NutriSystem Inc. Q2 2010 Earnings Call Transcript

Jul.29.10 | About: Nutrisystem Inc (NTRI)

NutriSystem Inc. (NASDAQ:NTRI)

Q2 2010 Earnings Call

July 29, 2010 04:30 pm ET

Executives

Cindy Warner - IR

Joe Redling - CEO and Chairman of the Board

David Clark - CFO

Analysts

Greg Badishkanian - Citi Group

Colin Sebastian - Lazard

Mitchell Pinheiro - Janney Montgomery Scott

Bill Dezellem - Tieton Capital

Presentation

Operator

Good afternoon. My name is Latanya and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2010 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

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

Cindy Warner

Good afternoon, everyone and thank you for joining us to discuss Nutrisystem's second quarter 2010 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 second quarter 2010 financial results, as well as statements that are preceded by, followed by or include the words believes, plan, intends, expects, anticipates or similar expressions.

Statements regarding Nutrisystem's plans and expectations for the third quarter of 2010 and the full year 2010 and similar statements that are not statements of historical facts 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.

The actual results may differ materially from the results predicted and the reported results should not be considered 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, 2009, which has been filed with the SEC.

Nutrisystem is making these statements as of July 29, 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 the company's second quarter 2010 results provide some key performance highlights for the second quarter, an update trends we are seeing in Q3. David Clark will provide more details on the financials in a few minutes.

Second quarter revenues came in at $142 million up 8%, as compared to $131 million a year ago. New customer revenue was the primary contributor of growth in the quarter as we achieved 31% increase in new customers versus the second quarter of 2009. Gross margin for the second quarter of 2010 was 56.4% which represents a 180 basis point improvement from Q1 2010 as well as a 240 basis point improvement versus Q2 of last year. Our continued improvement in gross margin is a direct result of improved customer management, supply chain optimization in channel mix. David will go in to more detail on gross margin improvements in a few minutes.

Marketing, as a percentage of revenue was 26% in Q2. This has improved significantly from Q1 of this year, where we experienced pressure on media rates and had several one-time marketing related charges that impacted our overall efficiency. In Q2, 2010, we were able to invest both aggressively and efficiently immediate. Our results this year have fallen back in line with Q2, 2009, when market spend represented 27% of revenue in the quarter. Overall these are positive results in a challenging marketplace.

Recall that rates in 2009 were near historical lows, so the year-over-year comparison is tough and in the first part of this year, the random market was a challenge as overall inventory tightened up and non-traditional players entered the marketplace.

We have effectively managed our position in the random market in the second quarter, and we expect to remain key media periods ahead of us to be manageable.

Adjusted EBITDA for the quarter was $26 million representing a 57% increase versus the second quarter of 2009. This EBITDA growth was primarily driven by strong new customer performance across all of our brands; continued gross margin improvement and G&A expense management from last year's expense reduction initiatives.

We continue to debt free and had $89 million in cash, cash equivalent and marketable securities on hand at the end of the second quarter. We generated $35 million in cash from operations in the second quarter and took the opportunity to put our cash to work as we actively repurchased shares in June and July.

We also announced that we will be paying our quarterly dividend in August and Dave will provide more detail on the share repurchase and dividend during his financial review.

Let's spend a few minutes highlighting some key areas regarding Q2 performance. As stated earlier, new customer starts in a quarter are very encouraging as we experience a 31% improvement in new customer starts versus Q2 of 2009. Also encouraging was that while we saw continued contributions from Nutrisystem D, we also continued to improve the new customer trends of our core offerings for Women, Men and Silver.

As I mentioned on the last call, we did see a stronger seasonal demand shift in April driven by the Easter holiday. That seasonal demand coupled with new creative promotional offers and an effective media effort enabled us to build on the new customer growth we experienced in Q1 across all our program offerings. That momentum strengthened in May, as we applied additional promotional way to take advantage of the reviewed consumer interest and to optimize conversion rates over the phone and on the web. This is quite a contrast from a year ago when we saw little if any, seasonal demand in the market for surrounding the Easter period.

It was a more difficult environment last year from a macro perspective as we experienced an improving consumer confidence trend in April and May of this year and we believe somewhat of a loosening on consumer's part to reconsider spending in the weight loss category.

