|Medifast stock chart after close on Nov. 7 --|
two days after 2014 3Q earnings announcement
When the Owings Mills, Md., company released its financials last week, we learned revenues were down a whopping 14% in the third quarter of 2014 compared to the same quarter in 2013 -- from $86.5 million to $74 million.
So what went wrong?
According to Bill Wolf, a blogger for Seeking Alpha, Medifast is sacrificing long-term revenue growth to satisfy stockholder demands for short-term earnings growth. That means cutting expenses in important areas like advertising.
The former hedge fund manager did not mince words when he lambasted Medifast for slashing its ad budget:
"On their Q2 earnings conference call, they said that Q3 advertising would grow 5% year-over-year. When actual results were announced for Q3, advertising expenditures were actually down 22% year-over-year. Medifast management likes to crow about their expense management capabilities, while all they are doing is simply clicking 'Pause Campaign' on their Google AdWords account. Some cost cutting prowess! Expenses fall, earnings rise in the immediate short-term, and management protests their dismay that the revenues just aren't growing due to a challenged consumer. However, this treadmill of slashing advertising and missing revenues can only go so long."Given that his blog post was titled, "Medifast: A Charade Wrapped In A Farce, Inside A Deception," it is clear that Wolf won't be investing his clients' dough in the weight loss company anytime soon.
I used to follow business strategies and stocks quite a bit, so I was intrigued by Wolf's analysis and wondered if he could be right. Is Medifast going to be just another failed company like Blockbuster and Montgomery Ward?
A lot depends on how the company executes in 2015. From my perspective as a person who lost 35 pounds on the Medifast 5&1 Plan and was a Take Shape for Life health coach for two months (before compliance asked me to choose between my blog and my coaching privileges), here are some reasons for hope and gloom:
What are the signs of hope?
|New Medifast Direct Veep|
(from his Meetup profile)
New Medifast Direct Vice President Kenneth Kopp seems hip. I did some Nancy Drew-style sleuthing on this latest member of the C-Suite who hails from California (definitely cool). One thing that intrigued me is he attended college for only five months yet built an impressive career in direct marketing that typically requires an MBA.
This guy's a maverick who drinks good Scotch, smokes expensive cigars, scuba dives, plays the drums, takes awesome photos, publicly drools over God and his girlfriend, and lists as one of his favorite quotes on Facebook, "For women, the best aphrodisiacs are words. The G-spot is in the ears. He who looks for it below there is wasting his time" -- Isabel Allende. I suspect Mr. Kopp is going to "shake" things up at Medifast HQ.
Medifast also hired a new advertising agency -- GKV -- that seems to specialize in growing mid-level companies. If they can create commercials for Medifast like they did for Cape Cod Potato Chips (click here), I'm guessing people will pause their DVRs to watch. According to the agency's website, the ad campaign helped boost Cape Cod's business: "Ad recall quadrupled, and sales are at an all-time high."
Another source of optimism are the soon-to-be released seven new products described as having "no artificial flavors, sweeteners or colors" that are geared to people who have already lost their weight and want to keep it off. If these healthy snacks/meals (Dark Chocolate Dream Bar, Salted Caramel Nut Bar, Strawberry Yogurt Bar, Chocolate Peanut Butter Shake, Cookies & Cream Shake, Piña Colada Smoothie, and Strawberry Banana Smoothie) are more appealing than what you could buy elsewhere and are offered at a competitive price point, this could be a terrific source of sustainable revenue growth.
Medifast is also in the process of appointing someone to head its flagging Take Shape for Life program, and if this person is talented, they could turn around the company's decline in the number of health coaches.
So what are the reasons for gloom?
|When it comes to Medifast the company, |
do you see the potato donut or the hole?
Medifast's IT department, for lack of a better word, sucks. The technological interfaces for health coaches seems like something out of the Flintstones. When I signed up to be a TSFL health coach I could not use my regular email address because it had a hyphen in it. Meanwhile, the company's new tracking programs, called dashboards, have been riddled with glitches, with people having trouble accessing them and old data being wiped out.
Increasing the threshold for free shipping was also a bad idea. The success of amazing companies like Amazon and DSW is that you get free shipping at a fairly low price point. No matter what kinds of discounts Medifast offers on future orders, it can't compete with the perceived advantage of free shipping; and it is confusing for health coaches to explain to their clients how they are really "saving money" this way.
Charging $42 a pound for popcorn was another mistake. It's great that Medifast came out with two popcorn options, but only the most mathematically challenged people would order them at that price. The new Chilltime™ Theanine Supplement Gum, at over a dollar a tablet, is also a head shaker. You can get a 60-day supply of Source Naturals Theanine Serene from Amazon for only 28 cents per dose and chew Trident gum instead. New Medifast products should be perceived as good values, not rip-offs.
Overall, I am still a big believer in Medifast and hope the company succeeds. Share prices dropped three points on Friday on slightly higher than average volume, but stock analysts are mixed on whether the company is a buy or hold.
Still, the number of overweight people on this planet who could use help shedding pounds continues to grow; and if Medifast execs plays their cards right, they may be clinking their shakes (Scotch for Kopp) next year at this time.
You can purchase Medifast replacement meals directly from Medifast Centers, the Medifast website or -- for soon to be lower cost -- through the co-branded website of a Medifast TSFL health coach. Medifast does not recommend purchasing its products from third party vendors, but if you choose to do so, you can find them on both Amazon and eBay.
Medifast Custom Order - You Choose ANY 10 Boxes
More from Diet Skeptic:
Fruck You! Fructose
Can You Drink Alcohol on Medifast
Medifast Centers Vs. Take Shape for Life
Planned Exceptions: What Is Your Pie Policy?