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NutriSystem Inc. (NASDAQ:NTRI)

Q3 2011 Earnings Call

November 2, 2011 4:30 PM ET

Executives

Joseph Crivelli – IR

Joseph Redling – Chairman, President, CEO and COO

David Clark – EVP, CFO, Secretary and Treasurer

Analysts

Gregory Badishkanian – Citi

Gary Albanese – Auriga

Mitchell Pinheiro – Janney Capital Markets

Anand Vankawala – Avondale Partners

Kurt Frederick – Wedbush Securities

Ross Berner – Weintraub Capital

Operator

Good day, everyone. And welcome to the Nutrisystem, Inc. Third Quarter 2011 Earnings Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference to Mr. Joe Crivelli, Investor Relations for Nutrisystem. Please go ahead, sir.

Joseph Crivelli

Thank you, Jamie. Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem’s third 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 the 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 November 2, 2011 and assumes no obligation to publicly update or revise any of the forward-looking information in this announcement.

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

Joseph Redling

Good afternoon. Thank you for joining us on today’s conference call. I will review the company’s third quarter financial results and provide some key performance highlights for Q3, and provide more granularity on our plans for 2012 diet season launch. David will then provide more details on the financials.

The revenue environment has been challenging all year, and by necessity we have been focused on managing expenses and optimizing our business model to drive profitability and cash flow. While consumer confidence has from time-to-time improved during the course of the year, it’s been frustrating to see that these periodic rises have not proven to be sustainable. Third quarter was especially challenging from that standpoint.

In August when U.S. debt was downgraded and the European debt crisis escalated, we saw revenue traction stall. It was no surprise to us that August consumer confidence declined sharply. As has been noted previously by analysts who follow Nutrisystem, our revenues are closely correlated with consumer confidence, which remains at one of the lowest levels in the past 30 years.

The ebbs and flows within our income statement indicate two strategies we’ve executed this year to maximize profitability and cash flow in a tough revenue environment. Our discount pricing strategy, which has enabled us to optimize marketing efficiency through higher conversion rates and the absence of new product messaging to counter macroeconomic pressure.

In our efforts to control G&A expenses, gross margin dipped 480 basis points from last year’s Q3 due to increased use of promotion to drive customer demand. But marketing efficiency up 23.7% was the best third quarter marketing efficiency we’ve seen in many years. In addition, our promotions have helped us to continue to optimize our sales mix with more of a higher margin ready-to-go product while sustaining high levels of ordership and second month take rates. G&A expense of $11.5 million is the lowest it’s been in recent history. This is reflective of the cost-cutting efforts we executed earlier this year, as well as the fact that as we get closer to the end of the year we have been able to reduce certain G&A accruals.

While reducing cost we have also been committed to investing in new growth initiatives. Approximately $600,000 in Q3 and a planned incremental spend of almost $5 million associated with securing new celebrity spokespersons and production costs for new creative. Net-net, operating margins remained relatively stable on a year-over-year basis.

While optimizing profitability and cash flow in a challenging revenue environment, we have also invested in re-energizing the Nutrisystem core product line and exploring new revenue opportunity. Our plans are clearly coming into focus. I’d like to share some additional details with you.

First, let’s talk about the Nutrisystem core product lines. It was apparent during last year’s diet cycle that we had to refresh the core product. We had done that and planned to roll out a revamped Nutrisystem program for the 2012 diet season. We have reformulated our programs, starting with exciting new packaging and branding. We’ve also included enhanced, better-tasting food offerings, with an expanded frozen line developed by our chef advisory panel. And, finally, we are integrating a simple-to-execute activity program that is intended to place minimal time demand on the dieter, while enabling them to get active and burn calories to enhance their weight loss success even further.

In addition, we are introducing personalized meal plan options for customers who have reached their weight loss goal that are designed to enable them to continue to integrate our meal options on an a la carte basis based entirely on their own needs. We believe that this shift, when combined with our enhanced maintenance tools and new activity components, will provide effective options for our customers to easily transition from our 28-day programs to fully personalized solutions for weight management. We believe that providing our customers with new and improved tools to deliver effective healthy and sustainable weight loss in a comprehensive system will provide the personalization and flexibility that the dieting consumer is seeking.

