NutriSystem, Inc. Q4 2009 Earnings Call Transcript

Executives

Cindy Warner – IR

Joe Redling – CEO and Chairman

David Clark – CFO

Analysts

Greg Badishkanian – Citigroup

Colin Sebastian – Lazard

Mitch Pinheiro – Janney Montgomery

Sam Bitetti – Thomas Weisel Partners

Bill Sutherland – Boenning

Bill Dezellem – Tieton Capital Management

NutriSystem, Inc. (NTRI) Q4 2009 Earnings Call Transcript March 1, 2010 4:30 PM ET

Operator

Good afternoon. My name is Laconia and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 and full year 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator instructions)

I will now hand the floor to Ms. Cindy Warner, Investor Relations. Thank you, Ms. Warner. You may begin.

Cindy Warner

Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem’s fourth quarter and full year 2009 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 this announcement contains forward-looking statements that involve risks and uncertainties. Such information includes statements about Nutrisystem’s fourth quarter and full year 2009 financial results, as well as statements that are preceded by, followed by, or include the words “believes,” “plans,” “intends,” “expects,” “anticipates,” or similar expressions.

Statements regarding Nutrisystem’s outlook and guidance for the first quarter of 2010 and the year 2010, its expectations regarding the effect of the economy on consumer spending and similar statements that are not statements of historical fact constitute forward-looking statements

For such statements, Nutrisystem claims protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from the results predicted and the reported results should not be considered as an indication of future performance. Factors that could cause actual results to differ from those contained in the forward-looking statements, include, but are not limited to those factors set forth in Nutrisystem’s annual report on Form 10-K for the year-ended December 31, 2008, which has been filed with the SEC.

Nutrisystem is making these statements as of March 1^st 2010 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

And with that, I would like to turn the call over to Joe Redling, our Chairman and Chief Executive Officer.

Joe Redling

Thank you, Cindy. Good afternoon and thank you for joining us on today’s conference call. I will review Q4 and full year 2009 results with some key highlights, and also discuss early results for the 2010 diet season. David will provide more detail on the financials in a few minutes.

First, Q4 results. Revenues totaled $106.2 million as compared to $114.6 million for Q4 2008. This represents a 7% decline year-over-year and shows continued improvement as we close the gap even further on top-line results.

Adjusted EBITDA was $14.5 million as compared to $13.5 million for Q4 2008. This represents an 8% increase year-over-year. Gross margins for Q4 were 54.2% as compared to 53.3% in Q4 2008, representing a 90 basis point improvement.

G&A as a percentage of revenues was 16.6%, a 370 basis point improvement over Q4 2008. And noteworthy in the quarter was the continued improvement in new customers as we closed the gap year-over-year with new customers acquired in the quarter being flat versus Q4 2008.

As we discussed on our last earnings call, the pace of our new customer starts is a key indicator of shifting from stabilizing our business to growing our business. I discussed in Q3 that we saw sequential new customer growth of over 20% from Q2 2009 to Q3 2009.

While that was encouraging, we were still seeing double-digit negative new customer comparisons to that same quarter in 2008. Q4 2009 was the first quarter that we actually closed the gap as we saw our new customer accounts equal prior year. This was an encouraging sign as we made ready for the 2010 diet season.

In addition, the work we had done in Q2 and Q3 on cost control and supply chain optimization contributed to a strong performance in gross margin. Nutrisystem D continued to deliver strong results and the investments made in Q3 provided the anticipated returns in the fourth quarter.

Stronger new customer trends, coupled with improved gross margins and lower operating costs contributed to our first quarter of EBITDA growth since Q2 2007.

Now, let me move to full year 2009 results. Full-year revenues came in at $528 million, down 23% versus a year ago, clearly, impacted by consumers’ continued pull back in discretionary spending. However, as I mentioned, as the year progress, we saw trend improvements in year-over-year revenue and new customer starts.

Gross margin for 2009 was 53.8%, as compared to 52.5% a year ago, a 130 basis-point increase based on the supply chain improvements we made over this past year.

Marketing as a percentage of revenue was 27.9% as compared to a year ago at 25.4%, as we invested in our Nutrisystem D launch

Adjusted EBITDA was $69 million, down versus prior year of $106 million.

