Nutrisystem's CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 1.12 | About: Nutrisystem Inc (NTRI)

Nutrisystem, Inc. (NASDAQ:NTRI)

Q1 2012 Earnings Call

May 1, 2012 4:30 pm ET

Executives

Joseph Crivelli - IR

Joe Redling - President and CEO

David Clark - CFO

Mike Hagan - Chairman

Mike Amburgey - CMO

Analysts

Greg Badishkanian - Citi

Mitch Pinheiro - Janney Capital Markets

Gary Albanese - Auriga

Frank Camma - Sidoti

Anand Vankawala - Avondale Partners

Kurt Frederick - Wedbush Securities

Operator

Good day, everyone, and welcome to the Nutrisystem first quarter 2012 earnings conference call. At this time, it is my pleasure to turn the call over to Mr. Joe Crivelli.

Joe Crivelli

Thank you. Good afternoon, everyone, and thanks you for joining us to discuss Nutrisystem's first quarter 2012 financial results. With the recently announced changes, we've added some additional people to join us on the call today. So in addition to Joe Redling, President and Chief Executive Officer; and David Clark, Chief Financial Officer; we're joined by Mike Hagan, Chairman of the Board of Directors; and Mike Amburgey, Chief Marketing 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 May 1, 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 Mike Hagan, Chairman of Nutrisystem's Board of Directors.

Mike Hagan

Thanks Joe, and thanks everyone for joining us. I appreciate the opportunity to say hello to the investment community and introduce myself, as it's been a while since I served in its capacity for Nutrisystem.

My main message to you today is that the Board is behind the company in its current strategic plan. Our company has been navigating through some challenging time, I believe and to my other fellow board members that we have a solid foundation in place to recapture positive momentum.

In particular, I'm excited about our first two launch into the retail channel. Joe will provide more detail on our retail plan in a moment that I've been impressed by the thoughtful process and planning that has led us to where we are today. This is simply one of the biggest growth opportunities we've attacked in our current incarnation. And one that we believe will significantly enhance revenues and earnings in the coming years.

We're disappointed to see Joe Redling leave the company. Unfortunately, Joe has added considerable debt to our management team over the past year. And we are well-positioned in staff to continue to execute on our current operating plan.

We are currently in the process of engaging a search front to identify our next company leader and we'll keep you informed of our progress. Joe continues to lead the day-to-day operations. And I look forward to once again working with Joe over the next several months to ensure a smooth transition and keep it focused on our critical growth initiative.

With the eventual resignation of Joe Redling from the Board as well as the pending departures of Board members, Ted Leonsis and Laura Lang, we are also working with a national search front to search an additional candidate for our Board of Directors.

In the meantime, I've taken a very active role on the company as Chairman. Together with my fellow Board members and the management team, we are committed to getting Nutrisystem business back on the growth trajectory and adding shareholder value. Nutrisystem has a strong balance sheet and the Board of Directors continues to remain focused on returning value to shareholders in the form of quarterly dividend.

With that, I'll turn the call over to Joe Redling.

Joe Redling

Thanks Mike. It's great to have you back. Good afternoon and thank you joining us on today's conference call. First quarter results were below our original forecast, but we believe that this is mainly a timing issue. And as David will discuss in a moment, we are reaffirming our full year guidance for both revenues and earnings.

During the year we are going to make investments, we believe will be accretive for the full year earnings, even if that result in a short-term hit for the quarter. New customer starts are the key driver of revenue growth and when our metrics indicate, we have the ability to lean into our immediate spend for extended programs that are producing results, we're going to do that for the benefit of the overall year.

Two examples that this happened in Q1. In Q1 we converted our Costco program from program cards to gift cards. This was a new element of our offering through the Costco channel this year. We tested and prepared sales velocity and profitability of shaping from a prepaid full program card purchase to a simple $100 gift card program. And the gift card program is the clear winner on all measures.

This change shifted about $2 million of revenue from March into Q2, related to cards purchased, but not redeemed. This is a direct result of different redemption patterns of gift cards compared to program cards.

