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NutriSystem Inc. (NASDAQ:NTRI)

Q2 2012 Earnings Call

July 26, 2012 4:30 PM ET

Executives

Joe Crivelli – IR

Joe Redling – President and CEO

Mike Amburgey – Chief Marketing Officer

David Clark – CFO

Analysts

Greg Badishkanian – Citigroup

Frank Camma – Sidoti

Mitch Pinheiro – Janney Capital Markets

Operator

Good day and welcome to the Nutrisystem’s Second Quarter 2012 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Crivelli. Please go ahead sir.

Joe Crivelli

Thank you. Good afternoon, everyone, and thanks you for joining us to discuss Nutrisystem’s second quarter 2012 financial results. Today, we’ll hear remarks about the quarter and outlook from Joe Redling, President and Chief Executive Officer; Mike Amburgey, Chief Marketing 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 July 26, 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. Joe?

Joe Redling

Thanks Joe. Good afternoon everyone. There are few things I want to update you on relative to second quarter. First, I’ll touch on our revenue. Second, I’ll give you a summary of the introduction of our new rate card. Third, I’ll update you on the retail initiative and finally provide an update on the CEO search.

We are encouraged to post a quarter of solid revenue growth. While the growth was below our original forecast for the quarter, with the first quarter we posted a year-over-year increase in Q2 2010. This was largely a function of the strong momentum we experienced in the first five weeks of the quarter. In April, the early Easter caused a spike in demand during the second wave of dieting season. This was amplified by the powerful buzz created by the Janet Jackson reveal of her impressed weight loss results as well as the continuing impact of our 40th Anniversary promotional pricing strategy.

In our last call we shared plans regarding the end of our 40th Anniversary promotion and the rollout of our new rate card which is designed to allow us to continue to promote aggressively, offer customers different options and value at various price points while still allowing the company to generate sufficient margins. Over the past 18 months, as we’re by necessity have to heavily discount to spur consumer response conversion, we’ve seen a continued erosion of gross profit margins which we’ve counterbalanced by carefully managing our marketing spend.

While this strategy has allowed us to maintain profitability and cash flow, during our rough consumer spending macro environment in the long run we have to get back to investing in the brand. The new rate card allows us to do that. It provides a basic option for consumers who want the lowest price, allows Nutrisystem to establish the value of services we used to provide for free, that is shipping and customization and it enables us to achieve gross margins in line with our historical norms.

In fact, we saw gross margins ratchet up each month of the second quarter, a very good early indicator that our strategy is sound. We anticipated that there would be a learning period for both customers and Nutrisystem alike once we flip the switch on the new rate card. Since we were introducing a new pricing strategy that customers had not seen before, it has taken us some time to optimize conversion.

In fact web conversion has been a challenge all year. We are seeing fairly good response across the board to our marketing efforts but conversion has been challenged as we educate new customers about the internal [ph] of the Nutrisystem program and now educate all of our customers new and returning about our new three-tiered pricing program. Mike Amburgey will talk in a moment about some steps we have taken to optimize conversion and how we expect to further leverage the new rate card in an upcoming new third quarter promotion.

You may have seen that we recently debut our enhanced Nutrisystem D for people with diabetes. There were a number of significant announcements that supported this initiative including the disclosure of promising new clinical data from a 2011 clinical study at Temple University and the University of Pennsylvania. As well as the announcement that Nutrisystem has been recognized as a National Strategic Partner of the American Diabetes Association.

We have also added certified diabetes educators in our contact center. So customers can consult with them at no charge if they have specific questions regarding our program. Although we plan to ramp up these efforts in conjunction with back to school messaging later this summer, we’re already seeing some impact with the nice uptick in Nutrisystem D sales in the month of July.

As we discussed with you last quarter, we are also excited about our expansion into the retail channel this quarter. Nutrisystem Everyday is now on the shelves of all 2,200 Kroger stores all throughout United States with 12 individuals SKUs of healthy snack, shakes and breakfast items. The revenue contribution in the second quarter was in line with expectations and now that we have fully stocking our Kroger stores we are beginning to invest in product promotional efforts. We are finalizing placements with a number of other retail outlets and we plan to provide additional update on our next call.

Our CEO search continues and interviews have been taking place. We are hopeful that Nutrisystem’s new leader will be in place within the next few months.