G&A expenses were down $10 million as implementation of our process improvements and rightsizing took hold in the second half of the year.

We continue to be debt free and had $63 million in cash, cash equivalents and marketable securities at the end of the year. We also announced that we will be paying our regular dividend in March.

And through December, we generated $58 million in cash from operating activity, and we returned $23 million to shareholders via mostly dividend.

Macroeconomic conditions remain challenging for us during this past year as we continued to see consumers view commercial weight loss as a discretionary purchase.

Now I will touch on some key highlights for 2009. We launched our first ever frozen line of food through our innovative partnership with Schwan’s Home Service. While it was a difficult period to launch a premium-priced product, the addition of an efficient top quality line of frozen meal options positions us well and provide unique competitive advantages that can be leveraged in the future.

We continue to work on a full integration of our frozen items to make it easier than ever for our customers to choose the foods they love.

In mid-Q2, we launched Nutrisystem D and have continued to see consistent growth and acceptance in the second half of the year. We believe D has created a new category in commercial weight loss and will continue to be a strategic component of our portfolio that will enable future growth.

We undertook a comprehensive productivity improvement process where we reduced costs and optimized our operation that delivered savings of $17 million in calendar year 2009, as demonstrated in our year-over-year gross margin and G&A margin improvement. This was done without sacrificing customer service and satisfaction, and, in fact, we have seen strong improvements in overall customer satisfaction.

Our order fulfillment accuracy is at record highs, which we know, is a significant driver of customer satisfaction. We completed our supply-chain optimization, which consolidated our distribution centers into two locations and enabled the rapid improvement in order handling and customer support while reducing costs.

We launched into the retail channel for the first time with Costco and that successful partnership led us to explore additional opportunity with new partners that I will be addressing momentarily.

We continued to invest in call center operations and our web sales funnel with a focus on improving overall conversion. I will talk about how those investments are really paying off when I discuss our early results in 2010.

Despite a very tough economic year, React revenue remained flat on a dollar basis, generating $137 million in revenue in 2009. And we’re able to once again manage our marketing spend as our full year marketing efficiency, marketing spend as a percentage of revenue, came in at 27.9% and includes the launch of Nutrisystem D.

Now, looking to 2010 and early indicators for the first quarter, first, we continue to see macroeconomic challenges that are impacting the commercial weight loss category. Our own internal quarterly tracking that monitors category intent and demand recorded the second year of contraction of the commercial weight loss category. Diet intenders continue to delay their entry into the category for reasons of cost and are opting to once again attempt to diet on their own.

Supporting our own internal findings on the commercial weight loss categories retail’s own sales tracking of the diet category, which reported a 20% decline in category sales in January. And finally, we cannot ignore the recent severe decline in consumer confidence.

In addition to the macroeconomic headwinds continuing, we also experienced pressure on media rates in the first two months of 2010. In fact, even the holiday week marked the first time we saw increased media rates for that particular week since we began advertising back in 2005.

In some cases, we were seeing 50% to 100% rate increases that carried through January. While it may seem counterintuitive that media rates would be increasing in this environment, there are key factors driving this increase in media rates.

First, there was a decrease of inventory available in the market as ad networks attempted to manage rates. Second, there was increased demand for the media as advertisers returned to the market expecting higher demand across categories as we began a new year. And third, there was a weak upfront buying market as more advertisers opted to wait and buy in the scatter market, expecting rates to be lower.

This pressure impacted traditional brand advertisers, which, in turn, put pressure on direct response inventory and direct response marketers. Reason I am providing additional detail on this point is that our business, especially, in January, is very reliant on heavy media levels to drive demand and create momentum. The impact of this type of media environment is that we simply pay more for each commercial we run or we don’t air.

And the fact that we limit our spend based on ROI and response, we end up running fewer commercials to stay within our profitability margin and in turn, drive fewer calls.

While we believe this was a temporary issue and that rates have and will continue to moderate, it did represent a significant obstacle to us in the first half of Q1. These higher rates drove down the frequency of our advertising and thereby impacted call volumes.

There was a great deal of volatility from week to week. However, the encouraging news was that when media levels were aligned, we did experience strong demand. Overall, this constraint impacted us negatively by approximately $5 million in media spend year-to-date. As I said, we do not expect this to be a recurring issue, but it is material to our overall results so far in Q1.