In addition, the lower than anticipated Q1 earnings was directly attributable to our decision to aggressively invest in marketing to drive improved Q2 and full year topline revenue and earnings. While first quarter marketing spend was down year-over-year, the month-by-month spend told a different story.

As many of you know, marketing efficiency or marketing expense as a percent of sale, drive our decision making about when to ramp up spend and when to throw it back. In January, marketing spend was down considerably due to soft consumer response and conversion, was negatively impacted marketing efficiency.

This flip in February and March as we are able to lean into stronger response and conversion rate and marketing spend was up significantly. In particular, we kept the peddle down on marketing spend in the latter part of March and build on program revenue for Q2.

Our April result indicate that that was the right decision as that investment is expected to fully accretive to earnings on a full year basis. In fact, we're seeing the strongest new customer trend that we have seen in many years with new customers increasing over 50% of that last year quarter to date.

This is the strongest April in new customer start that we have had since 2008. April is now the third consecutive month, we've been able to aggressively increase our investment in market spends.

In fact, directly spend in April is up 50% year-over-year. So we're encouraged that consumer response conversion appears to be sustainable and marketing efficiencies running at very favorable level.

As we witnessed in Q1, the increase marketing spends creates a slight drag on quarter earnings but drives strong topline revenue growth and the increases in marketing spend, our expected to be accretive to earnings on a full year basis. Our provided Q2 EPS guidance has already factored in the increases in marketing spend.

While the direct business continues to build momentum, we are also excited about our expansion into the retail channel this quarter. As we have shared on previous calls, we have been preparing for our retail launch for sometime.

We have been very careful in designing a retail strategy that leads back with the complementary to the direct business. We expect to shortly announce, the launch of Nutrisystem Every Day! Our new line in Nutrisystem branded products specifically formulated for the retail channel.

Our initial launch includes 12 individuals SKUs of healthy snack, shakes and breakfast items. We're launching this full line exclusively the Kroger, the largest traditional grocery store chain in the United States.

Nutrisystem Every Day! will be distributed throughout the corporate chain of 2,200 stores beginning later this month. We are very excited about launching with such a great partner that is embraced our new line and understands the potential of the Nutrisystem brand that we tell.

We received great feedback and interest from many additional retail partners and we expect that the announcing additional partnerships agreements later this year.

While the revenue contribution is expected to be in the low single-digit in 2012 with the breakeven contribution of profitability, we do believe that new channel has great potential to drive future growth.

Now I will hand the call off to Mike Amburgey, our Chief Marketing Officer who can provide more details on our current trends and upcoming plans.

Mike Amburgey

Thanks Joe. I'd like to provide some background on upcoming major initiatives including the rollout of our new pricing strategy, the continued optimization of Nutrisystem success and an update on Nutrisystem D.

We talked about the launch of our new pricing strategy on last call. With the strong continued momentum we've seen since the start of Summer Shape-Up season, we've made the decision to continue to play the healthy end rather than switch to the new pricing while things were still going strong.

We now expect to launch the new rate later this month. The new pricing strategy is designed to help Nutrisystem to continue to give greater choice and value to our customers based on what they desire while enabling the company to drive our gross margins back to historical levels over the remaining quarters of 2012.

The new pricing plan will be based on three tiers, all of which have the cost of good configurations that are designed to generate improved gross margins. First, our best price tier which provides consumers with a low entry point of price for a basic favorite kit with 28 days of ready-to-go food.

Second, our best value tier which provides 28 days of ready-to-go food while offering consumers the ability to customize their food selections, receive one month of daily protein shakes and direct unlimited phone access to trained weight loss counselors. The best value price tear will provide additional consumer value at a higher price point.

Third, our best program and premium tier, that provides everything in the middle tier plus frozen meals including our top rated new Chef's Table, 28-days of shakes and everywhere and priority processing of each order providing the most comprehensive and all-inclusive options at our top priced tier.

The new rate card was extensively tested with consumers and we believe we're in good shape to continue the momentum that was established in our very strong April. Each price tier represents a significant customer savings versus list price while allowing us to manage mix to optimize gross margins.

