Nutrisystem's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Mar. 5.12 | About: Nutrisystem Inc (NTRI)

Nutrisystem, Inc. (NASDAQ:NTRI)

Q4 2011 Earnings Call

March 5, 2012 4:30 pm ET

Executives

Joseph Crivelli - IR

Joe Redling - Chairman and CEO

David Clark - CFO

Analysts

Greg Badishkanian - Citigroup

Gary Albanese - Auriga

Mitch Pinheiro - Janney Capital Markets

Anand Vankawala - Avondale Partners

Kurt Frederick - Wedbush Securities

Operator

Good day and welcome to the Nutrisystem, Inc. fourth quarter and yearend 2011 conference call. At this time, I would like to turn the conference over to Mr. Joe Crivelli, Investor Relations for Nutrisystem.

Joseph Crivelli

Good afternoon, everyone, and thank you for joining us to discuss Nutrisystem's fourth quarter and full year 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 2012 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 March 5, 2012 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.

Joe Redling

Good afternoon and thank you for joining us on today's call. I will review the company's 2011 financial results and provide some key performance highlights as well as provide an update on our January diet season launch and our outlook for the year. David will then provide more detail on the financials.

As we talked about on prior quarterly calls 2011 has fair share of challenges for Nutrisystem, but we reacted quickly to preserve profitability. The cost cutting efforts we initiated in February of 2011 enabled us to reduce general and administrative expenses by $13 million during the year.

We also carefully managed our marketing spend to optimize consumer response and conversion. As a result, we delivered profitable year with $12.3 million of net income or $0.43 per share, which was in line with our original 2011 guidance of $0.40 to $0.50 per share.

The fourth quarter came in slightly below our expectation. This is largely due to additional marketing investment we incurred in December to support the announcement and publicity of Janet Jackson as our new brand ambassador and our new Success program.

Lowe customer account coming out of 2011 will negatively impact the first quarter of 2012. However, given all that's happening in the business, we see a clear path to mid-to-single digit revenue growth for the full year of 2012. We also expect to generate a low double-digit increase in EBITDA. David will provide additional details, when he discusses the outlook in a moment.

So far the early results from the 2012 diet season launch are encouraging. We believe it has created a strong foundation of demand for us build on throughout the year.

The announcement of Janet Jackson as our new female brand ambassador created a tremendous amount of buzz and initial response. Janet was featured on ABC Nightline, Extra, The Insider, Access Hollywood, Good Morning America, The Tonight Show with Jay Leno, USA TODAY, New York Times and other outlets.

Clearly, she has introduced us to a broader customer base. Janet continues to experience great results from the program and we will have more opportunities ahead to reinforce the efficacy of our new program and continue to expand on her story of her own personal weight loss journey. So stay tuned.

In addition to Janet, Terry Bradshaw, has been a solid step. His partnership with Nutrisystem was announced live on The Tonight Show with Jay Leno with exclusive premier of a 60 second television spot and follow-up placements ran on Fox and Friends, Entertainment Tonight, IMS and Good Morning and others.

As a result, our men's business is performing well. We've seen a steady double-digit increase in new male customers since launching with Terry. Terry has also shown to have strong crossover appeal as women are just as compelled by Terry ad as male, which isn't a surprise, given how iconic Terry is and his boundless charisma.

While we are encouraged by the growth of our men's business so far this year, our only internal survey signal strong increases in overall men consideration. And we still believe we have additional potential, as we optimize our marketing efforts, utilizing Terry and of course Dan Marino.

We feel we have a great set of assets with our broad base of brand ambassador. Marie Osmond and Dan Marino continue to support the sustainability of our programs and appeal to specific consumer segments that remain critically important to us. Janet Jackson expands our reach and appeal with women and men, and have clearly provided us with a high level of excitement, units and relevance to the Nutrisystem brand. Terry Bradshaw, both reinforces our overall brand positioning with men, while appealing to a broad cross segment of both men and women.

As a company where food is our primary product, we will continue to be committed to evolving and improving our food offering. Our new foods are getting terrific reviews and the Celebrity Chefs Culinary Council, we introduced last year is making a real difference.

Our Chef's Table steamers are without question the best foods we have ever had in the Nutrisystem program. Diets and review, one of the most influential media outlets in diet space, said "believe us when we say we're very impressed with Nutrisystem's Chef Table line, part of Nutrisystem's success and the expertise of the chefs involved in creating these meal is evident, and is clear that Nutrisystem have prioritized making meals as simple as possible that truly provide their customer something that's good for them and good to eat."

