Nutrisystem's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Nutrisystem Inc (NTRI)

Nutrisystem, Inc.

Q1 2014 Earnings Conference Call

May 1, 2014 5:00 PM ET

Executives

John Mills – Investor Relations, ICR, Inc.

Dawn M. Zier– President and Chief Executive Officer

Keira Krausz – Chief Marketing Officer

Michael P. Monahan – Chief Financial Officer

Analysts

Alvin Concepcion – Citigroup

Frank Camma – Sidoti & Company

Linda Bolton-Weiser – B. Riley & Co.

Matthew Gall – Barrington Research Associates, Inc.

Alec I. Jaslow – Midtown Partners & Co. LLC

Operator

Greetings, and welcome to the Nutrisystem First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. John Mills of ICR. Thank you, Mr. Mills. You may begin.

John Mills

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem's first quarter 2014 financial results. Today, Dawn Zier, President and Chief Executive Officer will provide an overview of the quarter achievements. Keira Krausz, Chief Marketing Officer will review and provide insight into the company’s expanding product phase and marketing initiatives; and Mike Monahan, Chief Financial Officer will review our first quarter financial results and provide an update on financial guidance.

Before we begin, I would like to remind everyone that during this conference call, Nutrisystem management will make certain forward-looking statements about its outlook for 2014 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate, or similar expressions.

Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995, because forward-looking statements relates to the future, they are subject to inherit uncertainties, risks and changes in circumstance that are difficult to predict and many of which are outside of our control. Factors that could cause actual results to differ from expectations include, but are not limited to, those factors set forth in Nutrisystem's filings with the SEC. Nutrisystem is making these statements as of May 1, 2014 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

In addition to the GAAP results, Nutrisystem will provide certain non-GAAP financial measures in this conference call. Nutrisystem's earnings press release for the first quarter of 2014 can be found under the News Release link on the Investor Relations page of the company's website at nutrisystem.com.

The table attached to this earnings press release includes a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

With that, I will now turn the call over to Dawn Zier. Go ahead, Dawn?

Dawn M. Zier

Thank you, John. Good afternoon, everyone, and thank you for joining us. We’re off to a strong start in 2014 and are pleased with our diet season results. Our first quarter results exceeded expectations and we are raising our full-year revenue and EPS guidance. We delivered our third consecutive quarter of the year-over-year revenue growth with revenues of 16% from Q1 2013. We also had positive earnings per share.

Our overall results were driven by organic growth in our direct channel and market share expansion in retail. New customer accounts were up well over 20% coupled with a 4% improvement in acquisition cost. Given the strength of our promotions, we were able to invest more in marketing and acquired customers more efficiently.

Our channel expansion into retail enabled us to increase brand awareness and capture new customer segments without significant additional marketing expenditures. Our first quarter results demonstrated meaningful progress we achieved over the past year since we began to implement our four point turnaround plan.

As a reminder, our four point plan now driving towards accelerating growth as a Nutrisystem team focused on one, launching new products and programs to better serve our existing customer segment and attract new customers to the brands; two, growing our direct-to-consumer business by focusing on key levers that will accelerate growth, optimize acquisition, and increase retention; three, capturing greater retail market share through both product and channel expansion simply stated more shelf space and more stores; and four, operating with excellence and continuing cost discipline. Given that we are still in the early stages of our resurgence. We are pleased with what we accomplished for this diet season and are even more excited about our future.

Turning to our direct-to-consumer channel, our new product offerings and messaging for 2014 diet season were very well received. We were able to achieve new customer growth by focusing on strong consumer benefits rather than messaging around discount. We also successfully tested into a $10 price increase on our monthly program mid-quarter.

We believe that Nutrisystem is leading the industry in meaningful product innovation. We entered 2014 with a strong pipeline of price and program offerings to both the direct channel as well as retail. We are pleased with our launches of Nutrisystem My Way and the Fast 5 kit, our Men's Protein-Powered kit in retail, our Kickstart kit announced yesterday to help keep a breakthrough inevitable diet plateaus, and our recently publicized launch of NuMi, a new multi-platform digital product that addresses the needs of do-it-yourself dieters and also helps people transition from structured programs.