Now turning to key drivers of our success in April, the early Easter has been beneficial but we were also seeing great response for our new marketing campaign. The new commercials featuring Janet Jackson, have been a tremendous success and are driving terrific consumer response and conversion from our public relation standpoint, the new reveal enabled us to do another push with Janet that has gotten us coverage in media outlets such as CNN, the Today Show, Good Morning America, Entertainment Tonight, USA Today and many others.

In the meantime, we continue to have additional commercials from the same shoot, kid up and ready-to-go when we launched the new rate card as well as an arsenal of commercials with Marie Osmond, Terry Bradshaw, Dan Marino and a range of other Nutrisystem customers who have achieved weight loss success. All this created will be unveiled in May when we launch our new pricing.

And speaking of our brand ambassador program, a true bright spots for us in Q1 of this year was our men's program. In January, we were proud to introduce our new men's ambassador, Terry Bradshaw. And the campaign within Dan Marino, a new campaign for men was launch with better success product and we saw immediate attraction.

We had a largest men's new customer quarter since 2008. Interestingly, in addition to this impressive performance for men's program, behind the television advertising, featuring, Terry Bradshaw, we were pleased to know that it drove a lot appeal and activation levels with 50% of first time order from that creative actually coming from women.

Moreover, our men's advertising drove a 36% increase in the number of multiple household orders versus our women's advertising. This is good news, because multiple household orders is through the longer we can say the individual dieters.

We experience efficiency levels behind our men's campaign comparable to our women's expense performance. This is not typical for us considering the relative sizes of the two markets.

A successful men campaign has enabled us to profitably expand the program versus prior year. And we are continuing to invest in our men's media going forward, encouraged by the increased velocity of this critical segment for our business.

Now, turning to the diabetes business. Our second clinical study on Nutrisystem D was concluded late last year. And it showed impressive results, reinforcing the efficacy of our program for people with type-2 diabetes.

The additional clinical results meaning, we are now able to make the claims that the Nutrisystem D program in combination with weekly conference sessions is clinically proven to deliver effective weight loss and men's blood glucose levels for people with type-2 diabetes, thus providing us with additional opportunities to expand our efforts in this category.

We still believe this is a significant opportunity for Nutrisystem and there are currently more than 100 million diabetics and pre-diabetics in the United States, who along with their doctors, payers and other healthcare professionals are looking for answers to fruition that actually work. And we are very proud of our partnership with the American Diabetes Association, and are looking forward to expand that partnership in coming months.

Given all that, we believe we will be extremely well-positioned to meet the guiding needs of people with diabetes and help them make real changes and with healthier lives. We'll continue to invest in building this business in the month ahead.

David Clark, our Chief Financial Officer, will now talk about the financials in more detail. David?

David Clark

Thanks Mike. Just a few highlights on the first quarter financial results, before we open the call up for Q&A. Revenues for the quarter were $128.5 million, down 3.2% from the first quarter of 2011. Net reactivation revenue represented 25% of our total revenue within our expected norms.

Gross margin for the quarter was 45.1% compared to 51.9% in last year's first quarter and was in line with our expectations. The major product investment in Q1 by including Chef Table steamers in our January promotion with protein shakes in all over for the new success program and shakers with all our new customer starts.

We wanted to get those products out of the marketplace to enhance product and create excitement for the new program. We believe that the strategy will work as we are getting very favorable reviews of our food from influential diet reduce sites. Now, the initial launch is behind us, we expected a new rate card that Mike Amburgey mentioned will help us recapture gross margin in the coming quarters.

In addition, the items that we've noted in Q1, Chef Table steamers, shakes and shakers, we're now in position for up sell and support higher program pricing and margin expansion. Our forecasts for full year gross margin were possibly 50%, as we see gross margin continually decline in the subsequent months, as the mix of customers on the new tiered pricing continues to grow.

Market expense totaled at $5.5 million for the quarter, down 7.6% from the first quarter of 2011. Marketing efficiency or marketing expense as a percent of sales was 35.4% for the quarter and compared favorably to 37.1% in 2011.