Our 8% year-over-year revenue increase in the quarter was a strong performance considering we had anticipated revenue head wins from a declining reactivation revenue base. Our net reactivation revenue declined 7% or $2.6 million in Q2 2010 versus Q2 2009 as expected and was fully offset by a 32% increase in new customer revenue and the stability of our on program revenue coming out of Q1.

When we summarized our various revenue streams on that Q1 call, we emphasize new customer growth as the catalyst to driving growth in on program and reactivation revenues. The new customer results in the second quarter put us in a strong position to show a rebound and reactivation revenues in the first half of 2011.

Now, let me expand a bit on marketing efficiency for the quarter. In Q2 2010 we saw a return to 26% marketing spend as a percentage of revenue. This improved significantly from Q1 and is consistent with Q2 2009. The adjustments we made in mid Q1 allowed us to respond to a tightening media marketplace and improve our overall efficiency.

Despite continuing pressure on rates, we were successful in leveraging our buying patterns for improved results and most importantly we're able to support the improving new customer acquisition trends with the appropriate media levels to optimize overall results for the period.

While marketing spend remained relatively flat to prior year, we drove significantly more new customers in the quarter. As we look ahead in the media front we are confident that we can manage through any potential rate volatility for the remainder of 2010.

Turning to QVC, QVC has been a key marketing channel for this company since we became a direct-to-consumer business model. During the recession our volume through QVC has been challenged and trends have remained unchanged. This challenge is forecasted to continue for the balance of the year. We are working with our colleagues at QVC to improve the offering. This shows and the value perceived by that distinct audience.

As you know, we are a seasonal business and so our focus is to reverse the trend in time for the 2011 dive season.

One area that I would like to touch on is the strength and scalability scalable leverage of our business model. After successfully implementing several fixed cost reduction initiatives, while simultaneously focusing on reducing our supply chain unitary cost over the past 12 months, Q2 2010 demonstrated how a modest increase and top line revenue of 8% left us poised to realize a disproportionate gain and profitability growth of 57% year-over-year.

Also key to achieving this EBITDA growth was the effectiveness of our real time marketing initiatives as manifested by a significant sequential and year-over-year improvement in marketing efficiency.

Taken in totality, we feel confident that we are poised to deliver material increases to our EBITDA margin when macroeconomic conditions improve, while also able to mitigate flat to deteriorating economic pressure due to our demonstrated ability to mange costs.

As we looked ahead to Q3 and full year 2010, it is important to keep sight of emerging consumer trends driven by ongoing macroeconomic issues. As I have said, we clearly believe that with an improvement in consumer sentiment, and loosening of their spending behaviors at least, within our category in the second quarter.

Consumer confidence rebounded in April and May, but has more recently reverted back to mid 2009 levels. We saw consumer confidence in June and July show a marked decline indicating consumers are once again beginning to retrench.

We have also seen a softening of our new customer trends in July, so we are being prudently cautious for the third quarter of 2010, as we expect the new customer's starts to be flat as compared to Q3 of 2009. In addition to this distinct consumer pullback based on current economic uncertainty in the macro environment, we are now past the one year anniversary of the launch of Nutrisystem D.

Our year-over-year new customer comparisons will be more difficult with the de-growth we experienced in the second half of 2009 and more specifically in the third quarter. As you may recall, Q3, 2009 experienced the sequential, new customer increase of 20% versus the previous quarter. This trend is inconsistent with our typical seasonal trends. The launch of the D program last year drove the sequential improvement from the second to the third quarter of 2009.

We expect seasonal trends to return to a more normalized pattern in the current quarter. While we are very encouraged about the positive results in Q2, we believe it's prudent to be cautious as we enter the second half of the year in these uncertain times.

With this in mind, we remain focused on continuing to innovate and create new and compelling acquisition programs, to attract new customers in the near term. We remain committed to optimizing our cost and improving overall customer satisfaction and profitability and continuing to return value to our shareholders.

With that, I will turn in over to David Clarke, our CFO.

David Clark

Thanks, Joe. Now, let's go through the quarter's financial results in a little more detail. For the second quarter of 2010, we generated $141.6 million in revenues, as compared to $131 million a year ago and increase of 8%.