As always, prioritizing nutrition is at the core of what we do. We will continue to lead in the area of advanced nutrition and the ongoing improvement in our nutritional formulas are designed to provide our customers with a simple, healthy and convenient way to lose weight while avoiding the normal pitfalls of other typical low calorie dieting approaches like hunger, cravings and limiting entire food categories.

Our advanced nutritional science is intended to deliver a high level of satiety while allowing customers to enjoy the foods they love. Our insights clearly support consumers’ desires to have this challenge managed for them. Making the right choices and maintaining the proper nutrition multiple times a day on a sustained basis is very demanding. However, we believe our new and improved program represents an effective approach that is easy to follow and provides the needed flexibility consumers want.

Moving to the marketing area, we have been very fortunate to have a very effective and stable base of celebrity spokespeople supporting all of our major programs. We believe the longevity of our existing spokespeople is counter to what you normally see in the category and a testament to the sustainability of our programs. As you know, Marie Osmond and Dan Marino have been great partners over the last five years and have inspired millions of people to take that first step to a healthier lifestyle and we plan to have Marie and Dan continue their great work in 2012.

In addition to this dynamic duo, we are making a major investment in broadening our team of spokespersons for the 2012 diet team. In the female market, we have signed an iconic brand ambassador who’ll be the focal point of our new product launch, an internationally recognized A-list star who has never endorsed a weight loss product before and who, in fact, has done very little on the area of endorsements at all, making her a fresh and inspiring face for the Nutrisystem brand. We have also added another marquee spokesperson who we believe will solidify our leadership position in the men’s market.

We are in the process of finalizing the creative featuring our new spokespersons as well as new spots with proven performers like Marie and Dan. We are excited about the potential of the 2012 campaign to reintroduce our brand to a broader market and provide us the opportunity to increase brand consideration and purchase intent. Our entire time marketing seen pulled together and has truly energized our marketing efforts for 2012. I’ve never been more excited heading into a new campaign launch than I am right now.

As noted in the press release, we expect our fourth quarter expenses to be approximately $5 million higher than previously expected with the majority of the investment due to retainer fees associated with our new band ambassadors as well as incremental marketing production costs.

We have previously talked about the need for new sales champs and retail has always been on the table for discussion. Our goals in exploring this new sales channel are to extend our brand to an entire new set of potential customers, to give our core Direct program customers additional convenient options to stay with the Nutrisystem brand for weight maintenance once they’ve achieved their weight loss goals and to enhance brand awareness and product trial to fuel the Direct business.

We have cleared a number of gates relative to branding, business strategy and feasibility and product lineup. The next phase is to finalize our merchandising strategy. This is our current focus and we hope to have additional details to share later this year.

I’m sure you’ve all seen the press release announcing that we hired our new chief marketing officer in mid-October. Michael Amburgey now leads the marketing and commerce departments as the company’s new Executive Vice President and Chief Marketing Officer and is responsible for all aspects of the Nutrisystem marketing team including acquisition and retention efforts, media planning, creative services, eCommerce, call center operations and brand management. Mike has a great background for the job and has hit the ground running.

He has extensive experience in managing large media driven brands and deep expertise in direct response marketing, consumer healthcare and packaged goods marketing for Oreck Corporation and the Bowflex and Schwinn Fitness businesses of Nautilus. He has also held domestic and international marketing roles at GlaxoSmithKline Consumer Healthcare as well as brand management roles at Procter & Gamble. He has already made a strong impact at Nutrisystem and we look forward to his future contributions.

I’ll now turn the call over to David Clark, our Chief Financial Officer.

David Clark

Thanks, Joe. While third quarter results met the low end of our guidance for earnings per share, we’re disappointed with the continued pressure on the top line. We continued to pull the necessary levers to remain profitable and drive net income, EBITDA and cash flow with operating margins remaining stable year-over-year, and we continue to invest in the new product launches that Joe just mentioned, both the revitalization of the Nutrisystem core product and continued progress on our entry into the retail channel.

Revenues were $85.6 million, a 29.3% decrease year-over-year. As Joe mentioned, first time orders and re-activations slumped in August, coincident with the U.S. debt downgrade and the European debt crisis and a consequent spillover effect of the associated negative headlines on consumer spending. We managed through this by adjusting our marketing and G&A spend and shifting back to our promotional strategy with more value-oriented offers.