As Joe noted, the monthly pattern spending was down for January year-over-year followed by a significant year-over-year increases in February and March, as we manage spend relative to customer response and conversion to drive to our target marketing efficiency.

General and administrative expenses were $16.5 million, down $5.3 million from last year's first quarter, reflecting the cost cutting initiatives we launched in the first quarter of 2011. Note, that the first quarter of 2011 G&A line included approximately $2.7 million of one-time expenses related to the cost cutting efforts for thing such as severance and the like. Cash G&A expense was $14.8 million, a decrease of $3.8 million or 20.3% compared to 2011.

EBITDA loss for the first quarter of 2012 was $2.2 million compared to positive EBITDA of $1.1 million in the first quarter of 2011. The same factors drove EBITDA that we talked about relative to gross margins and marketing spend. But we anticipate the investments we've made in the first quarter will be accretive for the full year.

A definition of our adjusted EBITDA as well as reconciliation to GAAP is included in the tables within our press release, is available on IR website at www.nutrisystem.com. Depreciation and amortization was $2.8 million and our non-cash employee stock compensation was $1.8 million in the first quarter of 2012.

The operating loss was $6.8 million compared to a loss $5.2 million last year. Income tax benefit was $2.6 million, bringing the first quarter net loss to $4.5 million compared to $3.4 million loss last year. Loss per diluted share was $0.16, while this is outside of our forecasted range for the first quarter of $0.05 to $0.10. The majority of this gap was due to higher marketing spend in March.

I will speak our second quarter guidance in just a moment. From liquidity standpoint on March 31, 2011, we had $66.2 million of cash, cash equivalents and marketable securities compared to $57.6 million at end of 2011. $30 million remained outstanding under our five-year $100 million line of credit. And this is the only debt on our balance sheet.

Cash flow from operations was $15.1 million for the quarter. Capital expenditures were $1.3 million. And we returned $4.9 million to shareholders in the form of dividend payments. Our Board of Directors authorized payment of a quarterly dividend of $0.175 per share, payable May 21, 2012, to shareholders' of record as of May 11, 2012. We did not repurchase any shares in the first quarter.

Now, I'll turn to our guidance for the second quarter and full year 2012. As noted earlier on the call, in the first quarter we made investments to build momentum for the summer shape-up season. These steps are paying off. New customer starts are up over 50% in the month of April, complemented by the Q1 deferred revenue contribution from our Costco gift program.

In addition, we have higher expectations for the launch of our new rate card, strongly supported by new creative from Janet Jackson and our portfolio of celebrities, which were launched later this month.

As noted in our press release, we will incur approximately $7.2 million of one-time charges in the second quarter. These charges are related to the upcoming management transition as well as various related legal and professional charges. All told, we're expecting strong double-digit revenue growth in the second quarter and earnings per share of $0.30 to $0.35, before those one-time charges.

Despite lower than expected first quarter results, we are reaffirming our annual guidance, mid-single digit revenue growth and earnings per share of $0.45 to $0.55, before the one-time charges. We continue to expect our capital expenditures to be in the range of $7.9 million for the year, including ongoing maintenance and the support of both our retail launch and key growth initiatives in 2012 and beyond.

As we plan on rolling out the retail, our supply chain has speed up again our national rollout across multiple retailers. The impact to our inventory levels will be quite manageable as we leverage real-time sales data. And we're closely with our network of suppliers optimize product shipment to the retailers we seek across the country. Even after incurring the one-time charges and paying capital expenditure and dividends, we still expect the full cash back on the balance sheet this year.

We will now take any questions you may have. Operator, you can open the call up for questions.

Question-and-Answer Session

Operator

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

Greg Badishkanian - Citi

Just a few quick questions, first one is, nice new customer growth 50% in April. And I'm just wondering what's I think the biggest driver of that and the biggest driver of kind of the marketing efficiencies that you've been seeing lately?

Joe Redling

I think we've been running the 40th anniversary promotions since February. Obviously, we extended that into April. But the trend of our new customer starts significantly improved as we hit the April period. So I would think the big driver that I think with the new creative in a combination of the promotion and early Easter and Janet. But I'll let Mike expand on that.