Additionally, we continue to looking to our customer’s food preferences and introduced 18 new food products, including four flavors of Fruit Smoothies for summer to complement our new craving crusher and energizing shake that was launched during the diet season. We also reformulated our popular breakfast, lunch and dessert bars 22 in total, making a more nutrient rich and removing artificial flavors and sweeteners.

We have more in the price line that we plan to introduce throughout 2014 as we continue to move away from "One size fits all" programs begin to fully address all stages of the weight loss journey, capitalize on other diet windows throughout the year, and also weight loss solutions that appeal to an extended set of consumers.

We are big fans of balance creativity, and informed research backed innovation, and while we have considerable enhance power in research and development, we don’t go it alone. We have Science Advisory Board comprising a group of teams medical and nutrition experts throughout to make sure on the leading edge of innovation within our space.

Regarding our retail channel, we are pleased with our first quarter performance and are on track to achieve 50% growth in 2014 and generated $25 million in revenue. Our end tapped into 2,500 Walmart stores for diet season 2014 performed in line with our expectations as we enter the second quarter with diet and diabetic kit as well as the shakes and snack pack continues to perform well.

We are pleased with our projected market share gains in both the diet and diabetic isle in Walmart, continued growth will come primarily for more product introductions, which will allow us to become a destination brand and retail and also from strategically expanding distribution. To that end, we launched our first expansion test into 100 target stores last week that will be able to report more mix and other initiatives during our next call.

We believe that our expansion into retail is enabling us to increase brand awareness expand market share and leverage our direct advertising with retail customers. As one of the leading and most trusted scientifically based weight management brands in the country, we are focused on expanding our reach by offering weight loss solutions to an expanded set of consumers, and I also coming up with programs that not only help people lose weight, but also keep it on.

We want to reach consumers where they are, whether that is at home, through retail or virtually. We want to introduce a more personalized and flexible experience offering solutions for those who want the structure of a food delivery-based program, as well as offering solutions to those who want to either transition trim or begin their last journey by cooking on their own.

Our recent soft launch of NuMi financial system is just one of the ways that we intend to do this. With NuMi, we are introducing a new approach to losing weight something that we call responsive dieting. Responsive dieting is adaptive to an individual food preferences, life style, metabolism, activity level and weight loss goals, it is just with your life style.

Different from other products out there, it focuses on behavior modification and provides real-time insights and guidance throughout the weight loss journey. We’re uniquely positioned to also provide one-on-one real-time mentoring through on demand chat with the NuMi Squad, our coaching team available seven days a week at the push of a button.

Solutions for eating out, new recommendations for eating in, and activity suggestions are also putting popular in early usage. We took a greenhouse approach to developing NuMi and as with most digital products, it will take time to have visibilities on the revenue stream and the profit potential.

However, whether large or small, we feel that as a progressive weight management company, it is important to have a digital clear product since part of our portfolio offerings, and NuMi is the latest addition to our treat. Also included in this treat is our robust highly transactional e-commerce site and active online community, as well as a Nutrisystem app for those who are following the traditional Nutrisystem weight loss program.

As we progress, this platform will be leveraged to treat other products such as NuMi Lite, which will serve as customers on existing Nutrisystem program. Before I turn the call over to Keira, who will provide more color on diet season, marketing, and our go-forward plans, let me summarize.

We had a successful peak diet season marked by organic growth and we have a formula for this business that we believe is sustainable and repeatable. Our model is based on sound direct-to-consumer fundamentals, research and product innovation. We are making strong decisions factoring quantitative and qualitative data and analytical modeling that reduces risk.

This translates into an ability to bring in more customers to our direct program, as well as an ability to provide increased consumer relevant through innovation and channel expansion. We believe that our channel is progressing and that 2014 will represent our first year of full year revenue growth in seven years as a strong endorsement of our brand, our repositioning program, and our team.

I will now turn the call over to Keira.