Net reactivation revenue for the quarter was $24.4 million, down 15% from a year ago. For the full year we expect net reactivation revenues to be in the mid-to-high 20% range of our consolidated revenues.

As expected, gross margins were down year-over-year due to our promotional strategies. In third quarter, gross margins were 51.8% compared to 56.6% in the same period last year. As we have discussed in previous quarters, we have accomplished this by leaning more heavily on promotion or price discounting to drive demand and offsetting this with reduced marketing expense. By doing this, we maximize profitability in one of the most challenging revenue environments we’ve ever experienced.

Marketing expense was $20.3, a significant decrease from $33.3 million in the last year’s third quarter and down by a little more than $3 million on a sequential basis. Marketing efficiency or marketing expense as a percentage of sales was 23.7% for the third quarter, up slightly from second quarter, but still at very efficient levels from a historical perspective.

General and administrative expenses were $11.5 million, down $6.6 million or 36.5% year-over-year and down $3.3 million or 22.5% sequentially, reflecting the cost reduction initiatives implemented in February 2011, as well as the reduction of certain accounting accruals now that we are further along in the year. Cash G&A expense was $9.4 million, a decrease of $6 million or 38.8% compared to the third quarter of 2010 and a decrease of $3.4 million or 26.7% sequentially. Within third quarter G&A expense there’s also approximately $600,000 of incremental expense associated with the initiatives that Joe referenced. This incremental investment negatively impacted earnings per share in the quarter by approximately $0.02 per diluted share.

Operating income was $9.6 million in the third quarter compared to $13.9 million last year. Operating margins remained relatively stable at 11.3% compared to 11.5% last year.

Income from continuing operations was $6.1 million compared to $9.2 million in last year’s third quarter. EBITDA was $14.7 million, a decrease of $5.1 million or 25.8% compared to last year’s third quarter. However, EBITDA margin was higher at 17.1%, up 80 basis points from 16.3% in last year’s third quarter. The fact that we can expand EBITDA margins in a decreasing revenue environment evidences strongly that we have levers to pull to maximize profitability and cash flow. A definition of adjusted EBITDA as well as reconciliation to GAAP is included in the tables in our press release.

Our depreciation and amortization expense was $3 million, and our non-cash employee stock compensation was $2.1 million in the quarter. Income taxes were $3.5 million during the quarter, bringing third quarter net income to $6.1 million compared to $9.2 million from last year’s third quarter. Earnings per diluted share was $0.21 within our guidance for the quarter of $0.20 to $0.25. And without the previously mentioned incremental marketing expenses, earnings per share would have been $0.23 per diluted share.

From a liquidity standpoint, on September 30 of 2011, we had $72.2 million of cash and cash equivalents compared with $41.2 million at year end 2010. The only debt on 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 favorable interest rates, and our all-in borrowing rates are 1.33%. We’re currently executing on the refinancing of our line of credit, which we expect to close in the fourth quarter.

Cash flow from operations was $16.6 million in the quarter. Capital expenditures for the quarter were $3.5 million. And our nine-month CapEx totaled $6.6 million. We expect total CapEx for the year to be approximately $8 million. This is the third consecutive quarter in which we increased cash balances while still paying out $4.9 million in dividends. We expect to end the year with approximately $60 million of cash and cash equivalents even after our fourth quarter inventory build and anticipating investments in new product and marketing initiatives.

The Board of Directors authorized the payment of a quarterly dividend of $0.175 per share, payable on November 25 of 2011 to shareholders of record as of November 14, 2011. While we have an existing share repurchase authorization of $150 million through June 2013, we did not repurchase any shares the third quarter, pending the announcement of our new celebrity spokesperson, which we believe is market-moving news.

We are now forecasting EPS for the year to be in the range of $0.45 to $0.50 per diluted share. The reduction in full-year guidance reflects the approximately $5 million in incremental investment we are making to prepare for our 2012 diet season launch. This was a major strategic decision, and one that was made with a great deal of thought and consideration and constructive debate. However, it has been five years since we had a combination of a powerful new celebrity spokesperson and a new product launch. While we recognize the significant input our additional investment will have on the fourth quarter and full-year earnings, we believe the decision will pay off in 2012 and beyond.