Last week we had the chefs gathered for a meeting and the introduction of a new member, ACafé Chef and Co-Founder, Andre Carthen, who is the culinary advisor to Janet Jackson and contributed to Janet's New York Times bestselling book TRUE YOU. The goal of these quarterly meetings is to bring fresh insights about ingredients, entrée innovation and culinary trends to the Nutrisystem menu.

Andre is a great addition to our incredible team of culinary experts that are helping us change the way people think about healthy foods. All fixed chefs are fully engaged in our development process. We're looking forward to more great-tasting frozen meals under our Chef's Table line later this year.

While our Q1 2012 financial performance may not be the dramatic and immediate turnaround than many investors and analysts expected, we are in a very different place than we were a year ago. For the first several weeks of this year, we experienced significant year-over-year gains in demand namely call buying and web traffic as consumers responded to our 2012 new product launch. Our year-over-year comp was favorable and we experienced double-digit increases in first time orders.

However, once we came up against last year's rollback price promotion, the comparable became more difficult and those growth trends flattened. In addition, the new program launch and the introduction of Janet Jackson attracted brand new consumers to Nutrisystem. This resulted in a longer sales process and lower conversion rates in the early part of the first quarter. However, with each week that passes, we are increasing our conversion rate. In fact, this was the best February since 2008 from a new customer standpoint, even stronger than 2011 when we had a full month of the rollback promotion.

By contrast, last year when our only message was low price, we only attracted previous Nutrisystem customers and new customers that were already very familiar with our offering and we could close them quickly. All of this is reinforced by how we track against call buying year-over-year. In 2011, we experienced steep declines in call volumes, but in early 2012, we saw call volumes spiked level of not being for several years and we saw continued strength in call volumes in February and expect March to follow suit.

Our plan to launch at the launch of the 40th Anniversary program played an important role in February. What's been encouraging is that even with a strong price promotion message, we continue to see strong gains year-over-year in call buying. This is a very positive sign that we believe will enable us to continue to build positive momentum leading into the second quarter.

Marketing efficiency for Q1 should improve slightly from last year, but we again will arrive there in a very different way. Last year, we had to cut marketing spend in February and March to leverage low pricing conversions as we were unable to move demand given the competitive pressure and lack of new product news. This year, we expect marketing spend to be up 30% in February and March as we anticipate continued demand in the ability for us to support that higher spend level profit. This should also position us well for the second quarter with the Easter holiday falling earlier this year.

Our plan heading into 2012 diet season was to leverage our powerful new brand ambassadors with compelling new product news. We believed our New Chef Table dinners were key and we wanted to get a high degree of trial at these high-quality unique processes. In addition, we reformulated our nutritionals with a high emphasis on protein to improve satiety and provide an additional meal occasion. We did that through the introduction of our new weigh protein shakes that are replacing a previous mid-morning snack that our customers provided on their own.

We also introduced My Daily 3, our fully integrated activity component, to introduce our customers early on to getting active and in breaking a fitness element at their own pace. Our plan was to maintain rate card pricing at acceptable level and incorporate these new elements at no additional cost to the customers. Shakes were included in every order and each new ready-to-go customer received seven free Chef Table frozen dinners on their first 28-day core auto shipped order, while our select new customers received them included in their program.

This was important because it enables us to focus on these key new elements in all of our marketing as they were included on every order. Net-net, the strong new product message and promotions were important to establish a new reason to consider Nutrisystem. The downside was to put pressure on gross margin. In the second quarter, we expect to launch a new rate card and new program options designed to increase gross margin, and David will provide more details momentarily.

On medical front, we're continuing to focus on our Nutrisystem D product which is aimed, as you know, at people living with type-2 diabetes. Results on our second clinical are final and continue to support the efficacy of our programs designed specifically for people with type 2 diabetes. These results which will be published later this year should continue to underscore the value our programs have in helping diabetics lose weight in a nutritionally sound way. We plan to focus on our diabetic product integrating new clinical claims in the second half of this year.

All of this is tremendously important as we continue to work with healthcare professionals who are first hand seeing the devastating impact obesity is having on the health of the American population. Last month, we relaunched the new Nutrisystem community site that for the first time opened up our web community to people looking to get healthy and lose weight.

The site which previously was only available to Nutrisystem program users or those who registered now has three levels of access that depending on their engagement with the site provides a wide range of content to lose forum and interactively. This is just the first step in a push this year to expand Nutrisystem online products.

We will also expand into the retail sales channel with a new line of Nutrisystem branded foods in 2012. We believe we have a solid game plan and we expect to launch nationally with a leading grocery chain in the diet aisle by mid year.

Additional channel distribution is expected and we are negotiating with other retailers in a number of categories including grocery, mass, club and drug and expect to announce additional partners later in the year with a goal of being fully national in 2013.

