Nutrisystem CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: NTRI
by: SA Transcripts

Nutrisystem, Inc. (NASDAQ:NTRI)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Joe Crivelli - IR

Joe Redling - Chairman and CEO

David Clark - CFO

Analysts

Alvin Concepcion - Citi

Gary Albanese - Capstone Investments

Mitch Pinheiro - Janney Capital Markets

Kurt Frederick - Wedbush Securities

Operator

Good day and welcome to the Nutrisystem Incorporated second quarter 2011 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Joe Crivelli, Investor Relations for Nutrisystem.

Joe Crivelli

Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem's second quarter 2011 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 during this conference call, Nutrisystem management will make certain forward-looking statements about its outlook for 2011 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as, believes, plans, intends, expects, anticipates or similar expressions.

Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. 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 July 28, 2011, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

I'll now turn the call over to Joe Redling, Nutrisystem's Chairman and Chief Executive Officer.

Joe Redling

Good afternoon and thank you for joining us on today's conference call. I will review the company's second quarter financial results and provide some key performance highlights for Q2 and an update on expectations and plans for the balance of the year. Then David will provide more detail on the financials.

Our plan for 2011, a year that we expected to be challenging from the revenue standpoint, is to optimize the Nutrisystem business model to maximize profitability and cash flow, strengthen our balance sheet, return cash to shareholders and invest in growth initiatives for 2012 and beyond.

We've emphasized this plan with shareholders throughout the year, and we believe our second quarter results demonstrate that this plan is working.

All told, we had a good second quarter. Net income was $10.8 million; and diluted EPS was $0.38, down $0.02 from last year's second quarter.

While the topline is still challenged, we are continuing to prove that Nutrisystem's business model can drive profit and cash flow, create customer excitement and inspire customers to lose weight with Nutrisystem even when the competitive environment is intense and the economy and consumer sentiment remains less than ideal. As a result of our strong second, we are increasing full-year guidance, as David will detail momentarily.

Revenues were down 18% in the quarter due to a number of factors, including Q2 promotional strategies and a late Easter that delayed the start of the spring diet season. As we discussed with you in our last conference call, the tough January we experienced also meant we had fewer on-program customers exiting the first quarter.

The second quarter is our toughest comparable quarter for the year. In the second quarter of 2010, we launched the Rollback for the first time, which resulted in very strong customer demand. In addition, last April, Easter was on the first weekend of the month; and as a result, the spring diet season benefited us the entire quarter last year.

Considering the tough comps, we were able to make up ground. New customer adds were down year-over-year, but improved marketing efficiency driven by higher conversion on lower spend significantly offset the topline pressure. The majority of the Q2 first time order decline occurred in April due to the late Easter holiday. The strong finish to the first quarter and excitement over the first quarter Rollback promotion may also have shifted some first time orders from Q2 to Q1.

However, we made up a lot of ground in May and June. We were up against our two toughest comparable months of the year; and with a 25% reduction in marketing expense, first time orders were only down in the single digits. This ties back to what we told investors in February when we set expectations for 2011.

We knew it'd be a tough year. The economy was still not cooperating and competitive pressure was intense. But in the face of those headwinds, we have worked hard to optimize our business model and strike the right balance between promotion and marketing.

We've always carefully monitored return on investment of our media spend, but with the discounting strategy we deployed in 2011, we are being even more disciplined as evidenced by our 20% marketing efficiency during the quarter. We're also encouraged that our auto-delivery rates for customers that signed up during our promotional offers are currently in the low-90% range. This is a record level for the company.

To be eligible for the discount price, our customers must sign up for autoship. We've also equipped the hardworking employees in our call center with the right scripts and training to extend customers' stay. As a result, we're also seeing record second month take rates and our average customer length of stay is increasing from historical norms.

As expected, the gross margin decline of approximately 600 basis points was directly attributable to the success of our promotional strategy. At first glance, this may seem like a dramatic decrease, but we effectively complemented this with strong marketing efficiency as our marketing efficiency ratio improved by over 600 basis points year-over-year just over 20%, a level that we have not seen since the first quarter of 2006.

Considering that the consumer confidence index has again dipped below the 60 level in June and July, it has been beneficial to be in the market with a price promotion value message. Our offer of 50% off in the first quarter of our core ready-to-go product resonated with consumers during the second quarter and customer response and conversion for both first-time orders and reactivations came in above our expectations while still driving the bottomline.