New customer starts experience 31% growth in the second quarter versus prior year. This growth was seen across all aspects of the business including strong year-over-year performance in Costco. Despite a recovery in our direct and retail channels, sales to QBC have performed below expectations and indeed below last year. QBC currently represents less than 4% of our overall revenues.

While, we are working to reverse these trends we have not built any recovery in to our third quarter or full year guidance. As expect net reactivation revenue was down 7% versus second quarter of last year to approximately $33 million. This was based on a sequential decline in new customer starts in the years of 2008 and 2009.

We foresee no change that previously forecasted full year reactivation revenue in the mid $120 million range for 2010. We expect this to improve in 2011 as a new customer growth we experience in the first half of 2010 transfers in to reactivation revenue next year.

Our gross margin came in at 56.4%, a 240 basis point improvement from a year ago that was based on lower cost of food, a shift in channel mix to our higher margin direct channel continue reduce fulfillment cost coupled with lower customer returns. We have completed our very successful supply chain optimization program and we believe that our gross margin is sustainable at current level for remainder of this year. We will continue to focus on finding operational efficiencies going forward.

As Joe discussed, marketing as a percentage of sales was 26.3% in Q2, down from 27% a year ago. This metric is also down 10 full percentage points from the first quarter. Our cash G&A expense which is total G&A expense less non-cash compensation was 12% or $2.2 million lower than last year, again based on cost optimization work implemented in May of 2009.

With that anniversary in mind, we do not expect similar year-over-year percentage reductions for the second half of 2010 as expect to incur one-time move related expenses and we are accruing for salary increases and management bonuses which were frozen last year. We will continue to manage these expenses throughout the year as we monitor seasonality pressures and begin to pair for the important 2011 diet season.

Our second quarter 2010 adjusted EBITDA came in at $26.2 million, a 57% increase over this period a year ago. The combination of gross margin improvement, marketing efficiency management and G&A reduction supported an adjusted EBITDA margin of 18.5% as compared to 12.7% in the same quarter last year. This quarter reinforces the ability to leverage our expenses as our year-over-year absolute dollar increase in EBITDA nearly equal the increase in our revenues.

Depreciation and amortization was $2.9 million and our non-cash employees' stock compensation totaled $3.2 million. Q2, 2010 operating income from continuing operations was $20 million or 14.1% operating margin and was 68% higher than the second quarter year ago. The company's effective tax rate for the second quarter 2010 was 36.8%, and our EPS came in at $0.40 a share, a 43% from $0.28 year ago. We expect our tax rate to continue at 37% for the full year.

Capital expenditures for the first half of 2010 were $11.3 million, and we plan for capital expenditures to be between 20 and $25 million as we complete the work that consolidated all of our employees and the datacenter into one facility at our new company headquarter in Fort, Washington, Pennsylvania.

I'm happy to report that the result of the effective and tireless work done by our 18 facilities teams we have largely completed this consolidation. Starting in 2011, we expect our facility in related cost including depreciation and amortization to be lower as a result of this consolidation and thereby accretive to earnings per share.

We ended the second quarter with inventory at $23.9 million as compared to 52 million at the beginning of this year. From a liquidity standpoint on June 30, 2010 we had $88.9 million in cash, cash equivalent in marketable securities. As compared to $62.2 million at the beginning of the year, and we continue to be invested in treasuries, U.S. Backed Securities and Money Market Fund Accounts.

Our Board of Directors approved the dividend payment of $0.175 per share payable on August 19, 2010 for all holders of record on August 9, 2010. We continue to see dividend as a consist method to return value to our shareholders.

In the second quarter and through Wednesday July, 28 we have purchase 3 million shares or approximately 10% of the shares outstanding as of the beginning of the second quarter. As of this date, we have nearly $44 million remaining under our authorization from a Board for additional share repurchases. We anticipate that we have sufficient liquidity for the recent share buyback and are expected seasonal inventory build based on our cash balances. Our bank facility is also available this for any additional buybacks that we believe will be accretive to our shareholders. The facility currently provides the borrowing rates at less than 2%.