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

Mike Amburgey

Thanks Joe. As Joe mentioned the transition to our new rate card was important to Nutrisystem. Internally we refer to this new rate card as good, better, best because it employs a classic upsell format this allows consumers to select the pricing and product feature levels that meets their individual needs while also allowing us to recapture margins. This new pricing structure is important to our success. It is also a new concept for our customers and one that we are working hard to optimize.

After launching good, better, best, we saw a drop in conversion. This was to be expected. Our returning customers and those who have been in our sales funnel throughout the year noticed the differences and features and pricing and we saw the conversion actually drop below that of first time visitors. Consumers continued to be very deal sensitive so they waited to buy with the expectation that at some point we would announce a big price reduction.

When we modified the offer periodically throughout the quarter, adjusted messaging to position us 40% off, adjusted the middle tier pricing and tested offering three weeks. We stuck to the underlying new program and pricing strategy and we saw our gross margin improve each month. One encouraging sign is there are two higher priced tiers are generating approximately 90% of our orders and our lower priced tier is our least selected offering. While we are largely margin agnostic in terms of which tier the customer selects, this shows our upsell options are working and is sustainable help to drive our top line sales, contribute to more growth profit dollars and should result in a longer length of stay as customers are more satisfied with the higher end offerings.

As previously mentioned, we were initially conversion challenged after the transition to good, better, best. In May and June, we worked hard on optimizing conversion in the call center. We made good progress towards this goal. Conversion rates returning to pre good, better, best levels and actually exceeding them. We haven’t been successful restoring web conversion to pre good, better, best levels but part of this is seasonal as over half of the unique visitors to our websites since late April are actually returning customers who saw our rate card before the transition we are not satisfied with the online conversion results.

We’ve turned our attention to additional adjustments and messaging and presentation that we anticipate will drive real progress. As we discussed on last quarter’s call, we aggressively accelerated our media spend in the growing part of the second quarter to take advantage of customer demand and to build the on program customer base for the balance of the year. Marketing spend was up 21% this quarter, versus the same quarter last year but this was front loaded to the first five weeks of the quarter due to a number of factors.

First, we started our Summer Shape Up marketing spend in the first week of the quarter compared to the third week of the quarter last year due to the early Easter and the start of that seasonal bound [ph]. Second, we were experiencing strong response to both the new created Joe referenced earlier and the final days of our 40th Anniversary event that continued through the first week of May. This media investment impacted both the top line and our marketing efficiency with revenues posting a solid high single-digit increase but marketing efficiency decreasing slightly year-over-year. This is one reason improving margins is so important to us.

In previous peak years when margins were stronger, we had more flexibility in our media spend so we could wean into customer demand even more to drive growth. Having said this, the increased spend in April was profitable on a full year basis. A few thoughts on what to expect from a marketing standpoint for the balance of the year. As we move deeper into the third quarter, we’ll see our promotional strategies shift slightly to provide consumers who have been thinking about joining Nutrisystem since diet season with a more compelling offer to close them in time for the back to school buying period.

This will look like some of the sales we have announced in the past. However we expect to be able to protect our margins at the targeted way because of our new rate card and program configuration. Our expectation is that this will give some of the millions of unique visitors to our website and hundreds of thousands of inbound callers to our contact center that have considered us but did not convert over the hub and convert them to customers. We think this will provide a good deal for the customer and good margin for Nutrisystem.

As Joe mentioned, we are ramping up marketing efforts for Nutrisystem D. We are leveraging the new clinical results with strategy partnership with the American Diabetes Association and program enhancements such as the inclusion of certified diabetes educators across a number of initiatives including both marketing to people with diabetes and outreach to healthcare professionals. We began running television and online advertising this month and are layering in additional more targeted media channels as the quarter unfolds.

So far we are encouraged by the early response and seen a nice increase in first time orders every hour [ph] month to month and year-over-year. In fact marketing efficiency is running similar to our core business. Ultimately we believe D could become a counter seasonal business as not as dependent on the January diet season. Over the coming months, we also anticipate introducing new Frozen Food selections with Chef’s Table Dinners created by our council of renowned chefs from across the country have proven to be popular with Nutrisystem customers and at the new instrumental in motivating more customers to pay up for our top tier plan.

Fresh Frozen entrees like the Chef’s Table Dinners have also helped us to continue to increase length of stay for our customers. Between now and the end of the year, we plan to more than double the Chef’s Table Selections and also adding over 20 other new items to allow for even higher food quality and more variety in our program.

