Medifast A Sell Ahead Of Earnings As Diet Sector Evolves Past Meetings And 'Coaches'

| About: Medifast, Inc. (MED)


We believe engagement is slowing to Medifast products and services, and that the company will have difficulty recruiting new Health Coaches.

We believe MED will miss Q4 earnings expectations and offer a revenue outlook for 2014 as much as 30% below current consensus.

Shares could plunge a minimum of 25% and ultimately revert closer to late-2012 levels near $15.

Institutional Insider believes Medifast (NYSE:MED) will miss Q4 earnings expectations and offer a revenue outlook for 2014 as much as 30% below current consensus, based on evidence of dramatically deteriorating trends to start 2014. If our hypothesis is correct, shares could plunge a minimum of 25% and ultimately revert closer to late 2012 levels near $15. More than a dozen separate data-based checks of demand (see below) indicate that sales are dramatically slowing. We believe these trends will only further deteriorate due to recent changes in the regulatory environment as well as the diet sector's movement towards higher-technology wearable devices.


While Q4 expectations are somewhat tempered, the street consensus calls for a return in revenue growth in 2014 for MED. We believe, based on more than a dozen separate pieces of quantitative evidence seen below, that revenue could rapidly decline in 2014. The first cracks appeared in Q3, with net revenues declining 5%, but recent data indicates much steeper slowing.

Similar to what has transpired with Weight Watchers, this small decline likely foreshadows much steeper slippage in coming quarters. WTW saw its revenue fall just 6% from 2012 to 2013 prior to this year's EPS guidance, implying a decline OVER 50% and revenue declines of nearly 17%.

Key Highlights

  1. Google Trends analysis of all Medifast and Medifast-related keyword searches shows tremendous Q1 deceleration below comparable 2011 metrics

  2. Closely-related nutrition and health companies (GNC, WTW, NTRI) have struggled significantly in Q4 2013 as free alternatives such as MyFitnessPal gain market share

  3. FTC has gotten more aggressive cracking down on marketing tactics and weight loss claims, and this could hamper MED's ability to grow Health Coaches

  4. TSFL Health Coach recruitment and revenue per coach could be significantly down, according to proprietary checks

  5. Web traffic to Medifast web domains down 30% year-over-year (including:,,,,,,,

  6. Mobile-App downloads have dramatically slowed and show usage may be limited

  7. Average online user engagement in Medifast Community down 40% over last year

  8. Increased promotional activity and discounting on Facebook and other channels indicates 2014 is off to a poor start

1. Google Trends analysis of all Medifast and Medifast-related keyword searches shows tremendous Q1 deceleration to multi-year lows

Analysis of Medifast-related key terms have revealed significant deceleration of customer interest, which has historically proved to be extremely accurate in the health/weight loss industry. For companies that have a significant share of their business online, this metric is critical. As demand increases for a product, the keywords related to that product will always have an upward trajectory, and vice versa for products where demand is falling off.

Let's do a case study in the most closely-related comparison: Weight Watchers (NYSE:WTW). For those not caught up, Weight Watchers sells web-subscription weight management products and interactive resources. In the company's most recent earnings release, management announced Q4 EPS of $0.54 against analyst consensus of $0.61 on earnings of $366.1 million against analyst consensus of $356 million. The stock dropped over 26% (from $30 to $22) on an FY14 outlook that missed estimates by 46%. The street was expecting full-year EPS to be $2.72, but management guided to a mid-point forecast of $1.45 (miss of 46%). Looking at attendance metrics, Weight Watchers reported 8.5 million versus consensus of 9.8 million, year-over-year. Management concluded by stating the year would be "very challenging".

Comparing Weight Watchers' Google Trends data with Medifast's Google Trends paints a very grim outlook for Medifast when they release earnings after the market closes on Monday.