More earnings from our private launch will not be material to our results in 2012. We believe that we have the pieces in place to enable the retail channel to become a significant contributor to our business in 2013 and beyond.

The retail channels are very synergistic to our core direct consumer response weight loss business. And we believe it will increase our customer lifetime value because it provides us a place to sell product for weight maintenance and healthy lifestyle to customers who have achieved their weight loss goals on a Nutrisystem Success program. And it provides potential new customers who may have never tried Nutrisystem with the opportunity to sample our foods.

Most importantly, we believe it will require very little in terms of additional marketing investments because our name and brand recognition with dieter is already high due to our substantial annual advertising spend.

It's important to understand that our retail strategy makes this channel complementary to our direct business because we are selling a completely different solution with different nutritional goals in our direct and retail business. Our direct business is focused on the goal of successful weight loss to complete new program that take the guess work out of loosing weight in a nutritionally balanced healthy way.

The Nutrisystem retail brand is focused on weight management and a healthy lifestyle for everyday life through snacks and products that become part of the consumers own overall nutritional program.

The Nutrisystem brand stands for healthy effective weight loss and weight management but the delivery of that promise comes in a form of our foods. We currently serve all new locations with over a 140 products fused including breakfast, snack, lunch, dinner, desserts and now even between milk protein shakes.

We've all support of ready-to-go line of shelf-stable products as well as an ever growing line of high quality frozen options. We have unique nutritional formulas built for healthy weight loss for women, men, seniors and even for people with diabetes. This we believe positions us well as we expand further into retail, as we have multiple avenues to expand our product portfolio. We believe retail expansion with broaden our customer base and drive Nutrisystem customer lifetime value through increased retention, loyalty and purchase frequency.

As we recently announced we have hard food industry expert to lead the retail charge, Dianne Jacobs has been in the consumer packaged food industry for over 25 years and have an expensive background working for large multinational companies including Nestle and Kraft Nabisco as well as entrepreneurial consumer business companies such as Pinnacle Foods, Earthbound Farms and Integrated BioPharma. She was responsible for transitioning Gerber from a baby food company to a complete nutrition system that serves you as a family and their babies from pregnancy to pre-school and was largely responsible for the successful Gerber Graduates brand launch.

Dianne has already made a strong contribution to the launch of our retail initiatives and we're thrill to have her on board. We are also excited to welcome Michael Hagan back to our board. Mike, as so many of you know was the original architect of Nutrisystem direct-to-consumer model and I'm delighted to have him back. He was instrumental in establishing Nutrisystem as the leader in the weight loss stage. And I look forward to working with him to leverage his entrepreneural experience in category expertise.

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

David Clark

Thanks Joe. At the beginning of 2011 we indicated that we would focus on two key financial initiatives. First, we would optimize the business model and reduce cost to remain profitable in the tough competitive and difficult consumer spending environment. And second, we would maximize cash flow to continue strengthening our balance sheet while retuning cash to share holders.

While the fourth quarter ended on a weaker note then we originally expected, we look at 2011 as a whole we accomplished both of these key financial goals.

Revenues for the year were $401.3 million, a 21% reduction from 2010. From a revenue standpoint, the weak start to 2011 diet season impacted us in three ways. We dramatically lowered new customer starts than anticipated. Our on program revenues were pressured all year long. In addition, the discounting strategy we deployed to drive response and conversion impacted the topline of each new customer start to make less revenue than in previous years. And finally, this combination of lower own program revenue and price motion strategy impacted our ability to spend higher media dollars as the year progressed.

Net reactivation revenue for the year was $111 million down 9.5% from 2010 and 28% of revenue was inline with our expected range for the year. Gross margin for the year was 50.6% down from 55.9% in 2010 and primarily reflect the impact of our promotional strategies.

In anticipation of our product transition to success, we sold Nutrisystem advance inventory to big lots, which impacted gross margins by approximately 150 basis points in the fourth quarter. We continue to sell off remaining advanced inventory to avoid any risk of additional obsolescence.

Market expense totaled $111 million for the year, down 24% from 2010. And our marketing efficiency or marketing expense as a percent of sales was 27.6% for the year and compared favorably with 28.6% in 2010.

On the third quarter conference call, we forecasted $5 million of incremental spending to support Janet, in the Success launch in December. And we ended up spending closer to $7 million to support these campaigns.

General and administrative expenses were $60.8 million, down $13 million year-over-year, reflecting the cost cutting initiatives we launched in the first quarter 2011. Our cash general and administrative expense was $51.9 million, a decrease of $11.2 million or 18% as compared to 2010.

As a result, EBITDA for 2011 was $40.1 million compared to $75.8 million in 2010. Adjusted EBITDA margin was 10% versus 14.9% in 2010. And definition of adjusted EBITDA as well as reconciliation to GAAP is included in the tables of our press release.