Earlier this year we conducted several weeks of online consumer panels with one of our key takeaways being that the increasing importance of customization and personalization to commercial weight loss customers is ever increasing. So we are working to satisfy this need better than ever before in part by expanding beyond in approximately 138 offerings in our food line up right now.

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

David Clark

Thanks Mike. I trust everyone has seen the financial statements in the press release that was issued before the call starts. So I’ll discuss a few highlights before we open the call for Q&A. Revenue for the quarter was $124.6 million, up 7.2% from second quarter of 2011. Net reactivation revenue represented 25% of total revenue within our expected norms.

Gross margin for the quarter was 46.7%. This reflects a steady improvement in the gross margin in each successive month within the quarter and represents sequential quarterly improvement of 160 basis points from 45.1% in the first quarter. To give you a sense of the improvement within the quarter, April gross margins were 45.4%, May was 46.7% and June was 48.3%.

We expect to see this trend continue as gross margins are forecast to continue to improve for the remainder of the year setting up strategically for 2013. However, the full year expectation now is for gross margins to approximately 48% due to the impact of lower gross margins in the first four months of the year and the continued efforts to optimize the new rate card.

Marketing expense totaled at $28.3 million for the quarter, a significant increase from last year’s level of $23.4 million. Marketing efficiency or marketing expense as a percent of revenue was 22.7% for the quarter and was up from 20.1% in the second quarter of 2011. This reflects the aggressive marketing investment for the first five weeks of the quarter supported earlier Easter calendar, convert strong demand from our 40th Anniversary promotion and driver profitability on a full-year basis.

One-time charge in the second quarter was $6.6 million. Of this approximately $3.3 million was cash and the remainder was non-cash. These amounts impact various line items in the income statement. These one-time charges impacted second quarter 2012 after-tax net income by $4.9 million and earnings per share by $0.17.

As a remainder the one-time G&A expenses relate to the management transition and other related charges. The variance to the $7.2 million forecasted one-time charge as we communicated on last quarter’s call was due to timing and the remaining $600,000 balance expected to be realized in the third quarter. Excluding one-time charges, general and administrative expenses were $13.6 million and compared favorably to $14.8 million in the second quarter of 2011. And cash G&A expense was $12.2 million, a $700,000 or 5% decrease from second quarter of 2011.

Excluding the one-time charges, the adjusted EBITDA for the second quarter of 2012 was $17.7 million, compared with EBITDA of $22.3 million in the second quarter of 2011. The same factors drove the EBITDA that we talked about relative gross margin and marketing spend. A definition of adjusted EBITDA as well as reconciliation to GAAP is included in the tables of our press release which is available on our IR website at www.nutrisystem.com.

Depreciation and amortization was $2.7 million and excluding one-time charges our non-cash employee stock compensation was $1.4 million in the second quarter of 2012. Operating income was $6.9 million in the quarter, fully burdened by all one-time charges. Income tax totaled $2.5 million bringing second quarter net income to $4.1 million compared to $10.8 million last year. Excluding the one-time charges, net income was $9 million and EPS was $0.31 per share within our guidance of $0.30 to $0.35 in earnings per share in the second quarter of 2012.

And I will speak to our third quarter guidance in a moment. From liquidity standpoint on June 30, 2012, we had $70.5 million of cash, cash equivalents and marketable securities compared to $57.6 million at year-end 2011. We continued to demonstrate strong cash flow inherent in the business model as we increased our cash balances by $4.3 million in the second quarter and by $12.9 million in the first six months of the year.

For the balance of the year, we’ll begin to use cash to build inventory for the 2013 diet season and we expect cash balances at the end of the year to be flat to what they were at the end of 2011. The only debt on our balance sheet remains a $30 million outstanding under our five year $100 million line of credit.

Cash flow from operations was $14.1 million for the quarter. And CapEx was $4.2 million. And we returned $5 million to shareholders in the form of dividend payments. Board of Directors authorized a payment of a quarterly dividend of $0.175 per share, payable August 16, 2012 to shareholders’ record as of August 6, 2012. We did not repurchase any of our own shares in the second quarter.