As we look at the rest of 2010, we have to balance the current uncertainty in the market, the return to traditional seasonality that Joe mentioned the impact of our QVC channel currently, as well as factoring the share repurchases. As a reminder our traditional seasonality patterns have suggested that our 60% of our new customer volumes comes from the first half of the year. Last year that was disrupted by the one NutriSystem the offsetting the traditional decline from the second to third quarter. Therefore, we do anticipate a slight decline in revenues for the third quarter versus a year ago and expect a fully diluted EPS range of $0.23 to $0.26 per share.

For the full year we have raised the lower end of the range of our guidance to $1.7 while maintaining the upper end of that range at $1.12 per share. Thank you and I'll turn it back over to Joe.

Joe Redling

Thanks David. Before we move into Q&A I would to like reinforce a few key points. With our first sign of a slight micro consumer sentiment improvement our unique direct-to-consumer business model enabled us to respond in real time to take full advantage of the opportunity to grow share in the second quarter. We have also leveraged our operating model to improve the EBITDA margins as over 90% of our revenue growth in the quarter flow through to the bottom line.

Even with continuing macroeconomic challenges we are able to generate significant cash flow for operations and have consistently returned value to our shareholders through quarterly dividend and most recently stock buybacks. While we still see challenges in the near term from hampered consumer discretionary spending, I am very encouraged by the growth in new consumer starts we experienced in the first half of the year and most notably the second quarter.

The consumer return to our offering of a convenient healthy value-based and proven weight-loss solution when their confidence was strengthening. We believe this is a very positive indicator for our future growth.

We will continue to focus on investing in our brand and improving our products and services to better serve the ever changing needs of this large and growing market.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Greg Badishkanian with Citi Group.

Greg Badishkanian - Citi Group

Hey, guys, you had really nice quarter with the new customers. I believe it was 31%. Was that comparable number 21% positive in the first quarter?

Joe Redling

We were up 11% in new customers in the first quarter, Greg.

Greg Badishkanian - Citi Group

Okay 11% versus 31% and that's a nice acceleration and then did you mention it was around flattish in July year-over-year?

Joe Redling

We said we saw a softening trend in July. We haven't gotten specific on kind of the indexing. We started seeing the kind of trends from the second quarter soften up a little bit sort of mid-June and that's continued into July and that's why, we feel we're going to be cautious as we look ahead for the quarter and full year.

Greg Badishkanian - Citi Group

Right, and when we look at second half, you looked at July, how much of that do you think is due to the consumer confidence that we saw it across, leisure and discretionary soften up versus up against, you've got a lot tougher comparisons in the second quarter or excuse me in third and fourth quarter, than you did in the first and second quarter?

Joe Redling

Yes, I think its three factors. I think that we had pretty phenomenal growth really in a tough environment in Q2. So you could say, we might have moved some of that business up from July to June or June to May. I think that's one factor. I think that's the smaller factor, and the other two you point out, clearly we're seeing some pretty tough consumer confidence numbers coming up of June and just recently released last week. For July, where you're seeing this consumer confidence rates really back down to mid 2009, pretty low levels and our comps are tough, going in.

We did have all of our investment spend in diabetic really happened in June and really the capturing of those customers we really capitalized in July and August. So that investment spent paid off and diabetic is continuing to deliver pretty steady business for us, but it's not going to be able to kind of measure up to the launch period.

Greg Badishkanian - Citi Group

And you know in tough times, I would think that just because of the offering, has a lot of value at $10 per day, is there any way that you can get that message clear to the consumers so they don't think about it as like an incremental roughly $300 purchase but instead it supplement other food costs that would be significantly higher if they were to just go to McDonalds or some other eating out it would be significantly more expensive than using your diet plan.

Joe Redling

I think it's a very good point I think in this in a more traditional environment you have many more options to rationalize price value. I think at this point when people are really looking at every dollar spent in their household, it's a tougher time to kind of drive a rationale value whether its $250 or $300 monthly investment in a product. It's still a big ticket item and it's still considered discretionary.

We are seeing some response as we do price promotions and we put new offers in the marketplace. We are clearly seeing a consumer that is looking for deals and that's quiet a contrast from last year where no matter how we change our offers, whatever testing we did in the marketplace, we really didn't see any response at all.

This year we're actually seeing strong response when we go out and get aggressive on price and on promotional offers. So we'll continue to look at that as we move into the third quarter and even in the fourth quarter to see if there are ways that continue to motivate people to buy now versus waiting and I think I just think that consumers right now are being very cautious about their spending.