We anticipate some loosening in media rates as we enter Q2 and have deployed new marketing initiatives to overcome this issue with good results. We have revised our media buying strategy, using analytics to adapt to a more volatile media environment to secure the broadcast media that is most important to our results.

TV is a core driver of our overall demand level and impacts other channels. Our new approach will enable us to be more proactive in securing media at key periods. We have expanded our channel mix and broadcast mix to provide us a greater flexibility.

Additionally, we will continue to build on our recent web conversion success by testing several new features within our e-commerce conversion engine. These efforts, in conjunction with optimizing our other strategic media channels, such as print and web media, will mitigate the macro rate pressures as we head into the second quarter

In addition to the conversion initiatives mentioned above, we are fortunate that our existing efforts in investments and improving conversion are paying off. We are seeing strong improvement in conversion rates, both on the web and in the call center, with increases of up to 30% year-over-year so far in Q1.

The significant improvement in conversion across our top channel enabled us to partially offset the lower call volumes impacted by higher media rates. As media rates moderate, these conversion-rate improvements should provide us with an incremental lift to our business as we move forward.

Now let’s shift to retail. Expanding our presence with three new partners in Q1 has been quite a learning experience for us. We knew this process would lead us to quite a bit of testing and evaluation as we added more chains to our retail effort.

Overall results regarding the new partners have been disappointing. While the new customer contribution for our new retail partners is immaterial, we will incur one-time expenses of approximately $3 million related to start-up and merchandising costs for these partners in the first quarter.

Our one outstanding partner remains Costco. We have seen excellent results from our placement in Costco. In our second year, volume has improved significantly as we have worked closely to leverage marketing, e-commerce, and in-store placement. We continue to see incremental business coming from the Costco channel and attractive customer economics.

The other new retail expansions have not performed to our expectations. We believe there are several factors impacting these results. First, we believe retail customer demographics are key. Costco household income levels far exceed all other retailers.

Even though we offered lower price two-week programs at other retailers that price point may still have been prohibitive given the customer demographic profile.

Second, normally referred to as basket size, which simply means average purchase sizes. Costco once again is almost 2X to 4X larger than our other retailers on average transactions.

And lastly, we believe familiarity with the prepaid card program is also key. Costco has been merchandising card programs for six years and selling big ticket items like cruises and vacations and their staff and customer base accept and understand the card program.

All of our new retailers were new to this effort and their customers and staffs are unfamiliar with the concept. Based on our evaluation of our retail effort, we believe that a retailer that has high dollar average sales, familiarity with card programs and a customer base with high income levels should perform well.

Conversely, we believe performance has been substandard at retailers with small average retail tickets and lower customer income levels. As always with retail, execution is also a key factor. How we are merchandised, where we are placed, and how employees support the sell-through are critical factors determining success.

As we enter channels, whether it’s print, TV, direct mail or retail, we will always evaluate profitability and adjust accordingly. With that said we are re-evaluating retail and expect to eliminate non-performing chains by early Q2.

We continue to examine the retail channel, but we’ll be more selective based on the learnings in Q1. We will explore and test viable retail concepts, but do not expect the retail channel to provide any incremental contributions in 2010.

In summary, it’s been quite a challenging quarter. David will discuss specific guidance in a minute, but let me highlight a few essential points. We are seeing encouraging signs. Despite the challenges and disappointing retail results, we do expect to get back to growth in new customers in Q1.

While that growth is lower than we would’ve hoped, it is still growth in a very difficult environment. As the category contracts, any growth in new customers equates to increasing share. The key driver of our growth has been the continued strength of Nutrisystem D.

D continues to make strong contributions to our new customer account and is offsetting softness we are seeing in our core business. We expect to grow new customers in the mid-single digits in Q1 and expect that trend to strengthen as we enter Q2. This will be the first quarter since Q2 2007 that we have experienced new customer growth.

We expect to continue to close the year-over-year revenue gap in Q1 and also expect to see that trend continue to strengthen as we look ahead to Q2 and full year.