Thank you. I’ll now turn it back over to Joe.

Joseph Redling

Thanks, David. Clearly, it was a difficult third quarter. Consumer confidence plummeted in August and we saw activity in the call center and on the Web slowing in unison with the headline about the debt downgrade and the European crisis. We worked hard to maximize profitability as we have all year in this challenging revenue environment by carefully managing marketing spend and G&A expenses.

As we head into the fourth quarter, I’m thrilled at the level of energy in the building as we put the final touches on our preparation for the 2012 diet season. The entire Nutrisystem team really pulled together to innovate across multiple areas and are completely engaged in delivering a successful 2012 diet season launch. We reformulated our core program and we believe it’s a dynamic plan that will work to help dieters lose real weight and keep it off. We are finalizing exciting new creative with new and existing spokespersons including an iconic transformational spokesperson for our women’s program and a new marquee spokesperson for our men’s program. We’re continuing to push forward on our retail plans that we believe will introduce our brand to new customers and leverage our significant marketing spend.

There is great deal of excitement here at Nutrisystem while we manage through 2011 and the challenges that it has presented. We’ve also invested for the future and have a clear plan that we expect result in renewed momentum and enhance shareholder value. I think you will like what you will see over the next few months. With that, we’ll take any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Greg Badishkanian with Citi. Please go ahead.

Gregory Badishkanian – Citi

Great. Thanks. Really interested to hear a little bit about 2012 to the extent that you can; how big of a part of kind of the innovation is going to be kind of celebrities versus changes in the product? Which is going to be you think more innovative?

Joseph Redling

Well I think, Greg, it’s going to be a combination of the two. This is probably the most significant reformulation of our program that we’ve done I would say since Nourish back in 2005 before I was even in the company. But equally important we believe to communicate that type of newness and innovation, a new credible face is really important and we’re very, very excited about the individual we have as our new brand ambassador for women and also for men. So we think they’re really equally important. The whole idea is to have a product that has new news that attracts a much broader segment of consumers and to have marketing that’s very compelling. We believe when you put a new iconic face on the brand like we’re planning to do it could have a pretty significant impact.

Gregory Badishkanian – Citi

When will all that hit? Is that going to be kind of late December, early January or...?

Joseph Redling

Yes. We’ll be launching for the 2012 diet season.

Gregory Badishkanian – Citi

Good. And maybe just a little more color on the investment. So, I think it’s – you had mentioned in the press release it looks like it’s about $0.11 in the fourth quarter. So, the investment – that’s not advertising on TV. That’s things that go behind it so that when you launch it next year it’s ready to go, right?

Joseph Redling

Exactly right. It’s really the costs related to securing the new brand ambassadors and all of the production costs that go along with that, which obviously when you have a new spokesperson and a new product those costs are much higher than they would be in a normal year.

Gregory Badishkanian – Citi

Right. So, last year they were, I imagine, substantially lower than the $5 million...

Joseph Redling

I would say they were sub a million.

Gregory Badishkanian – Citi

All right. Okay. Very substantial. Good. And just kind of looking at – it’s a tough macro. It’s roughly a $300 purchase, so I know that people view it as a discretionary purchase, even though it’s only like $10 a day or something like that. So, how much do you think has to do with that? And was there any – did you notice as you did your competitive analysis, was that – did that have any part to play in terms of maybe the softer sales environment that you’re seeing?

Joseph Redling

It’s a good question. I think we’ve been out there, Greg, very aggressively on pricing. We really plan to go into Q3. We finished the second quarter relatively strong. We had a very – encouraging first couple of weeks of July, which is typically the indicator for the rest of Q3. And we literally saw a very immediate decline as we got into that third and fourth week of July, which led right into a very depressed August.

We had planned to move our pricing back up after the promotions in Q3 and went immediately back to very aggressive price promotions in the third quarter and still kind of fell on deaf ears even with low pricing. So, we were out there with sub $250 price points. So, we didn’t think that there was any need to go lower. We just thought in that environment when consumer confidence dipped so dramatically we just felt that consumers just came out of the market, which lead us to really manage our marketing spend down.

Gregory Badishkanian – Citi

Right. Right. Good, okay. Thanks. Appreciate that.