Regarding our guidance for the balance of the year, we expect earnings per share of $0.13 to $0.18 in the third quarter before one-time charges. We continue to expect mid single-digit revenue growth for the full-year and we are once again reaffirming our annual earnings per share guidance of $0.45 to $0.55 before one-time charges for the full-year. We now expect CapEx to be in the range of $9 million to $10 million for the year including ongoing maintenance and also in support of our retail launch key growth initiatives in 2012 and beyond.

We’ll now take any questions you may have. And operator, you can may open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Greg Badishkanian with Citigroup.

Greg Badishkanian – Citigroup

Great, thanks. Hi guys, just a few quick ones here. Can you give – I may have missed this in the beginning part but can you give us a little color on kind of how your new customers came in throughout the quarter, the things over the last month or two is it a pretty consistent or somewhat color there would be great?

Joe Redling

Yes, sure Greg. I’ll kick it off. As we said on the last call, April came in very strong. We had significant growth year-over-year primarily because of the Easter period being three weeks early. Remember last year we really didn’t get – really didn’t have a real Easter demand period last year. This year we did. So we had significant growth in new customers April year-over-year. And as we launched good, better, best our new customer growth year-over-year had flattened out.

So those trends after the first week of May came down after we did the closeout sale on the 40th Anniversary. We kind of kept new customers flat for those last two months, flat to down in those last two months but we pick up a lot of new customers in April. So April really made the quarter for us.

Greg Badishkanian – Citigroup

Right. Good. And the diabetes D, the second part is more targeted I believe you mentioned. So could that accelerate the new customers and reactivations or with the kind of the meet the initial TV media was that the biggest part of the launch there?

Joe Redling

I mean I think we got new channel coming on so we are expanding our channels against the early news on encouraging. We are seeing a nice bump in orders from the D segment and even more importantly we’re seeing pretty good efficiency of the spend. So I think as Mike mentioned in his prepared comments, the D efficiency is tracking pretty close to our strict typical core business of women that’s something we haven’t seen. So we do believe that the added benefit of the program enhancements in clinical are allowing us to convert at a higher level than we’ve seen before.

What we have to wait on now is just obviously we’ve been added for a couple of weeks right now. We launched it I think by July 10. So we’ve really been at this for a couple of weeks. So you have to get pass that early surge of interest to see what kind of sustaining levels you have going forward but our goal to optimize it over the next couple of months to be ready for a strong push in 2013, but early signs are good.

Greg Badishkanian – Citigroup

I understand.

Mike Amburgey

Layering in the additional media channels after the television and the some of the public relations starts and we’ll additional PR going on should help each of those subsequent media channels be more efficient than they would have been otherwise but integrated multi-channel approach that we’re taking.

Greg Badishkanian – Citigroup

Good. And just the final one on the retail initiative with the 12 SKUs if its progressing according to plan, I mean could this be over the next two years a $100 million business or maybe it’s too early but how big could this be do you thing?

Joe Redling

I mean we – many of them are early I mean this quarter was really operational for us, this is the first time we had shipped product to pull this to grow distribution at Kroger with 2.,200 stores so we were very happy with our results from an operating standpoint. The early load in the Kroger we have been great in-store displays in front of those stores, sales velocity was looked pretty good. We have plan – our promotional plan is really back-ended towards the later part of the year and the fall so we’ll have to wait to see but we got into this business because we thought it’d be significant contributor to our business. It’s a little early for us to peg a number on it but we think it could be significant as we increase our distribution.

Greg Badishkanian – Citigroup

All right. And then new customers, they would probably come on in January or late December, would that be the timing if you sign on more customers [ph].

Joe Redling

In the new distribution partners?

Greg Badishkanian – Citigroup

Yes, exactly.

Joe Redling

Yes, there will be potentially some fourth quarter, late fourth quarter, most would be in 2013.

Greg Badishkanian – Citigroup

Okay, great. Thank you.

Joe Redling

Thanks Greg.

Operator

And our next question comes from Frank Camma with Sidoti.

Frank Camma – Sidoti

Hi guys, just a couple of quick questions. On the gross margin, you saw a pretty good improvement throughout the quarter. Could you just talk about what a normalized growth margin would look like as number of customers that were on the old program drop off?

David Clark

The target is to get our gross margin in our direct business in particular up above 50%. For the long time before we really had promotions our margins ran as high as 55%. So the goal was have the direct business be over 50% by the end of the calendar year.

Frank Camma – Sidoti

Okay, great. Yes, I think you mentioned 48% would be the kind of the blended rate for the full-year?