Just as we did in 2009, we will also continue to keep a sharp focus on the key cost drivers in our business. We continue to control our G&A expenses and keep them in line with our revenue performance. We also anticipate continuing to drive gross margin improvement by leveraging the full year benefit of our recent supply chain initiative focused on consolidating the warehouse network, driving down food costs and gaining shipping and fulfillment efficiencies.

Consequently, while EBITDA and EPS will be pressured by media rates and one-time costs related to the retail roll out in the quarter, we believe those to be one-time costs and anticipate a stronger recovery across the consolidated business in the second quarter.

Before I hand the call to David, I want to say a few words about Ian Berg, one of Nutrisystem’s Board members who passed away this past December. He was a Board member for nearly seven years and was a trusted advisor to management. Ian had adeptly served on the audit committee. He will be deeply missed and our thoughts continue to be with his family. As a result of his passing, our audit committee composition temporarily went from three members to two members. NASDAQ requires three members to serve on the audit committee. So while we consider potential additions to our Board, Pete Musser, our current Board member, has stepped into fill the open seat on the audit committee.

With that, I’d like to turn the call over to David Clark, our CFO, to discuss the financials.

David Clark

Thank you, Joe. First, let’s go through the fourth quarter results of 2009. For the fourth quarter of 2009, we generated $106.2 million in revenues, a 7% decrease from the prior year. This compares to a 22% revenue decrease in the previous quarter as we continue to close the gap on top-line revenue.

Gross margins came in at 54.2%, up from 53.3% a year ago, as a result of our multi-year effort to reduce food and freight costs.

Marketing as a percent of sales was 26.4% in Q4 versus 23.2% a year ago.

Our fourth quarter adjusted EBITDA came in at $14.5 million and our non-cash employee stock compensation totaled $2.7 million. Adjusted EBITDA margin was 13.7% versus 11.8% a year ago, despite the pressure from higher marketing efficiencies.

Q4 operating income from continuing operations was $4 million and represent a 3.7% operating margin. Adjusting for the Nu Kitchen impairment, Q4 operating income from continuing operations would’ve been $8.5 million, or an 8% margin.

As previously announced, in Q4 we wrote down our Nu Kitchen investment by $2.9 million net of tax. This reflects a strategic decision to focus on businesses that can be scaled with the help of our national media channel. This impairment charges is recognized as a part of depreciation and amortization.

For Q4, the Nu Kitchen write-down reduced GAAP EPS by $0.09 after -ax. The Company’s effective tax rate for Q4 2009 was 31% and Q4 fully diluted EPS came in at $0.09. Without Nu Kitchen write-down, EPS would’ve been $0.18 for the quarter. Non-cash employee stock compensation had approximately a $0.06 impact on EPS for the $2.7 million in total I mentioned earlier.

Now looking at full year 2009, we generated $527.7 million in revenue, a 23% decrease from prior year. Gross margin came in at 53.8%, up from 52.5% a year ago, reflecting the success of our cost reduction efforts.

Marketing as a percentage of sales was 27.9%. And the Company’s effective tax rate for the full year of 2009 was 27%, down largely from the tax benefit arising from our abandonment of our interest in ZeroWater.

Full year 2009 EPS from continuing operations prior to the one-time Nu-Kitchen impairment charge was $1.02. The full -year effective Nu-Kitchen write-down is the same as the fourth quarter $2.9 million, resulting in a GAAP fully diluted EPS of $0.92 for the year.

Reactivation revenue in 2009 held constant on a dollar basis as compared to 2008 or 26% of total net revenues. For the full year 2009, our direct channel generated 94% of our revenue, QVC generated 5%, and less than 1% of our revenue came from other channels.

QVC revenue for 2009 was $29 million, down from 31% versus last year as that channel struggled during the recession. Retail revenue is accounted as part of our direct revenue.

From a liquidity standpoint, on December 31, 2009, we had $32.2 million in cash and cash equivalents and $30.3 million in marketable securities backed by the U.S. government. We generated a net cash increase of $24 million for the year 2009.

Capital expenditures for 2009 were $8.4 million, down from $11.6 million in 2008 and our unused $200 million credit facility remains available should we need it.

In Q4, we typically begin an inventory build for the coming diet season and we ended 2009 with inventory at $52 million, similar to a year ago when it was $51 million.