Mike Amburgey

I agree, Joe. The new creative featuring Janet Jackson was a prime driver of that. The reveal that we discussed and the combination of that along with significant PR, literally the day right after Easter, which was early in April really kicked us off strongly, and we continue that with new men's creative featuring Terry Bradshaw and a combination of those things with a well articulated offer really grow with the neighbor.

Greg Badishkanian - Citi

And then with respect to the retail launch, I guess you'll have some additional announcements potentially later in the year. How quickly could you actually get product into stores that other channels and retail outlets besides just grows or is that late this year or would it be 2013?

Joe Redling

Yes. I think it's late this year. We are ready to move now. The supply chain as David mentioned has done a phenomenal job of expanding our capability to support reach out very different inventory model, obviously than the direct business that we look at sales every minute of the day. We have to really support our retail partners here.

So we are prepared to move as quickly as the opportunities present themselves. Obviously, the big retailers have loading periods that we have do abide by. So we expect that the additional retailers, if we moved into the additional retailer, it would probably be towards the end of this year.

Greg Badishkanian - Citi

And for, Mike Hagan, just I think it's disappointing to see Joe leave, especially as we have him, potential turnaround here some new growth opportunities. But you've turned the company around initially years back and did a great job. I'm wondering if that's something you'd be considering as coming back as the CEO?

Mike Hagan

You know, Greg, I've got the day job. But I don't plan to follow Joe. But I will be spending quite a bit of time, as I have over the last couple of months. And working with the Board and making sure that it's a smooth transition. And somebody that believed in the growth initiatives and at the same time has a healthy appreciation for the direct business. So it's going to be a thoughtful transition and we do think that it's a great opportunity for a world-class leader.

Operator

And now we'll hear from Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro - Janney Capital Markets

So, Joe, a couple of questions here. First, could you give sort of color on the new customer starts in this current quarter, in the quarter you just released?

Joe Redling

Well, in the first quarter Mitch or second quarter.

Mitch Pinheiro - Janney Capital Markets

First quarter?

Joe Redling

In new customer start we had a strong February. We had a very strong February. March those trends continued. The year-over-year comp was not strong, because we ended a big promotion last year in March, Mitch, that's when we stopped the rollback promotion that was the end of March. So we moved a lot business into March last year, but the trends continued.

So we were softer than we anticipated in January, but we launched the 40th anniversary, where with the brand new customers starts back up to grow. So over the two months of February and March, we were up high-single digit.

Mitch Pinheiro - Janney Capital Markets

But down for the full quarter?

Joe Redling

Flat.

Mitch Pinheiro - Janney Capital Markets

And have that average selling prices year-over-year?

David Clark

This year, 254 this year versus 263 last year, and that's reflective of 40% of program. And obviously, once we start to manage the rate mix on the three tiered pricing, we'll expect that to go up.

Mitch Pinheiro - Janney Capital Markets

I mean it's a big jump to go from the mid-40s in gross margin to reach your goal for the full year of in the 50s. So obviously, it needs to start to move higher. What's the biggest risk to getting to this to the higher gross margin with the new rate card?

Joe Redling

Well, I mean the rate card is fixed. So what we've been able to do is to reconfigure the cost component of each of those price tiers. So even if people are choosing our entry level price point, as Mike pointed out in that Tier-1. We're in the mid-50% gross margin on that price point.

And so really what we have to balance is the growth margin is fixed, but we also have to measure the response. Right now we're getting great response. We have a low-priced offering in the marketplace across all of our tiers. And that's driving a lot of response.

We think it's primarily, because of the new creative. So we've kind of fixed the gross margin as of percentage of the business, as we look at those tiers. Now you have to manage the mix. So we're going to be pushing people to that second tier and that high tier through all of our direct marketing capabilities, online and in the call center. So we can push them up. We think we have even more opportunity.

So the key thing for us is to make sure that this new rate card also gives strong opportunities on the demand and response side. And our forecast, we also have promotional borrowers available to us, despite that. But we can catch these price points, move them up or down as needed, we still have a lot of flexibility.