Even with our focus on marketing efficiency and an overall lower marketing spend, according to our ongoing surveys of dieting consumers, we still have the leading share of voice in the category on the media side. We monitor and test our spending continuously to determine the optical mix to get more customers on board at the highest level of profits possible.

In the current tough environment, we have sharpened our collective pencils from a media and marketing standpoint and achieved the right balance between investing in the Nutrisystem brand and carefully managing profitability. In many ways, this heightened focus on only those marketing channels which drive the very highest level of customer response is the new norm.

With the learning we've gained from operating in this tough environment and our ability to continually improve optimization of our marketing mix, we believe the implications for profitability when we get back to growth mode are considerable. So net of the gross margin hurdles and marketing efficiencies realized combined with continued G&A discipline, we generated $22.3 million of EBITDA and $24.6 million of cash from operations for the quarter.

In light of our cash flow generating ability and solid balance sheet, Nutrisystem remains committed to returning cash to shareholders. In addition, to a quarterly dividend, our Board of Directors has authorized a $150 million stock buyback program through June 2013. The $150 million share repurchase program is a statement that we believe in the intrinsic value of the Nutrisystem brand, our powerful and flexible direct-to-consumer model and our future growth opportunities.

This has enabled us to quickly seize control of costs and optimize spending, which has served us well this year as we grappled with the topline challenges. But it's absolutely imperative for Nutrisystem to reenergize growth and get the topline moving forward again.

In 2011, as we've mentioned, we are investing considerable management resources in the creation of complementary and reinforcing platforms that we believe will reach more consumers, extend our powerful Nutrisystem brand and ultimately create additional shareholder value.

There are a number of pillars to these initiatives, but our direct business is the engine that will drive Nutrisystem forward. The entire Nutrisystem management team is laser-focused on getting this engine going again, and we are making a major investment of time and resources into revitalization of the core direct business. We're working hard to reposition the core Nutrisystem product line for 2012, taking a fresh look at everything from packaging and formulations to menu items, celebrities and creative.

Obviously, we won't tip our hand this early in the game, but I am encouraged by the creativity and discipline our team has put into this effort, and I'm confident that this will breathe a great deal of new life into our competitive offerings.

As we have discussed, we're also exploring new channels of Nutrisystem products. This work is continuing; and while we are not ready to provide concrete details, we're pleased with the progress we've made in 2011 and believe there are multiple opportunities to augment our core direct response business and leverage the Nutrisystem brands.

Finally, I'd like to give you a quick update on our search for Chief Marketing Officer. Working with Spencer Stuart, we had a great deal of interest, and the opportunity has been received with enthusiasm from potential candidates. The Nutrisystem brand is appealing, well recognized and respected, and we expect to have the process concluded within the next few months. In the interim, I'll continue to lead our marketing efforts.

With that, I'll turn the call over to David Clark, our Chief Financial Officer.

David Clark

Thanks, Joe. Second quarter profitability exceeded our expectations. While both revenues and gross margins remained under pressure, the impact of our G&A cost reduction efforts and marketing efficiency improvements fell solidly to the bottomline. As a result, operating margins exceeded last year's second quarter and diluted income per common share was down only $0.02 from last year's second quarter.

Revenues were $116.1 million, an 18% decrease year-over-year. We believe this is due to the combination of extremely late Easter, which is the unofficial launch of the spring diet season; significant discounting as part of our 50% off offer, which ran during the second quarter; and shifting of customers from Q2 to Q1 as we counted down our Rollback promotion at the end of March.

While April first time orders were soft as expected, our May and June performance enabled us to close the gap. As a result, the sequential revenue decrease of 12.5% is very much in line with seasonal norms.

Although net reactivation revenue for the quarter was $30.2 million, down 7% from Q2 2010, our promotional strategies have resonated with our react base, as react orders had increased 2% year-over-year. Also encouraging was the fact that the price promotion saw stronger-than-expected orders from even our oldest react cohorts. We continue expect that net reactivation revenue will be in the mid-20%range of our consolidated revenue for the year.

Though our price promotion drove most of the order mix in the second quarter through our ready-to-go food, we did make some progress in finalizing our ability to provide customers with even further variety in our great-tasting frozen products. We put our two frozen warehouses into operation in the quarter, giving us the ability to customize frozen orders for the first time.

Further, early indications show that we can charge customers a premium for customized frozen orders. And we are now looking to expand the number of frozen foods available. By the fourth quarter, we'll be able to source frozen food from multiple vendors.