The Board of Directors approved a dividend payment payable March 22, 2010 for holders of record on March 11, 2010. This dividend consistently returns cash to shareholders while allowing sufficient liquidity to opportunistically repurchase shares and most importantly, having a large portion of discretionary free cash available.

During 2009, we bought back $1.9 million of stock in the first quarter and consciously did not pursue buybacks for the rest of the year. We will this year continue to evaluate buyback opportunities based on anticipated profitability, our capital expenditure needs, and working capital requirements. At the end of 2009, our stock buyback authorization was $113 million, and we had approximately 30 million shares outstanding.

Now moving to guidance for the first quarter. Our revenues are expected to be between $152 million and $157 million. And EPS in the first quarter is expected to come in between $0.10 and $0.13 due to modestly lower revenues, but more pointedly due to the negative impact of higher media costs Joe mentioned and the one-time costs related to retail. The retail related costs total almost $3 million and are mostly attributable to launch expenses supporting our new retail partners and we do not expect them to recur.

The total effect of the higher media and some retail marketing costs would be a reduction in EPS of $0.17 a share in the quarter. We have also provided for sufficient marketing spend in March to continue to drive customer growth for both full-year profitability and to replenish our reactivation pool for the reasons I will discuss in a minute.

These expenses will result in higher marketing efficiency as compared to our first quarter norms, which should recede in subsequent quarters and the full year 2010 marketing efficiency is expected to be comparable to that of 2009. This negative impact will be offset slightly by higher gross margins and lower general and administrative costs over the year.

As a reminder, our direct revenue can be broken into three components. New customer revenue, on-program revenue and reactivation revenue. New customer revenue is all revenue within a quarter from a customer joining within that same quarter. On-program revenue is all revenue from customers who joined in previous quarters, but are still within their first nine months with us. Reactivation revenue is all revenue from customers who are more than nine months from their initial purchase.

Overall, Q1 revenues are forecast to be down slightly. While we expect a slight increase in revenue from new customers versus prior year, we expect this to be offset by lower on program revenues due to fewer on program customers coming out of the fourth quarter 2009. Thus, revenue in Q1 will be pressured by approximately $3 million versus the prior year.

We are expecting modest downward pressure on react revenues, particularly in the beginning of the year, due to the fact that all of our new customers from the year 2007 and the first half of 2008 that are now inactive have fully moved in the two-year plus vintage, where we typically experience lower rates of reactivation.

While we’ve experienced success in inducing older customers to reactivate, we’re being cautious as they become an increasingly larger percentage of our total inactive or reactivation pool.

To put a finer point on it, we anticipate that 60% of our reactivation revenue in 2010 will be from the two-year-plus cohort as opposed to 48% last year. We expect full year reactivation revenue to be down 8% from 2009 to approximately $125 million as compared to 2009 total of $137 million net of returns.

We expect the decline to moderate as the year progresses. As we get into the latter half of the year, the new customer accounts we saw in late 2009 are expected to begin to replenish the database of inactive customers in our less than two year old cohort. However, this still reinforces the need to grow customers not only for in-year profitability, but also as it contributes to the inactive pool as a key driver of future years’ reactivation revenue.

For the full year, with an anticipated softening of media rates in the second quarter, we should see our marketing efficiency improve and our profitability recover. Consequently, we would expect full year EPS in the range of $1.02 to $1.12.

With our current dividend, we still expect to throw off excess cash this year even with a higher CapEx spend this year of $20 million to $25 million, $16 million of which is going to consolidate all of our administrative and call center operations under one roof. After the move this year, we expect our facilities and equipment-related expenses, including depreciation, to be down in 2011 as compared to 2010 and thereby accretive to earnings.

With that, I will turn it back over to Joe.

Joe Redling

Thanks, David. Before we open it up to Q&A, I’d like to emphasize that even though we are seeing category pressure in the commercial weight loss sector, we are growing new customers and we expect that to strengthen as we move into the second quarter.

We continue to believe that we have an enduring brand, a sound and tested business model, and a proven weight loss system that appeals to a large and growing addressable market. We have emerged from this difficult period a stronger Company with improved fundamentals. We have the opportunity to gain share and continue to build the Nutrisystem brand.

The addition of Nutrisystem D has expanded our market opportunity and has added another dimension to our business and our brand. While our expanded retail effort was disappointing, it reinforced the power and advantages of our direct channel.

