fact, a tough consumer environment in Q1. So certainly we suffered a bit from that as well. But I was not shocked when I – at the revenue numbers that we reported, most of that I did expect.

John P. San Marco – Janney Montgomery Scott LLC

Great, thank you very much.

Dawn M. Zier

Sure, John

Operator

(Operator Instructions) We’ll hear now from Frank Camma of Sidoti.

Frank A. Camma – Sidoti & Co. LLC

Good afternoon.

Dawn M. Zier

Hi Frank

Frank A. Camma – Sidoti & Co. LLC

Just a kind of a – just a quick follow-up on John’s question and how much clearly you anticipated this and the creativeness which was often – you just mentioned the consumer environment. I was just wondering is there a way to quantify maybe not in dollars but just like give us a little more color on how much of this do you think is impact on the consumer specifically from a payroll tax – loss of the payroll tax benefit perhaps or just the consumer continuing to be stretched?

Dawn M. Zier

You know consumer, we won’t say that we are in discretionary spend. So we do feel pressured FTOs when people have less discretionary mining. It canceled – only in the games until these new payroll tax loss came out. I don’t know that who can really say how it affected our revenue.

Frank A. Camma – Sidoti & Co. LLC

But, I guess at the same time, you’re seeing some pickup at Walmart clearly or success at Walmart so…

Dawn M. Zier

So we’re seeing positive returns at Walmart at again a lower out of pocket price. It’s supported for 98 price points compared to our average selling prices of $260. But again, one is a five day program; the other is a 20 day program. So the aggregated prices are roughly the same. So we are seeing positivity there. We’re seeing again the QVC channel which again is highly promotional doing well. So it’s really a mix of things that’s hard to quantify, Frank.

Frank A. Camma – Sidoti & Co. LLC

Yes.

Dawn M. Zier

Again we are seeing right now consumer response some of the discretionary spend issues. So we also recognize changes that are happening at a larger level with ObamaCare and other things that creates upside for us down the road.

Frank A. Camma – Sidoti & Co. LLC

Great.

Dawn M. Zier

So, again, we’re optimistic.

Frank A. Camma – Sidoti & Co. LLC

Okay, great. I know for competitive reasons you can’t give us much, but any chance of giving this a little more metrics around Walmart itself?

Dawn M. Zier

No.

Frank A. Camma – Sidoti & Co. LLC

I had to try. I guess just two real quick questions. You mentioned the average selling price going up. Can you state that perhaps in percentage terms roughly?

Kathleen Simone

Average selling prices to new customer is about 5% versus prior year. And again, we still think we’re still working on other test as Keira referred to see what the real optimal price elasticity is for our products and for a range of different products. We expect to able to price up certain things, others we might not able to, but we do believe there is opportunity in that area to optimize our pricing strategy.

Frank A. Camma – Sidoti & Co. LLC

Yeah, that’s great.

Kathleen Simone

Again, we are the low – the low cost provider to the market and it is definitely lower than many of our competitors. So we are looking at an opportunity there.

Frank A. Camma – Sidoti & Co. LLC

Sure. Last question, can you just give us a little more detail on the specific I know it’s not a huge portion of your revenue today that it used to be – what the offer was that you ran on QVC in April and that you mentioned that sold out?

Keira Krausz

Sure. This is Keira. The QVC offer instead of a 40% discount or something like that is built around bonus items in each shipments and over five shipments so that there is a value rather than a discount and then we quantify the overall value of cost of shipments. So for example it’s the $125 value, so it’s more value-oriented and discount oriented.

Frank A. Camma – Sidoti & Co. LLC

I see. Great, well, thanks.

Dawn M. Zier

Thanks, Frank.

Kathleen Simone

Thank you.

Operator

(Operator Instructions) And it appears we have no further questions at time. I’ll turn the conference back to our speakers for any additional or closing remarks.

Joe Crivelli

Thanks again everybody for joining us. If you do have any further questions, you could give me a call at 610-2282-100 or you can e-mail ir@nutrisystem.com. Thanks for joining us this afternoon. We’ll talk to you soon.

Operator

Ladies and gentlemen that does conclude today’s conference. Again we thank you all for joining us.

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