Operator

And we’ll take our next question from Gary Albanese with Auriga.

Gary Albanese – Auriga

Thanks, guys. How much of the top line disappointment is really a continued carry over from the first quarter? You started the – I think you said before you started the year a little weaker, picked up momentum and then it fell off. Is it still the same sort of feeling that you’re getting from the first quarter?

Joseph Redling

Well we clearly – the first quarter was sort of the tale of two chapters. It was a very, very bad January and then a comeback February and a stronger March, actually. We actually grew new customers in the month of March despite the intense competition in the category. What’s affecting us now, Gary, your point is obviously our program revenue quarter-by-quarter is less as you bring in less new customers even though we were very efficient in Q2 in terms of how we acquired customers. We were bringing in – our new customer counts were not growing. We were just optimizing in the quarter for profitability. So, we do have less on-program people moving into the third quarter from Q2, but what really affected us was really the new customer adds really fell off as we moved into August.

Gary Albanese – Auriga

Okay. And going into next year with the marketing spend – it has been a point that to keep the costs low to maximize – your margins in the environment. But how are we supposed to look at this going into the first quarter relative to like the prior year?

Joseph Redling

I mean, our approach is going to be – we have the capability to change our pricing on the fly obviously. So obviously we have a new product, we think we’re going to have pretty compelling marketing. You would typically in a normal environment say it’s a great opportunity to move your gross margins up. Obviously, we’re moving into another tough economic period.

We’re much more confident with the product and the marketing we have gearing up than were last year, but we’re going to be very flexible on the pricing component as we move into January. I mean we would love to have enough demand to move those gross margins up. We’re going to track that as we get into that diet season literally right after Christmas and test the market for how much room we have to move those prices up. But if we can drive demand with low pricing with a compelling new marketing message we may opt for that if that’s the best option for us at the time.

Gary Albanese – Auriga

Okay. Is there anything new to report on the medical side...?

Joseph Redling

We actually – we have a pilot going on in test markets as we speak where we’re taking the programs that we’ve researched over the summer and we actually launched marketing activities in specific markets reaching out to health care professionals. That would run through the end of this quarter. We plan to obviously scale that and expand that as we move into 2012.

The other news on the medical front is we have the final results of our multiple clinicals that are being publicized in the next week or so. And results of those are very positive on the diabetic front, our clinical with Temple and Penn have reinforced the credibility of our diabetic product and the effectiveness of it. We’ll have additional claims – additional clinicals that are completed, which will be very, very important as we message to health care professionals. As you add multiple clinicals to your evidence base, you really drive a higher level of credibility with the program. And we think our adoption on the health care side will be accelerated because of that, so that’s really good news that we have. So, we’re hoping to leverage that as we move into 2012.

Gary Albanese – Auriga

Okay. Thanks, guys.

Operator

And we’ll take our next question from Mitch Pinheiro with Janney Capital Markets.

Mitchell Pinheiro – Janney Capital Markets

Hey. Good afternoon.

David Clark

Good afternoon.

Joseph Redling

Hi, Mitch.

Mitchell Pinheiro – Janney Capital Markets

So what would you say your average pricing or promotional discount was in the quarter? So, if you were down 29% in sales, how much of that was price driven?

Joseph Redling

Our average sales prices was down about $50. So, our average – what we call our ASP, average sales price per order, was just about $250 where it typically it’s $280. So, maybe about – was it $30 bucks – $30 below where we would typically be.

Mitchell Pinheiro – Janney Capital Markets

Was that the same – that’s about the same level as it was in the second quarter?

Joseph Redling

Yes. Actually second quarter might have been a little bit lower. We were doing 50% discounts on that. We had anticipated that we’d actually bring those prices up in third quarter, and we were unable to do that in the environment we found ourselves.

Mitchell Pinheiro – Janney Capital Markets

Okay. On the G&A side, I mean pretty low G&A. I mean are you down to the bone here on G&A? Will you have to sort of reinvest there should business pick up in next year?

David Clark

Well, we would hope, honestly, because our G&A is largely variable because, as you know, 500 to 600 people that work at Nutrisystem are in the call center. And that call center staffing is based on customer demand. So, yes, I mean if we start to see growth, we’ll invest some G&A as we have in the past.