Depreciation and amortization was $12.1 million and our non-cash employee-stock compensation was $8.9 million in 2011. Operating income from continuing operations was $19.1 million in 2011 compared to $53.2 million in 2010. Operating margins were 4.8% compared to 10.4% a year ago.

Income taxes were $6.4 million bringing 2011 net income to $12.3 million compared to $33.6 million from 2010, and earnings per diluted share was $0.43 within our original guidance for the year. Without the incremental $1.8 million of marketing spend in the fourth quarter, EPS would have been $0.47 per diluted share.

From a liquidity standpoint, on December 31, 2011, we had $57.6 million in cash, cash equivalents and marketable securities compared to $41.2 million at yearend 2010. $30 million remained outstanding under our recently renewed five year $100 million line of credit. This was the only debt on our balance sheet.

Cash flow from operations was $47.3 million for the year. Capital expenditures were $8 million. And we returned $19.3 million to shareholders in the form of dividend payments. The Board of Directors authorized the payment of quarterly dividend of $0.175 per share, payable on March 26 of 2012 to shareholders of record as of March 15, 2012. We did not repurchase any shares in the fourth quarter.

Now, we'll turn to our guidance for the first quarter and full year 2012. For the first quarter, we expect revenues and earnings to be flat-to-up slightly year-over-year, due to the following factors.

We started the year with zero customers on program, as fourth quarter 2011 new customer starts were lower than fourth quarter 2010. We estimate this to have a year-over-year negative impact of $3 million in overall revenues. Offsetting this pressure has been the projected growth in new customer starts for the quarter.

In the first quarter 2011, we had to limit media spend, because of aggressive rollback promotion to reserve profitability. This year we are in a much better position to support our 40th Anniversary promotion and expect 30% higher media spend in the months of February and March, since it is driving higher core volume.

By a way of contrast, past price promotions drove higher conversion, but not response. While our planned additional spend will impact in quarter EBITDA, it is important to note, that any additional new customer start should be instrumental and driving greater on program revenue and EBITDA throughout the balance of the year, as well as future reactivation revenue for us. This in turn will afford us the opportunity to be aggressive in our marketing spend for the reminder of the year, when we so choose.

For the full year, we are forecasting revenue growth in the mid-single digits and EBITDA growth in the low-double digits, largely driven by a direct business, as our retail package goods revenue is not expected to contribute materially to earnings in the current year, as we work through our pilot programs.

For gross margin, Joe, discussed the strategic decision we made to leverage promotional pricing with the launch of Success as well as including our high quality shakes and premium chef table dinners with our new customer starts in January. This was a promotion that was linked to our January launch.

For the balance of the quarter, we'll leverage our 40th year anniversary promotion and to continue strive strong response and higher conversion rates for us. The result will be first quarter gross margins in the 45% to 46% range.

As we transition into the second quarter and over the balance year, our promotional strategy will leverage offers and expect to return our gross margins to more traditional levels in the low 50% range. This trend should accelerate as lower margin first quarter on program customers represent a smaller percentage of revenue as the year progresses. We expect consolidated full year gross margin to be similar to last year.

Although, we expect spend to be down single digits in the first quarter, entirely due to a lower January spend. Monthly expense for the full year is expected to be similar to that of 2011. However, marketing efficiency is expected to be improved, because of new creative messaging and pricing strategies.

For general and administrative expenses, first quarter 2012 will reflect our cost cutting efforts from last year, and will be roughly flat year-over-year as we incur expenses in support of our mid-year retail launch. As a result, our earnings forecast calls for the first quarter range of a $0.05 to $0.10 loss with the full year ranging from a $0.45 to $0.55 profit.

Capital expenditures will be in the range of $7 million to $9 million, including ongoing maintenance and support of our retail launch and key growth initiatives in 2012 and beyond. Based on our projected positive cash flow from operations, we expect to further strengthen our balance sheet and build cash balances in 2012, after paying CapEx and dividends.

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

Joe Redling

Thanks, David. 2011 was a difficult year, we're grateful to have it behind us. We believe we have a solid foundation in 2012 to move forward and return to growth.

It's clear that the consumer is still very deal sensitive and we continue to use promotional strategy to enhance conversion. The consumer has responded well to our new product, our two new brand ambassadors and our 40th Anniversary special, and we are seeing conversion continue to improve.

As the year progresses, we will launch a new tiered pricing strategy that will give customers a variety of options at different price points, while still optimizing gross margins. We should also benefit from a relatively early Easter in 2012, which marked the unofficial start of the summer shape-up diet season. And we will continue to execute in multiple areas, including retail, medical and our core direct consumer weight loss business.