We continue to try new things, challenging ourselves to be innovative and to stay true to our test and learn philosophy. All efforts, big and small, help us get better and help us continually improve the business. And while short-term economic factors are putting pressure on consumer spending, basic consumer trends are in our favor, as more and more consumers are realizing the importance of weight management when it comes to improving their overall health and wellness.

The health risks of obesity have been well documented, and we believe consumers are ready to make the changes necessary to begin their journey to a healthier lifestyle. We remain committed to educating, supporting and empowering consumers to make those changes and achieve their goals.

We have partnered with and have the support of great organizations, such as the American Diabetes Association and WomenHeart. Our entire company is dedicated to helping each and every customer achieve success.

We have a unique business where the success and well-being of our customers directly correlate to the economic success of our business, the returns to our shareholders and the happiness of our employees. While we once again expect a challenging year, we are encouraged by our recent progress and the improvement of several key fundamentals.

We will continue to evolve our brand and offerings to serve our customers today and in the future, as we believe, we are uniquely positioned to serve an ever growing consumer need.

With that, Operator, we would like to open it up for some questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Greg Badishkanian with Citigroup.

Greg Badishkanian – Citigroup

Good morning, thanks. Hey, just a few questions, first on the guidance I believe you said $1.02 to $1.12. Just wondering, is there anything one-time in that or how should we think about any type of expenses that might be there?

Joe Redling

Aside from what we flag as one-time expenses in the first quarter related to the media rates and the retail launch expenses, no, there’s nothing else that’s one time in that number for the full year.

Greg Badishkanian – Citigroup

Right, right, okay, good. And then, just on the cost side of things, food cost expectations for 2010, maybe a little bit of color there?

David Clark

Yes, as you know, Greg, we’ve done a lot of work over the last 18 months on our supply relationships. We feel pretty good about where we are on the gross margin side and if we think we could we’d manage to these improvements that we talked about earlier. So even with any sort of moderate increase in food prices, we think the efficiencies we’ve built in, in other areas, like fulfillment rate, as well as our warehouse efficiency, will also offset that. So we feel pretty good on the gross-margin side.

Greg Badishkanian – Citigroup

Good, good year. And then on the media rates, obviously, those are, I think you said about $5 million year-to-date incremental, and then so, the next few quarters, when do you expect it to be kind of maybe flat year-on-year or as you see ad rates, how much visibility do you have going out?

David Clark

I’ll try to answer the first part first. Our visibility is pretty real time in terms of seeing rates go up or down. So, we do have the luxury of understanding what’s happening with the rates on a daily basis, which is unlike most brand advertisers. The majority of the impact this year was really in the month of January and when we had to get out there with a heavy media level, that’s where we took most of the hit on that.

We’ve been able to revise some of our buying philosophy and systems to adapt to that, so we’re trying to moderate that through February. We’re already seeing some improvement, but if you think about just on a macro basis, we’re expecting that to start improving as we move into April and May.

Greg Badishkanian – Citigroup

Okay, good. And I know for competitive reasons you probably can’t go into too much detail because this is a public call, but you are looking at some new approaches, is there anything that you can share with us that you think might help over the next few quarters?

David Clark

I think we’re looking at getting foreign advance of our media planning strategy where it’s been a great scatter market for the several years coming up to 2010, so the longer you waited, the better the deal. We’re a pretty big advertiser with a lot of these networks and we’re really leveraging those relationships to take a little bit longer-term view of the media to make sure we have commitments and support when we need it. So, that’s one way of just take a longer view of when we’re buying and how we are committing our media with still having the flexibility to adjust based on business trends.

The second piece is we’re expanding into some new networks and expanding our mix, so we really have more programs and more networks to choose from. We’ve done a lot of that over the last four weeks. So those are things that give us a little bit more leverage and more flexibility to move our money around a bit.

Greg Badishkanian – Citigroup

Great. Just finally, big success, seems like here with Nutri D, whole new category, again like you did with men’s. Any other kind of color in terms of momentum, characteristics of the dieter, how long they’re on the program? Is there anything that’s kind of changed since you talked last?