Mitchell Pinheiro – Janney Capital Markets

Okay. And when it comes to your new celebrity spokespeople, typically in the past I was under the impression that there was little upfront retainer payments. Is this something new? Or is it the fact that this is typical being that you have a brand new spokesperson, and obviously A-list. Is that just the way it works now?

Joseph Redling

Yes. As you move up the food chain, compensation programs change. So, typically in the past when you look at the type of folks that have been in the category, they’ve been B to C level kind of people outside of Nutrisystem and in other categories. Typically for us, when you’re going after someone and this is a very strategic approach for us. This was an outreach to a person who really was at the top of our list. And to be honest, we didn’t believe there was a high probability. But we really leveraged all the resources. We really believe strategically that this was a real transformational type of person that could really re-launch the brand. So, when you get to that level, there are different types of compensation schemes you have to manage through.

Mitchell Pinheiro – Janney Capital Markets

And so this upfront – these upfront – the retainer it’s expensed here predominantly in the fourth quarter, there’s nothing more that gets expensed going forward?

Joseph Redling

There’s a piece of that extend beyond the first year of the agreement. The majority of this is really related to production and development of creative supporting the new celebrity.

Mitchell Pinheiro – Janney Capital Markets

Okay. And when do you, I may have missed it, but when will we learn of these people?

Joseph Redling

Soon.

Mitchell Pinheiro – Janney Capital Markets

Okay. So, soon. That’s good enough. With regard to new products in the retail channel, how – what type of distribution do you expect? Is this drug and grocery, food, drug and mass? And if so, how much reach do you expect to get?

Joseph Redling

That’s the final stage of our process, Mitch. So, we are evaluating those options right now. There are multiple ways to pilot retail. We are in discussions with the core retailers of who would be really significant in making this a significant business. Obviously, as we look at entering a channel we want that channel to have scale, but we also – we wouldn’t be doing it if we thought it was an insignificant effort. We think it’s a very significant channel for us.

The question we’re managing through now is the timing of that launch and the scale from when you start to what you expect to have within 12 months. We’re working with our partners and advisors on the retail side to help us manage through and navigate the best way to enter these markets strategically. In other words, do you launch at kind of a full distribution right out of the gate? Or do you work with specific partners to get yourself seeded and embedded in merchandise properly before you roll out? So, those are all the aspects of our last stage of this plan as to locking down on what the strategic merchandising plan is and then we can move to execution.

Mitchell Pinheiro – Janney Capital Markets

When do we learn more about that?

Joseph Redling

We’ll have more news on that probably towards the end of the year or early in Q1.

Mitchell Pinheiro – Janney Capital Markets

Okay. And then as you look at these products how do you think about cannibalization versus your core programs?

Joseph Redling

That’s a great question. It’s primarily why we’ve spent as much time as we’ve had evaluating this opportunity. As you know, we’ve been working on this for 18 months plus now. And one of the most important things for the management team was to make sure that whatever we do in the retail channel is actually complementary to what we do in Direct and actually could help feed the Direct business. So, the way we think about – if you think about our Direct business being related more toward an accelerated structured weight loss position. You’re eating every meal. It’s all about weight loss. It’s effective weight loss. It’s very restrictive. It’s 28 days. That’s a segment that we’re serving today.

We think retail is much more along the lines of flexible weight management, to give people the opportunity to choose products on an individual one item basis to fit into their own lifestyles for weight management. Not necessarily eating five of our products every day to lose weight, but actually competing in the aisle for share of wallet for people that are just looking for better, healthy choices on healthy snacking and specific meal occasions. So, we do think it’s complementary.

We believe that it’ll provide the opportunity to create a tremendous amount of trial for our products. We believe these products will be very, very high quality products, highly nutritious products that will compete very well in the space that it stands today and we think that ecosystem will help add fuel to both the Direct business and will allow to promote our Direct customers to go to retail as well. So, we’ve really spent a lot of time thinking through how these two businesses would be complementary.

Mitchell Pinheiro – Janney Capital Markets

And does – will you be offering the same products at retail on your website?

Joseph Redling

Right now the products that we’re thinking about for retail are not the same products that we have in our Direct business. There are different formulations of products. Obviously, having those available for our customers is a pretty easy thing for us to do. A lot of that will depend on where we come out on the merchandizing strategy.