Keira Krausz

Thanks, Dawn. As Dawn mentioned, we had a strong diet season in the direct business. We attracted over 20% more new customers than we did in Q1 2013, and did so more efficiently. New customer growth was primarily due to four elements. One, product innovation, we designed products and programs both specifically to provide benefits, which allowed us to build stronger advertisements.

Two, much higher response to our short and long form television commercials, TV was a big win for us in the first quarter. Our spots communicated benefits clearly and used the compelling offer that increased the proceeds value of the product in the brand. This was particularly important, because they stop talking about large discounts in our television commercials, and the people who responded to the commercials were much more engaged with the product benefits than worried about the price.

Next, we have a balanced mix of our celebrity ambassadors and inspirational real sports. We are pleased that Maria Osmond and Dan Marino continue to resonate with our Target customer and we are proud that they were able to lose weight and keep ethical weight over the years we’ve been working with them. We are also happy with our newer partnership with Melissa Joan Hart. Of note, our team created many commercials that each show good response. It would not be surprising to run a large number of creative treatments and have only one or two work wells, but this year we were fortunate and that most of our spots performed well.

In addition a cup of the commercial space we have released recently after diet season are working even better than those in diet season. We are enthused and excited about the progress we’ve made so far in TV, as a result of much higher television response we are able to efficiently expand media spend.

Three, better e-com results. In 2013, we upgraded our platform and made us many quick improvements as possible. In diet season, our unique visitors and orders increased by double-digits over prior year. Conversion across our paid channels increased modestly on higher visitors. Conversion on unpaid channels remains flat, but considering the growth in traffic we are pleased.

And four, we had a dramatic increase and buzz driven by our coordinated PR effort. As we mentioned in our last call, we had twice the media I mentioned as the next closest competitor. Our coverage like this will continues throughout the year.

For example, just before we aired our last round of Melissa Joan Hart commercial, we had 400 earned media placements, which resulted an over 105 million media impressions within the two weeks before and after this part is aired. Our goal is to use all means at our disposal to meet the storing new and relevant and to drive sales. We’ve made large strives towards doing so in Q1.

As we progressed in 2014, our marketing strategy in the direct businesses remains straight forward. One, attract morning customers more efficiently. Two, improve our relationship with customers to grow lifetime value and drive positive word of mouth. Three, expand to new customer segment.

As we said in past calls, smart data management and rapid product innovation enable all three of these objectives. To attract new customers more efficiently, we are very focused on the few actions that will have the most impact. First, we are committed to improving our online shopping experience to significantly increase online conversion. This will be a major area of investment for the next two years.

Second, we believe our products are worth more than what we currently charge. This February, we successfully raised price in all starts for 28-day programs by $10. We continue to test other ways of increasing price. We will still provide great value to our customers versus our direct competition.

Third, we love that we have products and then offer that attractive new customers. But we are always testing ways to improve. We have just tested and offer that is more profitable than the one we used in Q1 and we intend to rollout in the second half of 2014.

In direct marketing, it is all about moving a number of levers in just the right way to maximize profitability. Our priority as we enter 2014 was to increase new customer acquisition while we have suggest that we did see a slightly lower paid length-of-stay. We understand the key drivers around length-of-stay and have a number of actions in the works that should increase this metric. To grow like fund value and improve customer satisfaction even more, we will increase one-on-one communication with our customers, because the more we know the more we can act proactively. We revamped down all of our printed online on boarding materials for diet season and urge customers to take advantage of our council, whenever the customers wants to and without having to travel anywhere. So far, we saw a 40% increase in the use of these councilors and now about 20% of new customers’ interactive one with five counseling, because it helps the customer being more successful.

Customers are starting to embrace these elements of our business. We are also beginning to reward our customers for tracking their progress with our current online tools. Every time customers taken actions that might indicate risk satisfaction, we are asking them questions, defined to give us more visibility into their motivations.

And over time, we will integrate a version of NuMi that support to the direct business. This will provide more detail insight into customer activity and behavior. Once we have a larger percentage of customers giving as data as they progress along their journey with us then we will be in an even better position to offer them relevant programs and products.