Greg Badishkanian - Citi Group

I agree with that. And then just finally, share repos 10% of the outstanding shares that's petty substantial, which are plans going forward would you have the propensity to buy more. Are you price driven are you what would kind of drive that decision making process for you?

David Clark

Greg, its David. We have traditionally been, opportunistic around price, but also there are number of factors that go into our thinking in terms of, are we closing in on time, start building our inventory, what's our outlook on the business.

So this past quarter was the right time to go in, based on all those factors going forward, it really just be based on the situation as we look at it. So it's hard for us to sort of say, exactly what our plans are. But we do still have some authorized and of course, we still have the dividend going on at current levels.

Operator

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

Colin Sebastian - Lazard

Thanks very much, I guess just the follow-up on the last quarter on new customers in Q3, are you also seeing a decay here in your marketing efficiency and so are you pulling back spending on that front, and then just to be clear, does your guidance here for new customers, are you assuming that new customers in the core business are declining versus last year's pretty soft number?

Joe Redling

We were saying, we think its going to flat, again because of our comp with D was a big contributor last year. I mean our marketing efficiency, we don't expect to be worse, we manage that number, so when we see opportunities, we spend, then if we see it getting a little pressured, we pull back. So clearly, what we're saying in July is we enter each quarter aggressively as we did last April. We entered into Easter period aggressive then we saw pretty good results. So we actually increased our media spending in April and May.

We did the same in July and we saw a little bit of reluctance there. We didn't get the response we were looking for, so we would temper that spending as we move forward until we see some demand but we constantly tested.

So, I think we'll be inline seasonally with our norms for marketing efficiency going forward. I think we still have said we'll still be in the mid to high 20s for full year.

Colin Sebastian

Okay and so it sounds like you might expect that to be down a little bit versus last year in the quarter?

Joe Redling

Yeah. We anticipated that. If you think about July and August it's really when we captured most of the value of that investment spend on the launch. When we launched in the end of May and June, we spent a lot of media money. We had a tremendous amount of interest in calls of people finding more information.

Many of those potential customers wanted to check with their doctors and we kind of culminated all that activity and demand with conversion in July and August and now we've been operating under that model for years so we are much more steady now.

We are always testing to see if we can lean into that category, any category. We are always trying to optimize our media performance in all the programs whether its Women, Men, Silver or D. so we'll constantly look to see if we can bump that up, but we do think we have a pretty tough comparison in the D category in Q3 this year versus last year.

Colin Sebastian

Okay. And then in terms of web and TV pricing and inventory, any changes to that environment through the quarter and then to July?

Joe Redling

Yes, I think Q2, I mean we still saw higher rates but some of the adjustments we've made in expanding our networks and getting ahead of that a little bit helped us migrate through that. July was very opportunistic. We saw pretty good rates in July. The rate increases year-over-year subsided a bit from Q2.

We expect a little pressure, probably a lot of pressure in periods like late October and November as we move into elections. That's a very soft media period for us. So we really don't anticipate any pressures on media for us. We think we'll have opportunities. If we see the opportunity spend in August or September, we think the availability will be there and during a really tight period which will be mid-October or November we have a very light spend planned anyway from a seasonal standpoint. So we think we can manage through that pretty well.

Colin Sebastian

Okay. And then just last question in terms of your full year guidance, what does that imply in terms of your expectations for full year new customer growth?

Joe Redling

Well I think we haven't provided new customer growth full year. I think our guidance kind of looked at sort of a flat, kind of second half is what I think is implied in the guidance we brought up the lower part of the range because of our stock buyback and obviously the strength we saw in Q2, but we held the top line just because we want to make sure that we're being cautious about this sensitive consumer environment right now.

Operator

Thank you. Your next question comes from the line of Mitch Pinheiro with Janney Montgomery Scott.

Mitchell Pinheiro - Janney Montgomery Scott

For the same quarter could you April, May you said were you know sort of strong new customer trends what happened in June? Did it flatten in June or was it still up in June?

Joe Redling

It was up.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. Were April and May roughly even?

Joe Redling

We actually build momentum. I mean April was strong, May was stronger, June subsided a bit, but we're still up double digit in the month of June.