Mitchell Pinheiro – Janney Capital Markets

Okay. All right. Well thanks for the color. Appreciate it.

Joseph Redling

Thanks.

Operator

And we’ll go next to Anand Vankawala with Avondale Partners.

Anand Vankawala – Avondale Partners

Hey. Just have a quick follow-up question. So, regarding your ASPs, if you kept discounting the same between Q2 and Q3 due to the environment, but yet you saw an incremental rise in the ASP between Q2 and Q3, just trying to figure out what exactly is different. Was there a shift in mix? Or did you see more in frozen?

Joseph Redling

Yes. I mean we were doing 50% off in Q2 so we actually had a lower ASP on the first order. What happens there in the quarter depends on timing, right. So, for example, the customers that were getting 50% off in June that was a very low ASP. That was a hundred...

David Clark

$156.

Joseph Redling

$156. The customers that got it in May it was 50% off their first order then that averaged over two orders. So, overall, our ASP was lower in Q2 than it was in Q3.

Anand Vankawala – Avondale Partners

Okay. And then currently just what kind of discounts are you running right now relative to Q3 I guess?

Joseph Redling

I mean we’re – I guess that our ASP is coming in just under about $250. It’s more like a $100 off versus 50% off.

Anand Vankawala – Avondale Partners

Okay. Perfect. Thanks.

Joseph Redling

You’re welcome.

Operator

And we’ll take the next question from Kurt Frederick with Wedbush Securities.

Kurt Frederick – Wedbush Securities

Hi. Thanks. I was wondering on the new marketing campaign you’re doing for this diet, what would be the mix as far as online or TV ad? Is it going to be similar to what you’ve done in the past?

Joseph Redling

Yes. Media, obviously we’re going to engage in all channels as we have in the past. We think that obviously the Web when announcing a new product and a new spokesperson or spokespeople, in addition to the people we’ve had, provides a great opportunity to use social and Web. And we’re going to be leveraging that. As well as, as you can imagine, the PR angle of this; we have quite a bit of new news with not only a new product, but, you know, just a very impressive stable of brand ambassadors, some that have been with us for five years, and some that are relatively new.

So we have a sustainability message and an aspirational new spokesperson message, so that those are all very important. But at the end of the day, our business is still driven. The engine is still broadcast, cable and television and that visible message to create excitement and demand, so we’ll still be leveraging that to the fullest extent.

Kurt Frederick – Wedbush Securities

Okay. And then on the new products, is the margin profile consistent with your current offering?

Joseph Redling

Yes. Gross margins will be similar based on what our retail price will be. There was some added cost to the product on some of the food components that we’re adding, but overall it’s going to be relatively pretty close to where we are today.

Kurt Frederick – Wedbush Securities

Okay. And then just I was wondering on the share repurchases, as you haven’t done any in the last couple quarters. You have a big share repurchase out there. You have a lot of cash. Stock price is a little depressed. I was wondering if there’s any reason why you wouldn’t be out over the next few weeks to be active.

David Clark

You know we are opportunistic around share repurchases, but a lot goes into it in terms of what we’re looking at from an inventory build; what we’re looking at in terms of expenses in the quarter. So look, the last time we had a $300 million share repurchase authorization, we spent $244 million over a two plus year period. And that’s the reason we authorized another $150 million. The Board and management are committed to returning cash to shareholders. We’ve got a $20 million dividend payout every year, and we’ll use share repurchase as we see fit.

Kurt Frederick – Wedbush Securities

Okay. That’s it from me. Thank you.

Operator

(Operator Instructions) We’ll go next to Ross Berner with Weintraub Capital.

Ross Berner – Weintraub Capital

Hey, guys. Quick – a couple quick questions for you. First what gives you confidence that the business is more stable than appearances would give, given that the lower revenues come down the more you reduce G&A and marketing spend; the more marketing spend comes down, the more revenue and top line comes down. So how do you know that we’re now like in a kind of a negative circular spiral?

Joseph Redling

Yes. I mean we’ve seen pockets of growth. We’ve seen, if you look at February, March, May, June, we actually performed pretty well in the face of really intense competitive pressure. So we’re able to see those businesses come back when we have seen losses. When there is this dramatic decline in consumer confidence, I mean we literally were having bets around here about how low it would fall in August because we saw such a clear indication.