We continue to expand our cross-sell efforts and are moving towards having more personalized offers rather than "One size fits all" approach. We have launched a number of new products to our cross-sell in the past month including our craving crusher shake and our energizing shake, four fruit smoothies for summer, Cool 'n Carry kit in a variety of snack packs.

We are launching products to help people blush through their inevitable diet plateaus and the first one went live yesterday. We are developing several new and unique transition programs and maintenance programs, since our mission is not only develop our customers reach their ideal weight, but also to help them modify behavior to stay at that weight for the long-term. And we are developing a serious of products designed to win back former customers.

In short, we are aggressively progressing from selling one diet program to providing a variety of weight loss transition and maintenance products to help you lose the weight and keep it off in the way that works for you. And we know that when we do that lifetime value and customer recommendations will increase. While we intend to stay focus on attracting and serving our current customer segments with excellence, we are also expanding into adjacent segments in the direct business, with our single segments has large overlap with our current base both with type 2 diabetes who want to lose weight.

We had Nutrisystem fees for several years and we published pinnacle studies in 2009 and 2011, therefore that program is effective in helping customers with type 2 diabetes, lose weight, and manage blood sugar.

Now, with help from our Science Advisory Board, our diabetes educators, our counselors, and external experts in diabetes, we have revamped our programs to make it even more appealing and are outstanding both via both direct-to-consumer and house provider channels. We will expand to other segments as well begin testing later in 2014. As those tests are near, I look forward to telling you more.

We intend to help customers manage their ways in whatever way it works for them and to meet them wherever they shop, online, phone, or in retail. We will do so by developing an innovative customer focus for various products and services. Our products will always be backed by science, have proven appeal, the effective, simple to follow and convenience. I’m even more enthusiastic about Nutrisystem than I was one year ago. We have put together a talented, hard working inventive team. We are developing and introducing new products and programs to drive response and increase lifetime value.

We combine creatively with analytics, because we track their metrics smoothly, we are nimble and flexible. We have a brand with proven strength, products and programs backed by science in 40 years of experience and in understanding and deep respect for our customers.

Now, Mike will take us through the financials.

Michael P. Monahan

Thanks, Keira. We began 2014 with strong top and bottom line results as our first quarter exceeded our revenue and EPS guidance. Revenue was $122.2 million, up 16% year-over-year, representing our third consecutive quarter of growth. We achieved positive earnings per share while increasing our investments in both marketing and G&A.

Revenue growth in the first quarter was driven by both the direct and retail channels. Within the direct channel, we saw positive lift in response to the Fast 5 promotion as reflected by both growth in web traffic and calls into our call center.

Conversion rates modestly improved over Q1 2013 levels and resulted in increased new customer starts. We also tested, validated, and implemented a price increase. Partially offsetting the increase in customer starts in pricing, so the decline in paid customer learn program, total customer days on program slightly increased year-over-year however with the introduction of our free week a proportion of these days were freed to the consumer.

To increases paid day as going forward we have tested product and promotion adjustments at once implemented should positively improve this metric in the second half of this year. We delivered 32.2 million of reactivation revenue in the first quarter. We have the highly likelihood of reactivating customers within three years of their initial start date and are able to reactivate them with much lower marketing cost than new consumers.

As we continue to grow on new customers start we begin to rebuild our reactivation pools that suffered from multiple years of customer decline. As we replenish this pool, we can expect a favorable impact through adjusted EBITDA in subsequent year. First part it increased 13% to $59.8 million for the first quarter of 2014 compared to the same period last year due to higher revenues. Gross margins declined in the first quarter to 48.9% versus 50.3% from a year ago due to the higher percentage of retail revenues and the success of the Fast 5 promotion.

As discussed on our last earnings calls the Fast 5 offered frontloaded promotional cost of the on the first shipment and delivered stronger gross margin on subsequent orders to customers. While gross margin was down year-over-year in the first quarter we expect to finish the full year above 2013s blended gross margin and we have already seen these improvements month-over-month in Q1. Marketing expenses was $41.7 million in the first quarter compared to $36.3 million last year representing in 34.2% of revenue versus 34.5% in the same period last year.