Weight Watchers' Google Trends chart on a quarter that missed EPS by 12% and a guidance that missed by 46%:


The above chart represents the frequency in which the term "weight watchers" is searched for (think of this as how popular something is) on Google since 2011. Looking at the colored data-lines that represent time, one sees healthy growth from 2011 into 2012, and then a drop in demand in 2013, until finally it drops off the cliff in Q1 2014. Analyst expectations of FY14 EPS would have indicated growth into the area of the chart where the green and gold data points average out. Instead, true demand was nearly half of what was expected (the blue line), and thus, management cut guidance by 46%.

Medifast's chart shows nearly identical deceleration of demand as Weight Watchers:


The above is a chart of Medifast's popularity since 2011. We see healthy growth from 2011 to 2012, and then a slight dip downward in 2013 until 2014. We see an identical drop in demand that is roughly 50% of current analyst expectations for FY14 earnings of $1.93 per share. We believe that management could guide FY14 well below consensus.

Medifast Has Increased Spending in Paid Ad-Campaigns to Address Lowered Demand - A Bearish Sign of Driving Revenue at the Expense of Bottom-Line Earnings


Taking a closer look at Weight Watchers' Q4, WTW missed on the bottom-line but beat on the top-line, this usually signifies that the company had to pay more to capture the same amount of revenue. In the case of an online-centric business like Medifast, this would mean paying for keywords. Sure enough, in December, we saw a significantly increased presence of paid Medifast keywords in Google's search engine, which had been previously been mostly organic.

2. Closely-related nutrition and health companies (GNC, WTW, NTRI) have struggled significantly in Q4 2013 as free alternatives such as MyFitnessPal and Spark People gain market share

2014 has not been kind to weight loss and health-related companies. Difficulty by Weight Watchers, Nutrisystem, and GNC to generate demand has capped off an earnings season that has seen WTW share prices fall by 32%, GNC by 14%, and Nutrisystem by 13%. We believe one of the catalysts for the decline in the sector has been a migration to comparable products and services that are completely free. A search on the Android "Play" App market reveals that only 32 out of the top 35 diet apps are free. Even more interesting is that neither the Medifast app nor the TSFL app is even listed in the top 100 in category of weight loss applications. In fact, neither app is listed in the top 560 in the health and fitness category of the Play market. Both the Medifast App and the TSFL app on Android Play have downloads between the 10,000 and the 50,000 mark. All competing applications in the Android market in the top 10 have downloads of over 100,000, and exactly half have downloads of over 1,000,000. The proliferation of these free products and services have pushed demand for products from Weight Watchers, Nutrisystem, and Medifast down.

Medifast and TSFL Android App Not Within Top 560 of "Health and Fitness" Categoryandroidmarket.png 3. FTC restrictions on weight loss claims could hurt marketing

Recently, the FTC has come down harder on marketing tactics of various weight loss claims. The impact could limit the effectiveness of recruiting new members and coaches.

The Federal Trade Commission announced a law enforcement initiative in 2014 to target national marketers that used deceptive advertising claims to peddle fad weight loss products, from food additives and skin cream, to dietary supplements.

Sensa print advertisement showing fit female torso and product being poured onto salad.

"Operation Failed Resolution" is part of the FTC's ongoing effort to stop misleading claims for products promoting easy weight loss and slimmer bodies.

The recent FTC efforts have hurt HLF and NUS.

4. TSFL Health Coach recruitment and revenue per coach could be significantly down, according to proprietary checks

Our proprietary channel-check of employee headcount using LinkedIn and other forms of human resources data indicates that Medifast may be experiencing headwinds in signing up new Health Coaches for the "multi-level marketing" portion of their business. Over Q1, we have seen a steady decrease in the presence of Medifast Health Coaches on LinkedIn. Medifast relies on these Health Coaches, who focus on gaining commissions from selling Medifast products, to generate revenue. Any interruption in their ability to recruit them will send revenue falling.

On September 1, 2013, Medifast began including increased disclosures of actual expected income by Health Coaches. These more realistic income expectations could hamper recruitment - which MED depends on.