And some of that is just a shocking period for consumers. And then that normalizes. Then it gets – then you’re back out in the market. But you have these periods that seem to shock the consumer market and keep it a little bit of – there’s a lot of volatility in that – during that period of time. And then over that period, as you’d extend that into a couple more months, they seem to normalize. The problem that we have with Q4, there’s just no demand there. So there’s not – it’s not like we can bring – do anything and bring it back.

The other thing that kind of ran out on us was we’ve been using price promotion all year. I think our runway just ran out on us. I mean we really didn’t see the response that we saw in the first four or five months of the year once we got into this more challenging demand period. We seem to be back to what we saw in 2009, which was they just weren’t interested, regardless of the price. We don’t think that’s a sustainable marketplace. And what we’re trying to do is make sure that even in a tough economy, there’s evidence that new product, new marketing generates a lot of new interest from outside of your core.

People that – a lot of our customers right now that we’re generating orders from are people that have been with us before. They’re waiting for a good deal. We’re not – we don’t have a lot of opportunity right now to attract that new customer to Nutrisystem because we don’t have the compelling new news to get them to reconsider us or to consider us for the first time. So, we feel that the category, new matters in the category; always has, always will. We think spokespeople really matter as well to get people to consider the product. And as long as your innovation in your new product is real, that it’s not just a marketing spiff, it’s real product innovation, which we believe we have, I think you have the opportunity to really impact your demand flow.

Ross Berner – Weintraub Capital

Joe. And my next question is we’ve really liked you guys, Joe and Dave, we like you guys. You’ve done a really good job in a tough environment managing to the bottom line and keeping costs in check. And we certainly understand that this is a difficult environment. But along those same lines, at certain times we’ve seen some of your competitors show some pretty significant progress at various points in time.

There is a little bit of a waiting for (inaudible) element for the company at this point, the D product in partnering with an HMO and selling into the retail channel and new products and just a re-energizing of the brand in general. So, there’s always been something that’s always going to – it’s always sort of put out there. And yet despite that fact you guys can still generate $50 million to $75 million of EBITDA and CapEx that’s normalized at the low like under $10 million. So, the free cash flow is significant. You can do $40 million to $50 million in free cash flow even at these trough levels.

I guess the question I have as a shareholder is, is it time maybe to look for options to sell the business? Is there a better way that we can monetize the free cash flow nature if that is sustainable at those levels? It’s not meant to be a confrontational question. I just want to hear your answer.

Joseph Redling

Yes. I don’t take it that way at all, Ross. I appreciate your frankness. I think, listen, we’re all – all of management, especially me and David, we’re really committed to shareholder returns. And if there is – we’ll look at any way to generate incremental shareholder returns for our patient shareholders. We know there’s been a lot of puts and takes to this business over the last couple of years in difficult economies. And we know that a lot of our shareholders have been very patient. We think our dividend helps with that in terms of providing a pretty good yield while you wait for us to try to get the revenue growth going again.

This has really been – this last, I would say eight months to a year have really been a very big focus on changing the way we look at the business. We recognize that to wait for the core business to come back at the levels it once was is probably not realistic. That we have to diversify, expand. We have a great brand. We have talked about retail quite a bit, but we are progressing, pushing that ball forward. Every single quarter we’re making progress and we do expect that that could be a compelling channel for us. Diabetic was – is still a great business for us. And we recognize that to move that business along you need to have more credibility in the healthcare space.

So, these are all initiatives, and revitalizing the core has been one of the most important components of that that are really necessary. And we’re very focused on it. So, we know that this is sort of a wait and see. We understand that. This is kind of show me time. And we believe that we have a lot of the stars aligned despite the macro challenges that we’re looking at moving ahead that we have a very good chance to get this business back on track in 2012.

Operator

And at this time, that does conclude today’s question-and-answer session. I’d like to turn the call back over to you, Mr. Crivelli for any additional or closing remarks.

Joseph Crivelli

Thank you and thanks everyone for joining us today. If you do have any additional questions, please don’t hesitate to call the Nutrisystem IR hotline at 610-228-2100. We look forward to speaking to all of you in the near future. Thank you.

Operator

And that does conclude today’s conference. We do thank you for your participation.

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