This slightly improved efficiency reflects higher retail revenue higher on program revenue and more new customers starts in the first quarter. As long as our efficiency holds we will continue to increase our marketing spend to leverage our platform to drive profitable growth. First quarter general and administrative expenses $15.9 million as compared to $15.3 million a year ago which included $1.4 million in one time cost. The year-over-year increase in SG&A reflects higher commissions and labor cost stemming from our first quarters new customer growth and increased investment in growth initiatives.

For the first quarter adjusted EBITDA was $3.2 million compared to $3.9 million a year ago. The decrease was primarily due to lower gross margin from the Fast 5 Promotion discussed previously which we expect to recoup future quarters. Depreciation and amortization was $1.8 million during the quarter and non-cash compensation expenses was $1.1 million. On a GAAP basis operating income in the first quarter improved to $387,000 from a loss of $1.1 million as reported even the prior year. GAAP net income was $224,000 resulting in earning per share of $0.01 for the quarter versus a $0.02 GAAP loss reported in the prior year.

Moving to our balance sheet, as if march 31, 2014 we had cash in short term investments of $29.5 million up, $3.2 million from December 31, 2013. Receivables increased to $17.9 million from $7.7 million at the year-end due to timing. Inventory decreased to $24.4 million from $26.1 million as we began to manage through the seasonality of our business. Lastly, we didn’t have debt outstanding under our $40 million revolving line of credit.

As a result of our first quarter performance and continued success in customer base we are raising our revenue in earning per share range, we are projecting revenues in the range of $106 million to $111 million for the second quarter and $392 million to $407 million for the full year. This guidance includes an expected $25 million of revenue contribution from the retail channel for the full year. The expected adjusted EBITDA in the second quarter in the range of $14.5 million to $16.5 million and $40 million to $44 million for the full year. At the midpoint of our second quarter and full year ranges this represent a year-over-year increase of 14% and 33% respectively.

We expect earnings per share in the second quarter in the range of $0.23 to $0.28 and full year 2014 earnings in the range of $0.57 to $0.67. Capital expenditure of approximately $12 million to $15 million of projected for the year and support new initiatives into position ourselves for future growth. The year-over-year increase is primarily due to investments and e-commerce initiatives.

This past quarter, we conducted a review of our capital allocation alternatives. In 2013, we return more than 70% of our free cash flow stockholders though our quarterly dividend. For Q1, the Board of Directors has declared a dividend of $0.175 per share, payable May 22, 2014, to shareholders of record as of May 12, 2014. At this time, we feel that our capital structure is appropriate; however, the board continues to evaluate the best ways we can return and maximize value for stockholders.

I would now like to turn the call back to Dawn.

Dawn Zier

Thank you, Mike. Nutrisystem is one of the leading brands in the weight management industry. And as I have said before we have the brand license to do more. We will continue to drive meaningful innovation within our category and leverage our broad integrated marketing and distribution capabilities to help improve the lives of people struggling with weight issues or associated diseases like disease type 2 diabetes. These are serious health issue that affect people physically, emotionally and financially.

We’ll meet the consumers where they are in their home at retail adversely and treat them with the dignity, respect and privacy they deserve. Our industry is changing and we have the ability to be on the forefront of that change and help consumer set realistic and achievable right side goal have result them last thing behavior change. We are pleased that our overall performance during the diet season and our trajectory for top line and bottom line growth.

In closing, as we entered year two of our turnaround and drive towards accelerated growth I want to leave you with four thoughts. One, this team knows how to innovate whether it be Fast 5, NuMi, 5-day kit or craving crusher shake, demonstrating that we can think outside at the box. Two, we no how to execute and our leverage abroad and considerable marketing and distribution capabilities. Three, we are delivering profitable customer growth, reversing a multi-year trend of declining new customer count. And four, we are diversifying our channel having demonstrated success in retail and are expanding on the digital front.