As expected, gross margins were down year-over-year entirely as a result of our promotional strategies. In Q2, gross margins were 50.4% compared to 56.4% in the same period last year. This was expected and planned for and in fact represents our discounting strategy.

As Joe noted, this year we're investing more on price promotion which decreases gross margin and carefully managing marketing spend to offset this. As a result, the marketing efficiency or marketing expense as a percentage of sales was 20.1% for the entire quarter, the best ratio we've seen since early 2006.

We consciously manage media spend in light of the aggressive price promotions. Because of this, gross margin decreased 600 basis points or marketing efficiency improved by slightly more than 600 basis points on a year-over-year basis. You can see how clearly we're striking a careful balance here.

General and administrative expenses were $14.8 million, down $4.8 million or 24.5% year-over-year and down $7 million or 32% sequentially, reflecting the cost reduction initiatives implemented in February 2011. Cash G&A expense was $12.9 million, a decrease of $3.6 million or 22% compared to the second quarter 2010 and a decrease of $5.7 million or 31% sequentially.

This was the first quarter the full impact of the February actions were reflected on G&A line. As we noted when we announced the cost reduction efforts earlier this year, we expect to reduce G&A by a total of $9 million this calendar year, which we expect to be reflected primarily in quarters two, three and four on a fairly leveled basis. We do however continue to invest in growth initiatives.

Operating income was $17.1 million in the second quarter compared to $20 million last year. Operating margins increased 60 basis points year-over-year to 14.7% in the second quarter compared to 14.1% last year.

The net result of these puts and takes was income from continuing operations of $10.8 million compared to $12.7 million in last year's second quarter.

EBITDA was $22.3 million, a decrease of $3.9 million or 15% compared to last year's strong second quarter during which we increase EBITDA by over 50%. However, EBITDA margin of 19.2% compared favorably to 18.5% in last year's second quarter. A definition of our adjusted EBITDA as well as a reconciliation to GAAP is included in the tables in our press release.

Depreciation and amortization was $3.2 million and our non-cash employee stock compensation totaled just under $2 million. Income taxes were $6.2 million during the quarter, bringing second quarter net income to $10.8 million compared to $12.6 million in last year's second quarter.

Earnings per diluted share was $0.38, down only $0.02 from last year due to a combination of share repurchase activity and better operating margins.

From a liquidity standpoint, on June 30, 2011, we had $65.5 million in cash and cash equivalents compared to $41.2 million at yearend. The only debt in our balance sheet is a $30 million draw under our $200 million line of credit facility, which is committed through November 2012. This draw is currently locked in at very favorable interest rates. And in fact, $20 million of this debt is fixed at an interest rate of 1.5%. Our all-in borrowing rates stand at 1.33%.

We continue to talk to our banker about refinancing options, and we are finding that bank credit market is very favorable right now. We expect to complete our refinancing efforts by yearend. Cash flow remains a strong attribute of our business model, as even in this tough quarter we were able to generate $24.6 million of cash from operations.

Capital expenditures for the quarter were $1.7 million and our six-month CapEx totaled $3.1 million. We expect total CapEx to be in the range of $6 million to $8 million in 2011, reflecting some additional investment in growth initiatives in latter half of the year.

This is the second consecutive quarter in which we increased cash balance while still paying out $4.7 million in dividends.

We're also pleased to announce that our Board of Directors has authorized a payment of quarterly dividend of $0.175 cents per share payable on August 18 to holders of record on August 8, 2011, reflecting confidence in our expected full-year cash flow. The Board has also authorized $150 million share repurchase program through June of 2013.

Our original forecast for second quarter was $0.25 to $0.30 profit. The $0.08 to $0.13 outperformance in the second quarter is attributable to the fact that our in-quarter promotions and marketing efficiency overcame what we expected to be a deep April hole due to the late Easter.

We are now forecasting third quarter EPS to be in the range of $0.20 to $0.25 per share, and we are increasing EPS guidance for the year to be in the range of $0.65 to $0.70 per share. This reflects the better-than-expected second quarter performance and typical seasonal ebbs and flows for the balance of 2011.

As noticed, we continue to see very price-sensitive consumer and expect to use price promotions selectively to spur demand in the coming quarter, while also carefully managing costumer acquisition cost during these promotions. And as we discussed, we have baked into our forecast an expectation of food price inflation and an increase in shipping cost due to fuel prices as well as expected investment in growth initiatives.

Thank you, and I'll now turn it back over to Joe.