There's actually a great deal of excitement here at Nutrisystem. For the first time in a long time we have all the tools in our tool kit to reenergize growth, including new product news, new celebrity, and the ability to effectively use promotion to enhance response and conversion. We believe our plan will result in renewed momentum and enhanced shareholder value.

With that, we will now open the call for questions.

Question-and-Answer Session

Operator

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

Greg Badishkanian - Citigroup

Just a few questions here, first, just been pretty encouraging that you've seen some favorable momentum with new customer growth. So what are you also seeing in that like to increase marketing spend? I think you said about 30%. Is it kind of the response to the new product and to Janet or is you're seeing something else there?

Joe Redling

Yes, Greg, we are actually seeing high response to the advertising we're putting into the market. I think we've set a really strong foundation in January with new product news and Janet, and now with the 40th Anniversary. It's all culminating to drive pretty high response.

So we now have the ability to invest higher marketing dollars than we did a year ago, pretty aggressively 30% up, and that's driving strong call volume and traffic which is allowing us to convert and get additional profitable customers in the door. So we weren't in that position last year. So it's nice to have the flexibility to open up the marketing spend this year.

Greg Badishkanian - Citigroup

You spent the money upfront and you drive the benefit over the life of the customers. It's really second quarters when you're start seeing the benefit of that?

Joe Redling

Correct. Obviously customers plan to stay as averaging three months. So typically when you're bringing new customers on from the mid-quarter out, the profitability of those customers are not recognized until future quarters. As you know, you also get the benefit as you move out 12 months on the react side as well.

So we have the strategic choice to optimize the bottomlining order or invest for a stronger year. And obviously when you see this kind of demand, you really need to invest for the full year growth of the business and get new customers in the door. So it's great to have that option this year.

Greg Badishkanian - Citigroup

Could you remind me in terms of what promotions you had last year and this year? I think some of the promotions that you had recently were 40% than the recent months like 50% off. Can you just help me understand what the differences are in the promotions this year versus last year?

Joe Redling

Last year, we shifted in the second, third week of January to roll back what to us a complete shift of promotional messaging, lowest prices in 2003. What we did is we did have a three-day sale early on kind of mid-January this year when we had such demand early and we were really challenged with our conversion. We had a lot of people kicking the tires, finding out about the new product. You've seen Janet responding. So we had a three-day sale to get them back in at 50% off.

We had reasonably planned February as our anniversary promotion. That was geared up and ready to go Feb 1 and what was interesting is once we kicked off the anniversary promotion, we started seeing conversion really come back into the level that we were expecting.

So we got promotion and awareness of the new product, Janet and Terry, and then the anniversary promotion allowed us to really move that conversion up. But it also continued to drive the demand side, which was a real big change from last year. When we launched rollback last year, we really didn't see any improvement in call volume. We saw a pretty dramatic improvement in conversion rates, but it wasn't on the topline of the demand side.

We believe it's because we have strong new product news and new celebrities and a lot of new messages in the market with our food and our products that the anniversary promotion is providing a catalyst and not only to drive demand, but help us on the conversion side as well.

Greg Badishkanian - Citigroup

Just finally on the retail side, what do you think the opportunities for retail and then also maybe just to address potential cannibalization? I know the last time you had a retail promotion, it was one month's worth of food is kind of similar to your program and it was too high of a price point. So what are the price points now for these products?

Joe Redling

Sure. This is very different than anything we've done before. This is a much more traditional retail launch. We'll have a dozen SKUs of actual products at retail. So we will be in the diet isle with bar, shakes and various product lines. We've secured distribution with nation's largest grocery chain. So this is very different than anything we've done before. We feel very good about this business being complementary to the direct business.

The formulations of these products are really about weight maintenance, not specifically accelerated weight loss. So we're competing in a diet isle with the major brands in that isle. And you'll see, as I said, at least a dozen SKUs going into the marketplace by mid-year this year.

So we're working with one retailer, one grocery chain specifically to get the pilot out to really optimize merchandizing, but obviously we're talking to all of the big players that we expect to also be interested in carrying our products toward the end of the year and into 2013.

So we see this, Greg, as really a chance. We have a need for our current customers to actually be able to continue to keep Nutrisystem in their lives. This is a convenient way for them to buy products they're familiar with to keep the weight off once they move away to our direct program.

But we also believe this is really going to introduce a lot of new customers to the Nutrisystem brand and it's going to help bolster awareness of the brand and it's also going to get a lot of trials. And we believe these people are going to be incremental. These consumers are incremental. These are more DIY dieters. So we think it's a very complementary program for us and we think it's very strategic.