As a result, we expect which the full year revenue growth in 2014, again for the first time in seven years and are just beginning to realize our brand potential. We are optimistic about the future growth of this company. Before we take questions, I want to assure you that we are very focused on delivering one-time shareholder value. And as Mike said, in 2013, we have returned over 70% of our free cash flow to investors. We will continue to evaluate with our board the best ways in which we can return and maximize value. We want to thank our investors for their continued support, confidence and input. We’ll now open the line for question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Alvin Concepcion from Citi. Please proceed with your question.

Alvin Concepcion – Citigroup

Hi, good afternoon and congrats on a great starts for the New Year. In regards to the strong customer growth 20% just to clarify was that the core monthly plan and is there anything you can talk to us about the customer you are seeing and are you seeing this skew beyond your historically core group of customers.

Keira Krausz

Hi, this is Keira. Yes, we are talking about STO growth in our core business and the customer segmentation is largely the same now we will ship.

Alvin Concepcion – Citigroup

Great. And then a question on the NuMi program, are there any learning from the tests you would be willing to share and maybe length of stay or if you saw any cannibalization with the food plan, I know it’s a different target group and even complementary, but curious if you expect it to be of any significance.

Keira Krausz

Alvin we just on launched it last week and we saw a flaunt that we are starting our marketing efforts against it over the next couple of weeks, so we will have more to talk about it on the next call, but really its just – literally just out there.. But, we are – I will just add regarding cannibalization that’s something that we are managing very closely and we do not anticipate to have major cannibalization, because we have a coordinated marketing effort to really minimize and NuMi’s particularly an online business and that’s something that we can really coordinate well across the two businesses are of product.

Alvin Concepcion – Citigroup

Great, and after this dies season you gout trial at a retail, are you seeing any strong evidence that the retail customers are trading in for the monthly plans to any of all significance?

Keira Krausz

Right now, in retail and our relationship with Walmart, we’re partnering with Walmart to help drive those customers back into the store to drive the retail channel and to begin to make our products part of the destination sites in Walmart. We do see some upgrades to the product, but again we’re not actively pushing that at this time.

Alvin Concepcion – Citigroup

Got it, that’s its for me. Thank you.

Keira Krausz

You’re welcome. Thank you.

Operator

Our next question comes from the line of Frank Camma from Sidoti. Please proceed with your question.

Frank Camma – Sidoti & Company

Good afternoon guys.

Michael P. Monahan

Hey, Frank.

Frank Camma – Sidoti & Company

Just two quick ones from me. First of all on the $25 million in revenue, with you expect for retail in 2014. Is that, are you anticipating any revenue from Target in that number is that really just Walmart at this time?

Michael P. Monahan

Frank, it’s Walmart we just tested in Target a few weeks ago, so that’s going to be very small test. And we’re going to see how work goes from there, but we have into factored in any financial upsize from that test into our guidance.

Frank Camma – Sidoti & Company

Okay, and there was a comment made about the slightly lower paid length of stay and I think I might have missed it, but does that relate to the fact that you gave a free week, and it’s like a mechanical thing and/or is this something separate? I miss the explanation as to why that was?

Michael P. Monahan

What we found was that with our new promotion, customers actually stayed on our program a bit longer, but we were giving them away of three weeks so when you count up the paid number of days. We actually collected a few days less of paid revenue from these consumers. And so, we learned that we are changing our overall promotions, which we think we can effect in the back half of the year to reverse that trend.

Frank Camma – Sidoti & Company

Okay, so it was really just kind of result of the promotion itself, right?

Keira Krausz

This is Keira, yes it’s a result of the promotion itself and fortunately we basically already tested something, that’s slightly different, but equally as effective. That should basically take that length of stay backup.

Frank Camma – Sidoti & Company

Okay.

Michael P. Monahan

One of our main focus areas this quarter coming out of the year was steady increase our overall new customer count. So, we want out with the offer the tested – test the best, and now we’ve refining that to make sure, we can continue to get to attract customers, with a slightly different offer that we will a longer overall paid number of days.