Joe Redling

Thanks, David. We're pleased with the second quarter results. We knew April was going to be a challenging month due to the late Easter holiday, and it was. But the degree to which consumers responded to our promotional offer, which launched immediately after the holiday, was encouraging.

Response and conversation rates were high and length of stay is solid and supported by the fact that customers must sign up for auto delivery to qualify for the promotional rates.

Thus far, we have effectively executed on our 2011 plan. We've done what we said we were going to do and maximize profits and cash flow in a tough environment while strengthening the balance sheet and enhancing shareholder value. As we look ahead to the second half of the year, we expect to see the usual seasonality in Q3 and Q4, but we have a good plan for continuing to generate customer excitement through creative promotions.

In the third quarter, we're deploying multiple offers to address different consumer groups and to keep our marketing approach fresh. We are testing a new approach for people who are traveling in the summer, while also offering price promotions for those who continue to desire a price value proposition.

All told, we feel good about the quarter and the full year expectations and have raised guidance upward, as David previously mentioned. We believe our work is progressing nicely for revitalization of the core Nutrisystem program. I believe customers and investors alike will be excited about the changes we are readying for the January 2012 diet seasons.

We're also making solid progress on our channel expansion plan and have identified a number of opportunities to leverage the Nutrisystem brand into different end market that complement our core direct consumer response model. We are optimizing results in 2011 while setting the stage for potentially exciting growth opportunities in 2012.

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

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Greg Badishkanian with Citi.

Alvin Concepcion - Citi

This is actually Alvin Concepcion in for Greg. Can you give us any color around your revenue expectation for the third quarter? It sounds like your promotional strategy is performing well, but you mentioned the competitive environment remains challenging. So I just wanted to see if you have any color on those trends. And then also, how do you feel your market share has been trending?

Joe Redling

Starting in February, we think we reached our market share process. We believe we were losing share when we came out of January with a lot of intense competition, as we talked about before. But as we're seeing our share growth continue to improve, the price promotions are keeping us in the game. So we think we're getting our fair share of the market and at least are not losing share at this point. And we pretty much have good five months of improvement in that area.

Revenue is a little bit tougher for us to get our hands around. We think that obviously there is sequential decline in revenue each quarter. We think it will play itself out seasonally, and we're always testing promotions, deep discounts, other types of promotions, as I mentioned, to see what we can leverage and what will really optimize the results. So we really expect to see Q3 perform sequentially the way it has traditionally.

Alvin Concepcion - Citi

And your marketing efficiencies were pretty strong in May and June. How would you characterize your efficiencies in July, and what's your outlook for the rest of the year? And if you could give any color on where you expect marketing spend to be as a percentage of sales. I think it was in the mid-20s, but you're trending better than that. So I'm wondering if there is a change in the outlook.

Joe Redling

We're still saying it's going to be in the mid-20s. We want to keep enough availability for us to test these new programs and put a lot of offers in the marketplace. I mean the 20% marketing efficiency was not just May and June, it was really for the full quarter. So we really hit on all cylinders during that period. We had some great media rates. Our media buying was very effective. And we had great response in conversion.

That's everything coming together. So we'd love to see that again. It's hard to predict that those things will come together again. So I think as we look ahead, I think we're expecting to move back into normal range in the mid-20s.

Operator

(Operator Instructions) We'll take our next question from Gary Albanese of Capstone Investments.

Gary Albanese - Capstone Investments

A question about the frozen food vendors. You mentioned that in the fourth quarter you're going to have multiple vendors going from that perspective. Are you going to achieve some cost savings from that or is that for increasing your product offering or is it a quality issue? Could you expand upon that?

Joe Redling

I think it's all the above. It really remains to be seen. We're really just starting to contact the frozen food vendors out there. But there is a lot of interesting offerings. And obviously just like our ready-to-go food, we're going to be tough negotiators when it comes to price as well. But just given the positive aspects of length of stay with frozen and the feedback we get from customers, we think expanding the number of offerings is a real opportunity for us.

Gary Albanese - Capstone Investments

And with the post-Easter promotion, since most of that was really based on the basic plan, did you see a drop off in the frozen segment, or it was more or less than what you expected?

Joe Redling

We have fully expected that, and it played out. I think in the first quarter, upward of 50% of our mix was frozen. Second quarter was running on 20%. And that was fully expected, because the promotion only applied to ready-to-go food.