Joe Redling

Yes, sure. We have seen really strong length of stay. If you think about, as David pointed out, we kind of define our diet cycle, our initial diet cycle, as first nine months, so really, the people that we brought on, on the diabetic program in May and June in the first couple of months have shown some significant length of stay improvement over our core business. So, we kind of anticipated that. It’s nice to see that that’s paying off for us. The media channel is working very well for us where we’re also one of the big shifts, when I talk about conversion, the improvements in conversion, we’ve seen really significant improvement in conversions as we entered 2010 as well as in the fourth quarter versus when we launched. So, we’re really getting much better at conversing with the diabetic community.

We’re learning a lot for what these customers are looking for, how we need to work with them and their doctors, and that’s really given us a lot of opportunity to sign on a lot of new customers. So it’s a great program for us, it’s a great market and we are serving a lot of people that are looking for a really proven program that’s easy for them to implement, that’s something we’ll continue to push as we look at our marketing going forward.

Greg Badishkanian – Citigroup

Yes, absolutely, you’ve had good success there. So thank you very much.

Operator

Your next question comes from the line of Colin Sebastian with Lazard.

Colin Sebastian – Lazard

Thanks for taking my question. I guess, first, just following up on the media rates and some of the changes you’re making for the plan, I wonder if we should expect maybe also to see a shift in the channels a bit where you are acquiring new customers. For example, should we expect to see a higher mix of online or other sources of leads? And would that also eventually help you in terms of reactivations, reaching out via e-mail or some other ways to help reactivate that former base?

David Clark

Yes, Colin, it’s not as black and white as that. To give you an example, we actually bought the Olympics the last two weeks, which was something we typically don’t buy network, expensive network programming, but there were packages within the Olympics that had very good fundamental metrics for us in terms of cost per thousand and how we evaluate, what we buy, when we buy it. It was also great daytime viewing of the Olympics and the Olympics actually way overdelivered on their audiences, so those were really good buys for us that helped us a lot over the last couple of weeks.

So that’s an example that kind of goes against what you’d normally think we’d be doing. And that’s something that we wouldn’t have pursued before because we had such a large amount of media to choose from on national cable, but that was one thing. The second part is, exactly down that road that you’re discussing is, we have sort of looked at e-mail and print as well, as beefing those up to offset some of these media rates and that’s some of the adjustment that we’ve made and will continue to make.

Colin Sebastian – Lazard

Okay, thanks. And then in terms of Nutrisystem D, obviously, you don’t want to break it out specifically, but going back to the core business between men and women and I think those segments are on subtle different growth curves, maybe you can talk about the relative trends there.

David Clark

Sure, I mean D has continued to deliver I think I said last quarter that it’s delivering double-digit contribution to our business. That’s continuing and actually improving as we moved into the fourth quarter and Q1. Women are pretty stable. In terms of the women’s side of our business, we are seeing that stabilize and really it’s more the senior side where we are seeing some of the program order pressure versus where we were last year. So, core business is a little soft. And on the senior side, but D is making up a lot of that for us and we’re starting to see some regain strength with women, which is really important to us because it represents 70% of our business.

Colin Sebastian – Lazard

Okay. And then just lastly, you mentioned making some changes to the retail programs in (inaudible). Are you talking about being more selective about which stores you’re in or modifying the offers in those stores or potentially pulling out of one of the chains altogether?

David Clark

Yes, I think it’s a mixed bag. I think we are looking at pulling out of specific chains where the economics and the sell-through really didn’t meet either our hurdle rates or the partners. So, being in retail and thousands of locations, as we pointed out, is not an inexpensive proposition. So we need to get the return on those channels, and if clearly, we can’t get the returns in the first quarter, it’d be difficult to continue to stay focused on that going forward. So I think we will be eliminating the underperforming chains and we’ll be trying to revise some of the others in terms of looking for ways to go back to a smaller number of stores to see if we can make the program more effective for us.

And we’ll also consider other retailers. We really like the membership club business. As I said, Costco is really performing well. We think there is opportunities there to continue to look at that. But we’re not going to be in chains if we’re not really getting the scale and profitability that we were hoping for.

Colin Sebastian – Lazard

That’s helpful, thanks very much.

David Clark

Thanks, Colin.

Operator

(Operator instructions) Your next question comes from the line of Mitch Pinheiro with Janney Montgomery.