Frank Camma – Sidoti & Company

Actually one more quick question, just on your guidance, if I look at the high-end of it and try to the model that out, if I’ve done this right, it looks like the second half is pretty strong relative to what you have historically done. Is that based on the fact that you have attracted this strong customer starts here in the diet season and you expect some of spec. is that’s like what is driving that going forward or is it just a combination of multiple things.

Michael P. Monahan

Yes, it’s the combination of our strong performance in attracting new customers in the first quarter. As well as our expectations of the customers we are going to attract in the second and third quarters. And that revenue stream will flow through into the fourth quarter?

Keira Krausz

If you remember frank there the difference in promotions, this year versus last year. So, last year, every quarter – every order, subsequent order from the first one, was giving the customer and additional price decrease.

Frank Camma – Sidoti & Company

Oh, yes okay.

Keira Krausz

Right so that’s not happening anymore, which is why we say vis-à-vis we’re going to see prices increase as we go on. And additionally, we also implemented a separate price increase.

Frank Camma – Sidoti & Company

Right, so your ask fee is going to be higher, okay.

Keira Krausz

Yes, definitely.

Frank Camma – Sidoti & Company

Thank you.

Operator

Our next question comes from the line of Linda Bolton-Weiser from B. Riley. Please proceed with your question.

Linda Bolton-Weiser – B. Riley & Co.

Hi, I’m sorry if you have said this, but I missed the very beginning, but did you actually how much in retail sales that you had in the quarter?

Michael P. Monahan

We had $8 million of retail sales in the first quarter.

Linda Bolton-Weiser – B. Riley & Co.

Okay. And then just in my little kind of store checking activities at one point recently I tried to buy the Starter Kit at a Walmart and it was sold out, the store had it earlier in the year and they were sold out, they didn’t have it what would be the reason for that? I mean, I guess that’s a good sign in the sense of it selling well, but why would there be a supply problem for Walmart?

Michael P. Monahan

Yes, Walmart is a – there is a seasonal component to our Walmart business. And so my understanding is we’ve been working hard with our broker to make sure that the product is always in stock. But there are occasions when the product is selling better than expected. And so we’re continually trying to refine that as we work through our relationship with Walmart.

Dawn M. Zier

And why did you want to send us the store we can looking in for.

Linda Bolton-Weiser – B. Riley & Co.

No, probably…

Dawn M. Zier

Yes, you want our product stocked. Thank you.

Linda Bolton-Weiser – B. Riley & Co.

Okay

Operator

Our next question comes on the line of Matthew Gall from Barrington Research. Please proceed with your questions.

Matthew Gall – Barrington Research Associates, Inc.

Congratulations on the good start to diet season and never been there, so. Just wanted to may be follow-up a little bit more I know that NuMi is definitely new with the soft launch last week. And just hoping to get a little bit more color on the functionality, and kind of the integration that it provides with different fitness devices and the overall healthy living type of device stuff that over the transition customer?

Kathleen Simone

Sure that was holistically rock system, so it’s much more than a calorie, activity tracker with more than a barcode scanner. So it is a lot of additional functionality that really is year towards behavior modification and in real ways of the program. It is a powerful meal recommendation engine over 12,000 different recipes for eating and what we, another interesting feature is our GPS locator which if you are out on a streets in New York, for example, and want to know what is good to eat at a restaurant. It can help you figure that out.

One of the main differences is that - differentiates us is the real time mentoring to the NuMi Squad. And they are available seven days a week at a touch of a button. So if you are having a concern or not sure what to do keep reporting the office, so whatever it might be. You can immediately connect with a NuMi Squad member a mentor may he or she will give you advice. And as based on the this concept of response for dieting which means that it is adapted to use. So as you go through and if we see you’re struggling at 3’o clock in the afternoon everyday and having what we call a viable. We will begin to help coaching you around that. So really focused on behavior modification and providing real-time insights to help us see clients become successful on his or her weight loss journey.

And then we integrate with the major fitness devices out there. So there is a mechanism in the product to what you can think of to this fitness devices, such as fitted or chop on and it will just seamlessly tracking information.