So we think this year is very important to get this right and we'll be working with select retailers to do this in 2012. And we also need to set up all the information systems and management systems to be able to manage this program through our supply chain, obviously supporting retail.

It's a very different undertaking in the supply chain than supporting the direct business. We think it's really important to get that now and then we'll do that in the second half of this year to get us ready for a larger scale business in 2013.

Greg Badishkanian - Citigroup

Then I guess it's maybe a little bit too early for you to share your own internal projections on how big this opportunity could be for you?

Joe Redling

Yes. I think we want to get through this year with a select group of partners. I think we have a lot more news on that as we get into the third and fourth quarter.

Operator

I will take your next question from Gary Albanese with Auriga.

Gary Albanese - Auriga

Could you elaborate on what you're seeing relative to the core product versus the select percentages, are you seeing the demand on the select product that you anticipated?

Joe Redling

Gary, what we did is we introduced some of the new frozen meals with every order. So everything the customer is experiencing, the frozen food products, but we're typically running in the high 20% range on the select side, which is kind of where we expected it to be. And we think that it will move up over the time. I mean the way we generate that mix is pricing. I mean, we have a lot of leverage. The closer we bring the select pricing into the ready-to-go, obviously, the more consumers and customers we push there.

When you'll see it as we enter the second quarter is the new rate card that we'll be putting in the marketplace which kind of combines the best of all worlds. We know we need to have clearly a low price entry for customers. We're still seeing a lot of deals searching going on as witnessed by the 40th Anniversary and that has spurred new customers throughout in February and as we're moving into March.

We think it's really important to have a lower cost of lower price point entry for new customers but the key for us is to make sure the cost in that product are acceptable from the gross margin side. So we will be leveraging multiple options and programs for customers as we get into the second quarter when we finish the 40th Anniversary. So we'll be able to manage mix for gross margins on the frozen side as well as at the ready-to-go price points.

Gary Albanese - Auriga

Are you finding customers are wearing base like an amount that they're willing to spend or they constantly looking for the cheapest offering?

Joe Redling

I think it's a great question, Gary. I think what we're seeing is people wants to deal. Even if you give a low price point, if they don't think it's a strong promotional opportunity for them, they may wait you out. We saw this in January. Our customers that were interested were asking about deals that's why we some of those three-ay sale and we were very thankful that we have that anniversary program ready-to-go in February, because we knew that was coming.

So we are seeing an interesting deal. Making sure people are getting a good price for what they are buying. And so we are kind of blending together both to focused on the promotional and deal side. But we have to be able to do that while keeping gross margins in mind, and that's what you'll see happening in second quarter and beyond.

Gary Albanese - Auriga

Are you able to give again an average price point that you're seeing in the first quarter?

Joe Redling

Our ASP is pretty similar to last year, a little bit higher. I think than last year. Again, even with the promotional discounts, one of the things we are seeing that's very encouraging is breath-record levels on order delivery percentages. I mean we're in the high 90%, 96% range in order of delivery which compared to last year was in the high 80. So we might be seeing kind of ASP flattened out a little bit to last year. We're seeing a lot more order of deliveries, so that's helping us and an improvement in second order take rate.

Gary Albanese - Auriga

I was going to ask you about that. I know it's early, but can you quantify the second month take rate yet or is it just still too early?

Joe Redling

Yes. We're seeing about 80%. So it's up over last year. We're constantly moving these numbers up. We thought we were in the high 80% range, 90% range in order of deliver, we didn't feel there was a lot of room there, but we are attracting in the mid-95%, mid-96% this year. And I think that because our ASP is in a range where people have obviously all of our promotions are targeting the order of delivery offer. So to get these great prices you have to order delivery and we're seeing strong second month take rate. So we're going to see a higher length of stay that's going to help us a little bit offset some of these lower prices.

Gary Albanese - Auriga

And just lastly, with the shakes that you're including with each offer, is that sort of a lead into in the retail effort that you will be selling shakes in store?

Joe Redling

I wouldn't call it a lead. I mean the shakes we will be selling in stores, it's a very different formulations. They are not, obviously the shakes we have in our weight loss protein direct or powdered shake, we'll actually we're going with complete liquid shakes at retail once we are through the pilots. So what we try to do is really formulate our product a little bit differently on the retail side and really think about more healthy snacking and weight management than accelerated weight loss.

Operator

We'll take our next question from Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro - Janney Capital Markets

So if I'm look at your mid-single digit revenue growth for the year, how much of that is retail initiatives?

David Clark

Mitch, did you said retail?

Mitch Pinheiro - Janney Capital Markets

Yes.

David Clark

It's less than 5% of our overall revenue base in 2012 in our numbers.

Mitch Pinheiro - Janney Capital Markets

So when we think about sort of modeling your core business, it should be flat up slightly on a revenue, is that right?