I wouldn't call it risk in the gross margin. I think the gross margin is manageable. I think what we have to manage is and how we're managing gross margin versus response. And I think our marketing team has a pretty good and/or one had managed that going forward.

Mitch Pinheiro - Janney Capital Markets

Have you begun to ship to Kroger, yet?

Joe Redling

Yes.

Mitch Pinheiro - Janney Capital Markets

So there is a little bit of a channel fill positive, as you fill the show, but then as we take away on the other side. How will that impact the second quarter?

David Clark

From a topline perspective?

Mitch Pinheiro - Janney Capital Markets

Yes, that's actually top-end, and if there is any cost associated, whether couponing and other type of shelf investment?

Mike Hagen

Yes. It's not much the way revenue is as we've indicated. For the full year, we don't have retail on our plants raising more than 5% of revenue. So if it is a small component at 5%, we first channel fill this quarter. And there'll be a slight drag on gross margin. We've embedded it into our EPS guidance, probably $500,000 worth actually.

Mitch Pinheiro - Janney Capital Markets

Whether is it a slight drag on gross margin relative to your new rate card? If things work the way you think they are in fiscal '13?

Mike Hagen

The retail business has a lower gross margin than the direct business certainly. We don't have fiscal '13 numbers out there. But we'd expect when it gets up to scale, the gross margins in that business would be in the mid-20% area. The other thing that's about 2013 is obviously, we're going to be going up against the prior year with pretty low Q1 gross margin.

So for us to get to 50%, we're going to have to be in the mid-50s by Q4. And we think we can get there. So we expect to be higher in Q2 and then in Q3, as more of these people have the lower price come off program and more of the people on the rate card come on, and become a bigger mix of our business that will match and bring gross margins up. So we'll be walking in, leading into 2013, we believe with a pretty strong position in gross margins compared to 2012.

Operator

Moving on we'll open the floor to Gary Albanese with Auriga.

Gary Albanese - Auriga

The current customers, they're going to be grandfathered under the existing plans that they signed up. I think the bulk of it, probably been under the 40-40, is that correct?

Joe Redling

That's correct. And to what my point, the rate card takes whole, the ability for us to move gross margins up, gets greater. And the people who have been on the 40% off plan, come along the new customers come on.

Gary Albanese - Auriga

Are you seeing any changes in the retention rates within new food?

Mike Amburgey

Yes, we think there's a number of things happening. We're seeing record levels of order delivery. We're in the high-90% range now. I think the last number so was 97% on order delivery, which is really critical to our business. And we're seeing record levels of second month and third month take rates right now. So we're expecting to see improvements in (inaudible).

Gary Albanese - Auriga

Do you have a number for that (inaudible)?

Joe Redling

It's a little early, yes. We have to see as we move through 40% off into the rate cards and see if there's any adjustment that occurred. But our second month take rates now are in mid-70, as we sit here today.

Gary Albanese - Auriga

And just lastly, with the 40th anniversary plan it seem like, obviously you give a big discount, you give the free shakes, you give the shaker bottle. I mean are we going to see these type of giveaways for lack of the better term versus with the new rate card or this goes a bit to basically stop them?

Mike Hagan

Yes, you'll see that these both elements are embedded in the rate card. So for certain plans to get the shakes, for certain plans you'll get the shaker. What we were trying to balance was obviously, when we're out there with a low entry price, we got a lot a of new customers.

The problem is we won't get any credit for all of the added benefits we were putting into that plan, because it was one side that fits all. We've also found that there are customers that really don't want all the bells and whistle, and they want the lowest price point available. And that's what the new rate card addresses, that we will have an entry price point that's literally as low as we are offering to today. But it will be a mid-50% plus gross margins for us.

So we're managing that from a profitability standpoint. And we're also building more value into those components. So if you want our frozen and you want the shakes its part of your order. Then you're going to have to go up to a higher price point. But there will be a great value proposition to move those customers up on the rate card.

Gary Albanese - Auriga

And not to walk you down, but can we expect to see this later in the month or earlier in the month?

Mike Hagen

Early.

Operator

Moving on, we'll hear from Frank Camma with Sidoti.