Matthew Gall – Barrington Research Associates, Inc.

Great thanks for that color on functionality. One thing I guess also just to kind of put on and I think this was just based on what was mentioned in the last quarter’s call, the kind of expectations for gross margins being little bit lower in the first quarter due to the fast five promotion. But it seems to me that I think that you guys may be did a little bit better than what was expected by being right around 49% and may be what impacts that causes margins do increase and is 50% or slightly above still a target or possibly from the higher work for the fiscal year?

Michael P. Monahan

So we think overall we guided towards above 50% on gross margins. If you look at our blended gross margin for 2013, it was right at 50%. So we’ll be above that for this year putting to our guidance. There are two drivers that increased it, one was the fact that the promotion over the course of time from the first quarter to the fourth quarter, we expect gross margins to increase as customers since we front-loaded the promotion as customers begin to take their second, third and fourth order of the gross margins will be higher. The second piece is we were able to increase prices in the first quarter so that starts to flow through will get the benefit of that in gross margin throughout the year.

Matthew Gall – Barrington Research Associates, Inc.

Got it, and that’s the kind of order I was getting to that may the increased pricing in February is what helped with that maybe better than expected Q1 margin.

Michael P. Monahan

Yes.

Matthew Gall – Barrington Research Associates, Inc.

Yes, okay great, well thank you very much for taking my questions.

Dawn M. Zier

Welcome.

Operator

(Operator Instructions) our next question comes from the line of Alec Jaslow from Midtown Partners. Please proceed with your question.

Alec I. Jaslow – Midtown Partners & Co. LLC

Hey guys.

Michael P. Monahan

Hi, Al.

Alec I. Jaslow – Midtown Partners & Co. LLC

My question is about a pricing if you could I just wondering if go walk through me your thought process on how you came to the $10 and maybe talk about the range and potential of that price increase going forward?

Keira Krausz

So this is Keira I guess we start with the idea that a couple of years ago we had charged more for monthly shipments and wondered why we were no longer doing so. And we also looked at all the work that we done over the years some gone into analysis that helped us predict were a good point would be. And we started testing in that direction. The easiest way you don’t need to do any development is just to raise prices by $10, so we tried that we did not see decreases to conversion. And so after some careful watching to make sure that performance was okay we rolled it out in late part of the quarter. Next we are continuing to play around with some straight price increases and then some bundles and now will be happening in the rest of 2014.

Dawn M. Zier

If you remember what we said last year is that we really needed to walk away from this discount messaging. So it was really important that we started training the customer to not expect the discount messaging and only once we successfully did that which we have done where we able to being to increase the price but really important to understand that as a data driven direct marketing company we test everything that we do. So we don’t just raise prices and hope for the best and we do real analysis statistical decision making against it so we were confident in this decision.

Alec I. Jaslow – Midtown Partners & Co. LLC

And then do you have any, I know you sometimes mentioned the cross selling if you could talk a little bit about that how it performed in the first quarter and I don’t know if you have any first that will be helpful to?

Dawn M. Zier

I will just talk about how, we were higher than previous year, actually things to new customer growth coupled with very high peak grade on the shake, ran out of shake for short period of time so we had a dip in the latter half of January but it sounds back and rebounded, you want to add any.

Michael P. Monahan

Yes, still small piece of the business that we are able to get double digit increases on a year-over-year basis. So its something we are continually working towards and we can push a lot of improvement opportunities.

Dawn M. Zier

Yes.

Alec I. Jaslow – Midtown Partners & Co. LLC

Okay. And that was my last question. I think that’s it. I appreciate your time. Thanks guys.

Dawn M. Zier

Thanks, Al.

Operator

There are no further question in queue, I would like to hand the call back over to management for closing comments.

Michael P. Monahan

Great thank you. Thank you everyone for listening and participating in our earnings call today. As a reminder we will be filling in number of investor events in the coming month. And look forward to updating you on a turnaround progress, where we announced second quarter results in early August. Thanks again, and have a great day.

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!