Joe Redling

Yes.

Mitch Pinheiro - Janney Capital Markets

And then in terms of the margin or normalized margin for that business, how should we think about that?

David Clark

Normalized margin for the retail business?

Mitch Pinheiro - Janney Capital Markets

Yes. I'm talking about your new retail initiative.

Joe Redling

I think early on, obviously we don't expect any bottomline contribution this year. Obviously to get that business started there is a lot of upfront cost in that business. We were expecting it to start contributing to the topline in 2013 but we're expecting double digit EBITDA margin in that business.

Mitch Pinheiro - Janney Capital Markets

And so this year, when we think about less than 5% of your overall sort of revenue mix, does that include slotting expenses and things like that?

Joe Redling

Yes, that's all in.

Mitch Pinheiro - Janney Capital Markets

Is our gross margin in the retail business similar to your core direct business?

Joe Redling

No, it'd be lower.

Mitch Pinheiro - Janney Capital Markets

And when you look at, how is the board thinking about the dividend because at $0.70 rate obviously you're paying out more than the earnings, I realize you're spend on CapEx about $5 million or so less than your depreciation. So there is some of that, but it still looks like it comes a touch shy of the $19 million to pay out. How should we think about it, how should board think about it.

David Clark

This is a fairly unique business in terms of the amount of cash that we generate relative to our GAAP profitability. So board just approved the dividend on management's recommendation and as long as we have the ability to see that we're generating cash and we're going to contribute cash to balance sheet. It seems like it's a fairly sound decision to keep paying the dividend.

Mitch Pinheiro - Janney Capital Markets

So at some point you have to start earning a little more than the $0.45 to $0.55?

David Clark

Yes.

Mitch Pinheiro - Janney Capital Markets

So let's go for this year, the dividend rate looks solid?

Joe Redling

We wanted to earn more $0.45 to $0.55 at some point. But the dividend decision is a cash based decision.

David Clark

Yes, I think at that levels makes the dividend, it's relatively safe. I would say, last year obviously $0.43 and $40 million in EBITDA. So we're predicting double digit growth over that. So we're going to adding cash to the balance sheet. We expect and what we're hoping is that with the demand we're seeing now we can optimize that and continue to add to growth with that sort of goal here, that we are seeing something that we haven't seen in a while.

So we're encouraged to have a little bit more room both on the marketing side and the investment side to do things in the market and be more aggressive versus last year. We didn't had the topline demand so you're really half of your model in the direct business was really challenged. So here we're really optimizing the demand side. Now we're seeing good core volume. Obviously, we have lot of plans for Q2.

We've just started the Janet story. This was a very different approach for us, if you saw any of our advertising. It was really a journey approach with Janet. She got on the program. She had some early success, it was working for her. We did not have a bigger deal with Janet because she had just recently gone on the program in the fall. And we think we have additional news and compelling marketing ahead of us. So we're hoping that the opportunity that we're seeing now actually strength us as we move forward.

Mitch Pinheiro - Janney Capital Markets

As part of with your guidance, are you factoring in a continued sluggish consumer environment continue deal searching at sort of the current level or how conservative would you consider your forecast relative to the unpredictable consumer?

Joe Redling

We have not baked in any economic improvement. Obviously we've been through this enough for the last three or four years to know that the consumer is pretty fickle. Obviously, it was encouraging to see consumer confidence jump 70% in February that was great. And we haven't seen a number like that for some time. So if that hold that that's a benefit but we're looking at the current response we're seeing today. And we're forecasting out on those trends and that's how we get to that guidance. We don't have dramatic improvements in those trends baked into the plan.

Mitch Pinheiro - Janney Capital Markets

And just one last question, relative to pretty big election year, how do media rates look? How are you thinking about that and once again relative to your guidance, how would that be affecting your media spend?

Joe Redling

We are pretty fortunate now in that respect. We've been through this before obviously. The majority of that spend is typically local. It doesn't affect us. There are spikes of periods for election and softer periods for us October, November. We typically have the ability to buy around those spikes. We haven't seen any challenges the last time we've gone through elections. And our forecasting now for election spend, we feel we are in a pretty good position to buy around it.

Mitch Pinheiro - Janney Capital Markets

For 2012, what's the year-over-year sort of growth rate in media rate?

Joe Redling

I mean it depends on the period, but we have seen 10%, 15% media inflation, but we have been able to keep our CPM levels right in check. So we have been able to buy around it depending on the date part. The great thing about launching the way we did, we did have Janet, we had Murray, we had Terry, we had Dan. So we had a lot of different pieces that creative that we could help leverage by network. So it gave us a lot more flexibility. So even though we are seeing some price inflation, as I said before on some of these calls, it's 10% to 15% inflation in media, something we really can manage pretty well. And that's kind of what we've been seeing so far this year.