David Clark

Full year. Remember that only have the impact from the first four months of the year being well, the low gross margin months but also you have to blend in on a consolidated basis businesses like retail, like UDC [ph] that have lower overall lower gross margin.

Joe Redling

So we’ve got the majority of our volume coming at first four months of the year and that was at 45% margins. So the goal for our strategically as David said, is to get into the low 50s by the end of the year. So we’re starting 2013 in a position that we want to be in. Q1 this year we were at 45% gross margin. So if we could get over 50% in a plan that still drives response that gives us pretty big delta to go after for Q1 2013.

So that total being very pragmatic about this approach and trying to move this up a 150 basis points almost every month. It still gives us the opportunity promotionally to be out there, don’t be confused when you see us with these 40% off promotions and things like that. That’s all baked into our gross margin plans. So we took a lot of cost out of the products now. So we are really (inaudible) on those promotions. We can still drive those 50 plus percent gross margins with strong promotion messaging. So that’s been the piece that we really have to live in [ph].

Frank Camma – Sidoti

Okay, great. Just a comment or question on the Frozen Food Selections. You had mentioned that the Chef’s Table has been well received. I was just wondering if you could tell us in quantitative terms has that led to longer months of stay or longer number of weeks on program?

Joe Redling

Yes, we know that our Select segment which is our highest price segment has the highest length of stay, has the highest segment take rates and it’s really our most profitable customers. What we are seeing in the new rate card which was actually pleasingly surprising to us that we are seeing pretty good share of business coming on that top gear, I think Mike mentioned in his comments that over 90% of our business right now is coming in our high price tiers. 30% of that business is in the Select.

So it’s really representing 30% of our segment now and that’s almost profitable segment. That’s a $309 price point. So that’s encouraging for us. So that’s why we believe we should continue to invest in the food side where it’s our number one gross profit category. So from a gross margin profit dollar, it’s our best program to put dollars on the bottom line and it’s our best customer. So we feel as we expand that line with more variety, we could increase that penetration.

Frank Camma – Sidoti

Okay, great. And the final question is how much does Nutrisystem D represent portion of your revenue?

Joe Redling

We’ve always said it represented less than 10% of our total volume. Obviously that’s not something we’re happy with and that’s why we’re re-launching. We know the diabetic market is large and growing with over 25 million diabetics, 70 million pre diagnosed diabetics. The segment is big as the men’s segment as we really wanted to look at weight loss segment. We just needed to kind of get the credibility and the positioning of the product well positioned so we could do a better job in the marketing efficiency.

So we expect that that percentage to go up in terms of this contribution especially next year, we hope it will be a big growth driver of our business.

Frank Camma – Sidoti

Okay, great. Thanks.

Operator

(Operator Instructions) At this time, we’ll go next to Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro – Janney Capital Markets

Hi good afternoon.

Joe Redling

Hi Mitch.

Mitch Pinheiro – Janney Capital Markets

The new customer growth, it looks like – was it like in the 20% area, is that right?

Joe Redling

No, it’s lower. For full quarter.

David Clark

The full quarter, Mitch.

Mitch Pinheiro – Janney Capital Markets

For the full quarter. So but it was I mean can you range it, I mean was it north of 10%?

Joe Redling

It was single digit for the quarter with pretty strong – I mean really all the growth came in April and we think we moved some business up for May into April. April was such a big month and it really flattened out after that and kind of started declining as we got into June. So we got to kind of single digit in the customer growth.

Mitch Pinheiro – Janney Capital Markets

Okay. And so you’re coming into this new promotional effort, does it these deals just add further confusion for conversion rates and things like that. I mean it’s just a success of this promotion that you can upsell and reach these high percentages that you saw in the second quarter?

Joe Redling

It’s really – it has a real permanence [ph] of this is that we have a belief through our testing that which I think is really underlined by the fact that we have sub 10% of our current customers from good, better, best coming in at the lower price point. But we have a 229 price point out there that’s really getting sub 10% of our business. So that tells us and through all the testing we’ve done is that consumers are very promotional sensitive, not price sensitive. And we’ve seen that by if we’re offering a 40% discount on a higher priced tier and its $40 or $50 higher than the lowest price, we’re still booking a lot of business. The majority of our business that higher price tier.