David Clark

But what we are seeing is that the actual number of frozen orders continues to be significant from its tails of Q1. So new customers is one component to look at. But if you look at our mix of orders even in the second quarter, we were running 40% of our actual orders. People on program, including new customers on program, was about 40% of our orders, which we think is pretty amazing considering that actually 100% of that promotional offer went to the ready-to-go.

So while our new customers or majority of our new customers chose the ready-to-go line to get the price offer, when you look at our overall orders for the quarter because of the strength of Q1 and how those people are staying on program, we had really good order volume. And it really leads us to the point about frozen that we're building a pretty big business with frozen. And we think we have the leverage now to allow and leverage that volume for better COGS, maintain quality, increase variety.

And as I mentioned on my prepared remarks, we actually had some pretty big gains in the quarter on the supply chain side where we have complete capabilities for full customization of frozen. And we've actually passed those charges on to the customers. So we don't have any incremental COGS on customization, because our customer testing has shown that they're willing to pay for that. So again, that helps us with the COGS side and the profitability side for us to lean more into the frozen segment.

Operator

And our next question comes from Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro - Janney Capital Markets

So getting back to the promotional marketing strategy and conversion, et cetera, obviously you're getting good conversions and I guess you're certainly hitting the right buttons on the consumer in terms of the value. But it doesn't sound like this is sustainable. Is this like a limited strategy to this quarter, next quarter, the balance of the year? In theory, if you're marketing is equally efficient, should be more new customer growth. And if you're looking at the change or get back to growth, you'd have to think marketing expense is going to go up.

And so as it relates to that, you're getting better advertising rates. Is that sustainable? And why not apply this buying strategy going forward? If it's this effective and conversions are this effective, should this sustain itself or is this just a couple of quarters I guess is really the crux of my question.

Joe Redling

I think you're spot on. What we're seeing here is that the combination of a great price offer obviously helps us optimize media. So when you have a very straightforward offer like 50% off, it really communicates very quickly in your media.

We've stained our price focus now for going on six months. We started the Rollback, and we're coming up with different expressions of how to offer people new fresh promotional strategies around price.

So we started in February and here we are in July and we are doing the same thing, and we will continue to test new expressions. But I completely agree that that's not a sustainable 12 or 24-month strategy. I think we have learned a lot on the media side and we have gotten much more disciplined on how we look at media and how we plan and buy media based on that response, because when you're providing a lower price, in order to drive the profitability that we just did in the second quarter, the management of the media is paramount to that result.

And so it's really actually created a lot more discipline around that, which really implies that we have a better view of once we get topline moving and we create more demand that we should see more profitability be driven by the media spend.

I do believe that the learning we've had both on the media side and price promotion side just give us additional tools as we move forward. But we are making our quarters on conversion. We are not at this point. Because of the lack of new product news, we are not really inviting a broader base of customers to come and sample of our products. We're really feeding off our base of past and current, considers that people that are in our segment now and that are considering our product right now and a strong price off has really accelerated that conversion.

So we do have to get back to growth. We do have to provide new product news which really generates a lot more top-side demand. And naturally we are focused on that for 2012.

There really are no new product catalysts for us in 2011. So we'll be optimizing price and other promotional strategies to make the most of the year, but we definitively need to get some really compelling product information in the marketplace in January. And then the price promotions just become another tool in our toolkit in the marketing department.

Mitch Pinheiro - Janney Capital Markets

I guess, David, you talked about that CapEx might be a little bit higher in the back half. You're investing in some growth initiatives? What are we talking about there?

David Clark

Whenever we look at either additional product offers, anything new, we have to obviously put money on our website capabilities. In particular, some of the back-office, IT is to be expanded. So it's really expanding in and around that, things like that on the IT side.

Mitch Pinheiro - Janney Capital Markets

Is that going to correspond with what you're planning for '12?

David Clark

Yes.

Mitch Pinheiro - Janney Capital Markets

As far as food inflation is concerned, how would that have impacted this last quarter, and how do you feel playing out for the balance of the year?

David Clark

Well, in the last quarter, we were still working out of the inventory that we had starting the year. So it would not affect that. But I just think going forward, we provide for a little bit of food inflation as we go up to the end of year and start to buy not only for the New Year, but also some placement for 2011.

Mitch Pinheiro - Janney Capital Markets

How do you see gross margin? Is it a drag in the second half?

David Clark

Well, without aggressive price promotions, we have gross margin improving slightly in the second half of the year. But if we are getting the very effective marketing efficiency, we'll continue to use price discounting. So the recovery in the second half of the year is really less about food inflation and more about how we manage price promotions for the balance of the year.