Operator

(Operator Instructions) Our next question comes from Anand Vankawala with Avondale Partners.

Anand Vankawala - Avondale Partners

Starting off a few housekeeping things. What was new customer growth in the fourth quarter?

David Clark

We haven't typically provided the specifics on new customer growth for some time.

Anand Vankawala - Avondale Partners

And then with perspective to gross margin side, even with the 150 basis points drag from the big lots I believe you said. It seems that the gross margins still came in weaker than I think most people are expecting. So can you provide a little bit of color what was weighing on that and how in the continued promotional environment we're going to see gross margins pick up in '12?

David Clark

The fourth quarter was affected by big loss and the introduction of the shakes when we launched Success in the last few couple of weeks of December. So that probably contributed to some of it. What you're going to see is we are moving different pricing schemes in the second quarter to basically rebuild the gross margin back up to traditional levels of low 50% consolidated.

We also in October got very aggressive on even additional discounting, because our media levels were ineffective. So really it almost peaked the year's kind of theme where we were out discounting most of the year. When you get into an October where we had a difficult time putting media in the market, we actually added on additional discount components to existing promotions to try to close new customers. So it put a little bit of pressure on there in the early part of the quarter as well.

Anand Vankawala - Avondale Partners

And then I guess going into Q1, can you give us any kind of flavor on what you expect the revenue growth to be like in Q1?

David Clark

Yes, I think we said in the script that we're expecting revenues to be pretty flat year-over-year in Q1.

Anand Vankawala - Avondale Partners

And then I guess the last question is relating to the retail side of it. What kind of incremental cost on the SG&A should we expect in the second half while you launch the pilot, and then later in the Q4, I guess as we really expect the preparation for the rollout in '13.

Joe Redling

As I said, we expect the aggregate dollars of G&A spending to be relatively flat year-over-year. So even though we did a fairly aggressive G&A reduction program in the first quarter of last year, you'll see that show up in Q1, but then we're going to probably build another $2 million or so into the remaining quarters of the year to support the retail initiatives.

Operator

We'll take our next question from Kurt Frederick with Wedbush Securities.

Kurt Frederick - Wedbush Securities

I am looking at $0.43 in 2011, $0.45 to $0.55 in 2012 on mid-single digit sales growth. And then you're launching the retail initiative as well and you don't have a $7 million incremental investment you had in Q4. So I'm just wondering why EPS wouldn't be higher next year or this year 2012?

David Clark

You're talking about the fourth quarter investment spend?

Kurt Frederick - Wedbush Securities

If you have sales growth in 2012, why you don't have that $7 million spend? Why wouldn't your earnings be higher?

David Clark

We're basically having to rebuild gross margins from the low in the first quarter of 45%, 46%. And the first quarter being our highest revenue quarter, it's going to take a need to get through the rest of the year to basically get that gross margin back to being flat year-over-year. And also, we are building in basically flat marketing spend year-over-year. So we are actually anticipating that we may not spend $7 million, but we're going to spend probably $1 million at the end of 2012 to help us launch for 2013.

Kurt Frederick - Wedbush Securities

And then the other question I had was just on your strategy going forward as far as the promotions and that. 2011, you had a problem, right, where you promoted earlier in the year and then through the year people didn't really pay attention by the end of the year. You started promoting heavily again in beginning of 2012. So how does that work for the back half of the year?

Joe Redling

As I said earlier, we are seeing a very different response for the 40th anniversary. The 40th anniversary actually reinforces the sustainability of the brand. We've been around for 40 years. Last year, we had no new product news. We had no new celebrities. It was really straight price. This year we're seeing a combination of strong interest in the product, actually stronger interest than we had last year and an interest in deals.

So when you combine those, it gives you more flexibility. We don't plan to keep discounting for the entire year. We do believe that that got old as we got through the second quarter last year. And that's why strategically what you'll see in the second quarter is that the introduction of a new promotional rate card which will allow us to have different messaging out there. And we are also looking at different types of promotions that aren't price-driven.

So once we create the rate card that we believe gets people a fare price entry point at different levels, whether you want frozen or whether you want our stripped down product or a product that's more inclusive of all the different options and services we provide, we also think there is opportunity to add on other promotional elements that are not price-based that we believe could be pretty exciting. And so we are taking a different approach to looking at how we look at premium items and relevant things to promotion that we can move away from price. So our plan is to not constantly be out there with deep discounts once we get into this second quarter.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to Nutrisystem management for any additional closing remarks.

Joe Redling

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

Operator

That concludes today's conference. Thank you for your participation.

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