That’s good news for us. One of the fears you have with the good, better, best when you put a low priced tier out there even though from a gross margin perspective (inaudible) if you move aligning your business to that priced tier, it’s going to affect your revenue or customer mind and eventually your profitability for customer. So we’re really glad to see that that’s not happening. So we think there is huge promotional sensitivity in the market right now. Consumers want deals. We need to build the strategy where we can put these offers and promotions in the marketplace that doesn’t kill our gross margin and that’s what we’ve been trying to optimize through the second quarter.

I think we’re pretty close in figuring that out now. So it was confusing Mitch. I mean we never add upsell price tiers before where there are three different prices and programs for you to choose from if you’re a man or a woman. So clearly there has been education with that and that’s what’s kind of slowed us down. When we see our call center conversion come back pretty quickly. It tells us when we explain that consumers accept it.

It’s a little hardy to do that and they have web environment so those are the things Mike mentioned about constantly upgrading and testing and improving on messaging on the web. So it was confusing initially. Our goal is to simplify that through the optimization process and make that very clear to consumers over the next month or two.

Mitch Pinheiro – Janney Capital Markets

And what percentage customers are captured off the web let’s say?

Joe Redling

Yes, the majority of our new customers are websites. So it’s – it used to be the reverse where the majority was from the phone. We’ve moved the majority of our web business. It’s 70% of our new customers are come through the web.

Mike Amburgey

And I think that’s the other point about the promotion at this time of year because when we get to this time of the year, the majority of our unique visitors to the website are actually returning visitors. So they’ve been thinking about us for a while and that’s what we think that promotion can help roll some of those folks out and put them on program before the end of the year and before we go into the...

Mitch Pinheiro – Janney Capital Markets

Is this promotion centered on the website? Is that what it’s focused on or is it for off product?

Joe Redling

It’s off product.

Mike Amburgey

Yes.

Joe Redling

It’s all really for us is we believe that is as we have the opportunities to bring these gross margins back historic levels. We want to have this rate card completely optimized by the time we enter diet season which we will in 2013 and to Mike’s point in January that’s when you have a lot of new customers. Our unique visitation on the web in January is sky high.

And they’ll see this rate card for the first time. They’ll see great opportunities to save and we’ll have great promotions but we’ll protect those gross margins in a really important period of demand. So that’s what we’re marching toward and we have to stay religious on that. So we did not kind of fall back and say let’s go back to lower gross margin pricing. We held and we changed some of the promotional messages to keep that margin ratcheting up every month from April to May to June and we have to stay pretty focused on that for the next few months.

Mitch Pinheiro – Janney Capital Markets

Okay. And then in terms of the your retail initiative, do you launched early mid May, so being almost like two months after that is there any sense for the velocity which is or actually working better. Is there any surprises that you’ve learned in the very early stages and are you – is there any changes that you’d make as a result?

Joe Redling

Yes, there is a lot of learning as you can imagine we were really without any marketing. We were very encouraged about early velocity when we were in front of the store which reinforced the power to brand in the channel. We have really no marketing at all at launch and we wanted to look at the organic velocity that we saw. It was great execution on our supply chain parts in our retail management side as well with our partner at Kroger so those displays were in those stores and we were moving product.

We were moving the products we anticipated. There were some surprises of one that became big volume drivers. We had couple of desserts that surprised us in terms of what was contributing a lot with (inaudible) with 12 SKUs. Obviously we had winners and losers. We have more SKUs in that available so we also have realized it’s a very – that’s like everything. It’s a very promotional category. The competitors in the categories and highly promotional during this period you’d expect with the Nutrisystem brand coming into the dry [ph] aisle. And so we know we have to be aggressive and that brand was really back-ended.

So we’ll have to wait and see what kind of velocity improvements and impact it has when we’re out there really talking to that Kroger base and reminding them and telling them we were in the dialog. Our goal is to move traffic into that aisle and we saw the sales when we were kind of front in center. Now we have to make sure we’re communicating with that customer that and letting him know the new process there.

Mitch Pinheiro – Janney Capital Markets

All right, thank you very much.

Joe Redling

Thank you Mitch.

Operator

And as no further questions in queue, I would like to now turn the conference back over to Mr. Crivelli for any further or closing remarks.

Joe Crivelli

Thanks everyone for joining us today. If you have any additional questions please don’t hesitate to call me at 610-228-2100. And we look forward to speaking to all of you in the near future.

Operator

And that does conclude today’s presentation. We thank you again for your participation.

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