Frank Camma - Sidoti

Just wanted to follow-up on the question on the gross margin on the rate card. On the lower-end, how do you keep the gross margins high if you're offering at the same price?

David Clark

Remember that the entry point, price point, the product that is sold that you're paying that price point is basically a favorite food kit of our ready-to-go food. So it does not include the shakes and not even frozen. And it does not include customization. So it's all prepared favorite kit is off the shelf.

Frank Camma - Sidoti

So you get to pick it, so you favorably improve the mix then that way.

Joe Redling

That's right.

David Clark

We learned a lot about pricing, I think in the last few months. And we learned, as Joe said that not every customer wants all the bells. And with some of them just want the entry price point. And then unfortunately our configuration before it can allow us to solve both problems, this configuration gives a small flexibility for both the entry price point as well as people, who want more no value.

Joe Redling

It also provides the opportunity, as David pointed out, an up sale. So you think about wherever you are toady, we are putting every component of our plan, enterprise point plan, where the people want these components or not, they are actually included and we incur a cost for including them.

At this point, if you want to choose an entry price point that is our lowest price, there is also the opportunity, once you agree to that the kind of move up in upgrades, get the shake, to get customization and other things for an additional price. So we're really giving our customers more and more options, that they can come in at a low price and they can determine on their own, what value they place in these other options and other program benefits.

And as you move up to price tier, all of those things are included, and they provide a greater value for a much lesser price increase above the base plan. So we're providing optionality for the customer and protecting our gross margins at the same time.

Frank Camma - Sidoti

Just wanted some follow-up on the men's program. Can you speak to that was a bright spot in the quarter? Can you just speak to what percentage of revenue that now represents and why you think it's been so successful?

Joe Redling

I think men's with mid-to-high 20% of our business is men. And obviously, men convert higher, stay longer, pay a higher price. So they're very profitable for us. And as Mike, pointed out typically we don't see this sort of sustainability of an increased spend against men like we do with the women's category. But because of the compelling nature of the advertising with Terry Bradshaw combined with Nutrisystem's success as a new product, we've had a lot of opportunity this year to kind of leverage that spend more than we have in the past. And Mike, if you want to add anthing.

Mike Hagan

No, that's exactly right. We have multiple streams of creative out in all channels of activation channels or media channels rather, which has also allowed us to place media where it was the more efficient and improved our efficiency. But probably think of bigger thing is the fact that the men's advertising was strong 50% of its new customer activations from women. While still driving growth on the women's program year-over-year and we just haven't seen that.

Frank Camma - Sidoti

So the men's advertising was effective in the women's channel. And you think it's just because of Terry Bradshaw maybe, is that?

Mike Hagan

We did some consumer research with it. I have tried to understand that. I think it was a combination of that and well-articulated methods. But they like his big personality and sense of humor. And he really comes across as he really is, a real Nutrisystem customer, who came to us and was successful on the product. And people can tell that genuineness in the creative and it comes through.

Joe Redling

The reinforces the point Mike made in his prepared comments, which was we're seeing significant increases in most of the household orders, which is telling you that that advertising is getting husbands and wife's talking about going on the program together. And it's not eliminating to women to see that advertising. It has a lot of value. They actually buy into the entire proposition that Terry is leading for us. So there's a lot of item that point to the effectiveness of this across agenda.

Operator

(Operator Instructions) And now we'll go to Avondale Partners, Anand Vankawala.

Anand Vankawala - Avondale Partners

Just a few quick ones. What percent of the Q1 orders included frozen food, excluding any promotional give out to frozen food?

Joe Redling

It's holding in 25% to 28% range, smaller than we did last year, because we put a lot of focus on frozen last year with special pricing. But it's kind of where we like it to be within 25% and 30% is a good mix with frozen food for us.

Anand Vankawala - Avondale Partners

And then the ASP for the second quarter last year, just so I can get a little bit of feel for where we're trending this quarter over the last?

David Clark

Last year it was right around $250. They were running 50% off last year at this time.

Joe Redling

For May and June we were at 50% off first order on them.