Joe Redling

We're seeing anywhere from 2%, 2.5% pressure on food. But we have a lot of ways to offset that. We have many vendors. We can consolidate foods. We can look at other things to offset that. We can rationalize the various products we have. And we do sub-variety. I mean there is a lot of ways for us to deal with a 2% food pressure. So while we absolutely have included it in our forecast, we have a lot of opportunities to manage it.

Mitch Pinheiro - Janney Capital Markets

How should we think about frozen versus your traditional line of food as far as margin? Are you indifferent on the gross margin side on a percentage margin?

Joe Redling

Well, it depends on the pricing. In Q1, if you recall, we hit over 60%. On some period, 70% of our orders were frozen. And that's because we have sort of price parity with the ready-to-go line. We've done a ton of testing over the last couple of months, and we got it up to about 40% differential, which was enough to get that point. And still 40% of our business was frozen. We think that's about right.

But now that we've added customization and customers are willing to pay a premium to customize, we think we can open up that window a little bit more. Our goal, as we take a look at supply chain, take these warehouses in-house and look at additional vendors, is we're hoping to take some cost out of that product as well and maintain the quality.

So we're looking at that right now. We'd love to be agnostic, but I think we'll set the price to where we think the right price point is for frozen, because we do think it's a very high-quality product. So we'd like to get to a point where we would be agnostic.

Mitch Pinheiro - Janney Capital Markets

Of the sales decline in this quarter, how much do you attribute to discounting and promotion?

Joe Redling

Quite a bit. Even though we had Rollback last year, if you think about looking our Rollback brand, really only in May. And in the Rollback was a $240 dollar price point coming off the top of my head here. And so if you look at 50% off for May and June, it's like 150 wasn't off our auto delivery. So it's a much lower cost product or a much deeper discount in Rollback. So that accounted for a lot of it. But we did see significant declines in April with the late Easter period.

Mitch Pinheiro - Janney Capital Markets

And then finally, are you able to talk anymore about what you're doing with potential other products like shakes, bars, things like that, non-traditional Nutrisystem?

Joe Redling

We are continuing that process. We move forward literally. Every 30-45 days, we're getting through another gate. We think there is an opportunity in the retail channel, and we've said that before. The key for us is to make sure that we're being comprehensive in what we do and making sure that the product that we're developing would be complementary to the direct business, because that's our goal is to really not have a line of products that will jeopardize the direct business, that would actually create a halo and complement it. And that's what taking us the time to go through. But I think we'll have more news on that as we get closer to October-November.

Operator

(Operator Instructions) We'll take our next question from Kurt Frederick with Wedbush Securities.

Kurt Frederick - Wedbush Securities

I just had a couple of questions. One is on the Flex program, a little bit more, promotion and advertising for that. I was just wondering how the sales for that has been versus your basic plan? And also, what's the margin differential between the two?

Joe Redling

Yes, it's the low price point, but it's less food. So the actual gross margin is comparable to our core product. We entered July, we still had our 50% off at first week. And now really, we have multiple programs going out there right now with summer savings with price discounts and Flex. And so the jury is still out on which of those will win out as we move forward.

Our goal is to promote full offers in the market. We felt that the summer was an opportune time to put a weekend-off product out there. We've done that with QVC. That's been our staple at QVC is weekend-off. And that's the first time we really marketed last since probably 2009. So the jury is still out. We need to let this run. We expected a little bit of a low when we came of our 50% off, which ended the first week of July. So we need to give these programs a little bit more time to play out.

Kurt Frederick - Wedbush Securities

And then just looking at I guess Flex, like the basic verses select, I think the price points are pretty narrow there. Is there a high take rate I guess on the select side versus the more basic side of it?

Joe Redling

You're comparing the Flex select product and the Flex ready-to-go products? It's fairly comparable. We are just looking at the number. It's split right down the middle.

Kurt Frederick - Wedbush Securities

And just on the share repurchase, is that going to be funded from cash flow?

Joe Redling

As a general matter, yes. I mean we had a share repurchase authorization for many years and it expired March 31 of this year. And our Board reauthorized it at our last Board meeting.

Operator

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Joe Crivelli for any additional or closing remarks.

Joe Crivelli

Thanks, everybody, for joining us today. We hope you'll join us for our next conference call when we discuss the third quarter 2011 results at the end of October. Thanks and have a great evening.

Operator

That concludes today's conference. We thank you for your participation.

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