Mitchell Pinheiro - Janney Montgomery Scott

And so as you enter July, obviously with the consumer softening, were you seeing that directly in as you started the new quarter? Did you see the softening or yeah, did it happen later in the month?

Joe Redling

We actually saw some softening in June. Its almost like on a weekly basis as we came out of Memorial Day, June stayed pretty strong and then, as we got to the end of the quarter and again our media kind of flows down as well during that period. April the strongest month, May the second, June is the softest month so our spend follows that down. But we did see some declining trends in June and I think consumer confidence's numbers came out it kind of raise our eyebrows a bit that we're seeing some trends. While we're still up over prior year we want to run as strong as we were in May.

So we really thought maybe we moved a little business up into May, but for the quarter we're still very strong and we saw those trends continuing to July that we saw some softening in demand as we moved into July and July is typically a better month. I mean July is always a better month from seasonality standpoint than June is because you have much better media rates and media opportunities. And so when we stepped on the gas, Warren thrilled with the response that we saw. We're hoping we could kick start that quarter again like we did in April, and we did see resistance on the consumer side.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. So, just so the remainder of this quarter, I guess, August has got to be pretty dead from a diet season, hard to diet maybe in during like heavy vacation, so do you, is in fact that's true, are you light on the media spend in August, I mean how do you play August?

Joe Redling

We play in week to week. August is a big opportunity month for us, I know it sounds counter-intuitive that August is a good month for diet, but we could have a strong August, we look at it on a daily basis, we have plenty on drive power on the marketing spend, good thing about August is we can, kind of push our commitments off a bit, because it's a low media period, so we have a lot of flexibility during that month, to really react pretty quickly, so we'll go into the beginning of August and, we'll step into month, see how it goes and if we're seeing some better news, we'll be able to spend pretty aggressively the next week the week after, and vise versa if we don't see, we will able to reduce that commitment in media, because it's a pretty open media month.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. And so NutriSystem D customer maybe as a percentage of new, was it trending in same mid teen kind of rate or how would you characterize that for the last quarter?

Joe Redling

Very consistent.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. Would you expect that to be more the same in the back half or I know it tough comps, but as far as, would you expect core business to go down, and D to stay strong and that's how you sort to get to flattish?

Joe Redling

Yes, I think, yes, I mean D has been contributing the same amount of business to us but our comp, I mean kind of our negative comp, if you will, is definitely against D.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. How do you stand with your D, the website development aimed at D only and whether any other efforts or studies and things like that that you might be working on in that sector?

Joe Redling

Yeah. As you know we are in the middle of the development process to create a Nutrisystem D micro site if you will. We expect that to be up and running in early Q4. Our primary purpose behind that is really to get it up operating tested. So it is fully ready for the 2011 season.

We believe that's a big opportunity for us as we try to serve this community in a much broader way providing them more tools on the website, more information and easily accessible information about the diabetic program where today it is just listed with our other programs on our home page and sometimes it's difficult for consumer to find the information they need. We think these are pretty specific segment and our team is all over kind of improving that experience when diabetic customers come to our site. So we'll start putting that out. They are probably in the August month making sure it is tested for scalability and be ready for January.

Mitchell Pinheiro - Janney Montgomery Scott

Are you doing any studies, any clinical studies, anything in the works, any end-dates for any these clinical studies?

Joe Redling

Yes. We have ongoing studies going on right now that have specific skates in them. They are longer studies that we've done before. But we do have a pretty major clinical that's already been initiated that's going on as we speak.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. So inventories at the end of last years second quarter was about I think was $30 million and I don't have I can't find my, I think it was in the low 20s for the ending this last quarter is that correct?

Joe Redling

24.

Mitchell Pinheiro - Janney Montgomery Scott

24, is there any implication there, you know, down $6 million are you better adjusted it then what you have was last year too high?

Joe Redling

Remember that we are now fully consolidated into the two locations. And I just think we got more efficient we can carry less inventory as to meet…

Mitchell Pinheiro - Janney Montgomery Scott

Okay.

Joe Redling

Meet demand. We'll start buying in the fourth quarter for the new dieters and as well its not like we are running them down to very low levels.

Mitchell Pinheiro - Janney Montgomery Scott

Also on the G&A spending, the $20 million sort of level in the quarter is that the right sort of dollar level for the remaining two quarters? Is it change in any way?