"With the launch of the New Integrated Compensation Plan on September 1, to provide information on realistic earnings opportunities for Health Coaches under the Integrated Compensation Plan, Take Shape For Life has provided the following chart." - Medifast Management


As can be seen in the disclosure, Health Coaches generated an average of just $87.45 a month for their efforts. Previously, Medifast did not disclose this document, this will deter new Health Coaches from signing up, as income expectations are realistically lower. At the end of the 3rd quarter 2013, Medifast had 11,700 active Health Coaches, up 8% over the same quarter in the previous year. The average revenue generated by these Health Coaches was $1,530, down $100 from the same period last year. We believe that with the decision of Medifast to disclose of true expected monthly income of Health Coaches, and the rising of minimum wage across the country, these trends could deteriorate quickly.

Medifast Executives Are Quitting, or Being Laid Off

In a January 13 official Medifast press release, VP of ecommerce, Joel Layton is quoted saying they have "lots of momentum".

"We are excited to start the year with a lot of momentum," said Joel Layton, Vice President - eCommerce & Digital Marketing at Medifast. "Accessibility and personalization have always been priorities at Medifast and we see huge value in integrating mobile and multi-channel functionality into our go-to-market strategy. Mobile accessibility will help our customers reach their weight loss goals with information readily available on personal devices at all times."

Yet, less than one month later, he appears to have left the company. Key employee loss during peak diet season is likely to indicate that things are not going well at Medifast.

JoelLaytonLInkedin (1).png

5. Web-traffic to Medifast web domains down markedly year-over-year

Medifast Direct - In the direct-to-consumer channel ("Medifast Direct"), customers order Medifast products directly through the Company's website,

Traffic to has significantly slowed down year-over-year. The critical first-quarter diet season has been a disappointment for Medifast's primary engagement channel across all analytics tools we have seen. Below is one representation from shows significant lower traffic year-over-year in Q1 2014alexa.png

Another view of search traffic slowdown, of which 73% comes from the search term "medifast"


The Take Shape for Life segment of Medifast accounted for nearly 65% of revenues in Q3 2013, but the growth rate slowed to just 1% compared with YTD of 8%.

Health Coaches recommend Medifast products at the website. metrics in Average Time Spent on Page, Visits Per Person, and Pages Per Visit are down an average of over 20% year-over-year TSFLmetricscompete.png Page Cumulative Page Views Are Down 35% Year-Over-YearTSFLpageviews.png

For a company that is so dependent upon the web platform to generate revenue, it must be able to drive traffic, and Medifast has been unsuccessful in doing so, according to an ensemble of signals across multiple analytics platforms.

Dramatically Less Ordering Activity Detected From Direct Channel

Furthermore, the website that Health Coaches use to monitor their clients' ordering patterns has seen a steep fall-off in traffic YTD. This could indicate dramatically less ordering activity is occurring.


6. Medifast Mobile-App downloads down significantly compared to comparable free apps

Non-existent iOS App-Store Penetration


iPhone Medifast App has an overall 2-star rating, and does not even have enough reviews to display the rating for the current version. Only 39 people have rated the Medifast App on iPhone.


7. Medifast Blog Volume down 40%

MyMedifast is an online community which provides a library of support articles, forums, meal-planning tools, and social media functionality.

Perhaps more compelling is that user engagement in the Medifast community blogs are down in every metric. Cumulatively, we are seeing that overall volume is down ~40%.

Q1 2013 Medifast community engagement showed 356 pages of active user participation2013.png

In 2014, during the first quarter, against the same time-range in the aforementioned screenshot, there are only 199 pages of user participation. A 40% decrease.

Q1 2014 Medifast community engagement slowed to 199 pages of activity versus 2013's 356


8. Increased promotional activity and discounting on Facebook and other channels

Recently, Medifast began discounting its 4-week package extensively, an initiative that was not needed a year ago. We believe this discounting was necessary due to weak demand.


Disclosure: I am short MED. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.