Anand Vankawala - Avondale Partners

And then, I guess, last question, just circling around the marketing for the new Every Day! product. Is Janet going to be participating in that? And just trying and get a feel for how you're going to prevent people from saying, I'm on the NutriSystem program, because I'm buying from the retail channel, I don't need to go to the direct channel. So preventing cannibalization essentially?

Joe Redling

Is the question is, will Janet be supporting the retail launch?

Anand Vankawala

Yes?

Mike Hagen

So the retail program actually is a great opportunity for us, because it answers the question a lot of people for our Nutrisystem Direct have, which is what's next. So they're for different purposes. The objective is, Joe pointed out in last quarters call of our direct program is concentrated weight loss, healthy weight loss, where the Every Day! product is really about weight management and healthy eating.

So the answer to the question, what do I do after I reach my goal, yes, we have transition programs both online and in the call center. But if people transition back to normal or regular shopping patterns and grocery stores are also be able to maintain their weight with Nutrisystem Every Day!

So there are different customers at different points and time that's why we don't see the overlap there. We think it's an accretive position for people who have been successful on Nutrisystem and also have the opportunity to drop people back the other way.

David Clark

I mean clearly we believe that the direct marketing, the extent of marketing we do with direct will obviously provide a halo for retail. Janet will indirectly be endorsing all Nutrisystem products. We won't be using our mass media to drive people to retail. That would we believe confusing. Our focus on marketing in the retail channel will be to that retail partners' customer base.

We believe there is enough traffic in the stores. We go to get traffic to that aisle within the stores. So while our sense of media spends over $100 million will obviously drive the brand. We also think that we're cyclical value it we get distributed through thousands of retail locations that also will help awareness on the overall Nutrisystem brand as well I should make the direct business that much stronger. So right now we believe, the amount publicity we get Janet, how deeply associated she'd become, very quickly with our brand.

If you look at our social engagement on the web and how people relate Janet through Nutrisystem, anytime you see the Nutrisystem brand, you'll be thinking of Janet Jackson especially if you are a women thinking about weight management.

Operator

And now we'll move on to Kurt Frederick with Wedbush Securities.

Kurt Frederick - Wedbush Securities

Just couple questions, one is on marketing, just wondering if you just kind of walk through your plans for Q2, just kind of given the plan changes with the pricing strategy.

David Clark

Kurt, could you speak up just a little bit. We couldn't get the question.

Kurt Frederick - Wedbush Securities

I was just wondering on marketing in Q2. What your plans were as far as just kind of, like level of spend just given the change in your pricing strategy.

David Clark

Well, as we mentioned earlier, we are quarter-to-date we're up about 50% in our spend in the quarter. Obviously, we think the new rate card with new created with Janet is critical. We expect to be pretty aggressive in May. And we'll play that out, June become a month where we have to track response, because June become somewhat of a soft month.

In any time in Q2 regardless of your momentum you see a pretty big fall off in response rate as you get into June. So we will track that and we intend to be pretty aggressive for the rest of the month of May.

Joe Redling

At this point of the range of our guidance and better than there would be about 20% lift year-over-year in marketing spend.

Kurt Frederick - Wedbush Securities

And that's comes in like May , the similar level to April.

Joe Redling

Probably not as strong as April, little ramped down the last two weeks, but it will be up probably on 20% to 30% May. And then you'll see flatten out in June.

Kurt Frederick - Wedbush Securities

And then, I'm just wondering for the on-program customers, how would that compare when you entered Q2 versus last year?

Joe Redling

Pretty about flat because the new customer production in each of the quarter was basically equal, our disadvantage really was in Q1. We had a headwind on-program revenue coming into Q1 of between $4 million and $5 million versus the previous year. So that was a headwind that we had to fight through and unfortunately our even though we would started out getting good traction on new customer revenue in that regard, that wasn't up enough to offset that.

Operator

And there are no further questions. And I will turn back to our speakers for any closing or additional remarks.

Joe Redling

Thanks, everyone for joining us today if you have any additional questions please don't hesitate to call us at 610-328-2100. We look forward to speaking to all of you in the near future.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect.

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