Medifast: Excessive Correction Following Another Stellar Quarter

Aug.15.06 | About: Medifast, Inc. (MED)

Medifast (NYSE:MED) reported quarterly results today with revenue growing 89% and income increasing 100% when compared to the same quarter last year. While the numbers are not as spectacular as last quarter, I am satisfied with another triple digit earnings increase.

Highlights from the first quarter 2006 conference call are given below:

  • Revenue came in at $20 million vs $10.6 million for the second quarter of 2005, an increase of 89% year-over-year.
  • Income for the second quarter came in at $1.475 million or 12 cents per share (11 cents per diluted share) when compared to $0.753 million or 6 cents per share last year, an increase of almost 100% year-over-year.
  • Selling, General and Administrative expenses [SGA] increased to $12.6 million from $6.8 million last year. SGA increased primarily on account of increased ad spending, which rose from $1.2 million to $4.5 million. As a percentage of sales, SGA actually fell 3% to 61% for the six month period ended June 30, 2006 when compared to 64% for the same six month period in 2005.
  • Medifast increased guidance for the fourth consecutive quarter. Full year revenue guidance was increased to a range of $70 to $72 million from the earlier guidance of $66 to $68 million. This time Medifast did not raise guidance on income and still expects to earn 38 to 40 cents per share.
  • Based on a question on the conference call, Medifast offered a breakup of revenue increase by division. The direct-to-consumer model posted a 160% increase in revenue. The "take shape for life" division posted a 70% increase in revenue and the clinics posted a 25% increase in revenue. The clinics are now profitable while they were not profitable last year.
  • Customer acquisition costs [CAC] jumped from $135 per customer in 2005 to $150 per customer in Q2 2006, representing an increase of 11.11%. This was a cause for concern and lead to many questions during the conference call as higher CAC usually translate into lower operating margins. Medifast claimed that the higher CAC was on account of some advertising testing on a wider demographic and they expect CAC to drop in the future. The lifetime value of customers still remains about $575 per customer.
  • Medifast, which is currently listed on the American Stock Exchange, soon expects to be listed on the NYSE. The date for this NYSE listing would be around August 25, 2006. This does not come as much of a surprise as Medifast was added to the Russell 3000 index on June 16, 2006 and is gaining recognition amongst institutional investors.
  • The company plans to spend about $11 million to $12 million on advertising in 2006 and even more in 2007. The breakup of advertising spending did not change from the first quarter of 2006 and remains 55% print, 35% TV and 10% web.
  • Cash balance increased to $2.5 million when compared to $1.2 million in the second quarter of 2005. The company increased inventory in anticipation of future sales growth.
  • The stock however dropped almost 25% in after hours trading to $13.46. It probably fell on concerns about increase in CAC and the drop in income when compared to the first quarter of 2006. However a 25% correction seems extreme for a company that is still exhibiting very high growth and has raised guidance for the fourth consecutive quarter.

    I have often seen stocks drop in after hours trading based on some news and actually open higher the next day. It will be interesting to see how the broader market interprets results tomorrow.

    If you are interested, you can check out highlights from the first quarter 2006 and the fourth quarter 2005. You can check out the reasons why I like Medifast here.

    MED 1-yr Chart