Joe Redling

It will probably run and about that level but we are as I said accruing for management bonuses and probably slightly higher than third quarter also because of the move. But that will be a pretty level for the rest of the year.

Mitchell Pinheiro - Janney Montgomery Scott

Okay. And then as you look into 2011 first quarter you know, getting back to media rate does you know, did you participate in the upfront and sort maybe a hedge or anything you can share with how you are looking at 2011? What media rates might be doing six months out?

Joe Redling

Let's just put it this way, prepared not to have the same experience we have in January last year. So we have a number of contingencies and plans in place to make sure that we are hedging and we are making sure we're going to be in the market. And for us it's not as important in January to make sure we're getting the absolute lowest rate. We need to be out there. It's a bit month in the category and we're going to make sure we're out there and if we can hedge that and do it more efficiently by earlier comments we would that consideration would be looked that on a network-by-network basis.

Operator

Thank you. (Operator Instructions). And your next question comes from the line of Bill Dezellem with Tieton Capital.

Bill Dezellem - Tieton Capital

Thank you. We have a couple of questions. First of all, I think you've somewhat address this in a pervious remark. Are you finding that if any less economically sensitive in the remainder of your business?

Joe Redling

I think the customers are always thinking about value. I think we have an older demographic that's responding right now, initial diabetic offering. They skew now, they skew older and obviously spend an income is a factor in anything in this environment, we do think it is somewhat more recession proof, because the majority of these customers are treating a medical condition and they have higher proceed value of what the weight loss means to them, its not in the static effort for them, they are not trying to look better the really, under the care of the physician, and they are trying to do everything they can to manage the chronic condition that is so difficult for them to deal with on a daily basis.

The profitability of those customers are strong for us, linked to stable is very good, and I think our challenge is diabetic is truly one of just awareness, again we've been out there for year, it's a very noisy market place, we have to continue to invest in having not only just awareness of our product but a strong understanding of what, the benefits of our product, that's why we are doing a new site, that's why we think we have a bigger opportunity to bring people to the web, as they are looking for more information, so we think, its more of an awareness issue for us to continue to build the awareness on the Nutrisystem D brand.

Bill Dezellem - Tieton Capital

Thank you. And then my second question was relative to the share repurchase program, what prompted you to really begin that in earnest in June, as appose to sometime earlier this year or frankly later this year?

Joe Redling

There is a number of factors, we have over the years been active in share repurchases but we tend to be very opportunistic. Last year because of the economic uncertainty, we really sat on the side lines, so we build up quite a large cash balance and actually got through the first and has visibility for the second quarter remainder of the year, we thought it was the right time and the right market situations to get ahead in and do the share repurchase. Also in this quarter we tend to generate the largest amount of cash seasonally because as we get into the end of the year we'll start buying up inventories for the new diet season.

Operator

Thank you. Your next question comes from the line of (inaudible) Advisors.

Unidentified Analyst

Hi, guys. I wonder if you could just update us on your relationship with Costco. We've noticed in some of the stores on the East Coast, there is not product available. And there are not really certain when the product will come back into the stores. Is that just a seasonal shift?

Joe Redling

Yeah. Costco has what they call interestingly a treasure hunt merchandizing strategy. So we are on the e-commerce. We are only on a permanent basis on Costco.com. They took us out of their stores in most locations about the end of May. So kind of dark with them during the summer months because they have other priorities during the summer and we typically come back in December to get ready for daisies.

Unidentified Analyst

Okay, great. And could you comment a little bit about sort of your average revenue per customer that you are seeing? I mean is it little but higher, it was a mix because of a little bit promotions. What's happening there?

Joe Redling

Yeah. Even though we've been pretty promotional our average selling price is pretty steady and year-over-year we had a bit more FLEX sales last year in the first half which was a lower price product. And we are seeing some improvement in length of stay and improvement in revenue per customer. We typically see that each year. So we feel pretty good about kind of the average revenue that we are generating right now.

Operator

Thank you. At this time there are no further questions. I will turn the floor to management for closing remark.

Cindy Warner

We'd like to thank everyone for their time. And we hope you'll join us for our next conference call when we discuss our third quarter 2010 results.

Operator

Thank you for participating in today's conference. You may now disconnect.

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