Medifast Inc (MED) 2007 Q4 法說會逐字稿

Greetings and welcome to the Medifast Incorporated fourth quarter 2007 earnings conference call. OPERATOR INSTRUCTIONS)

It is now my pleasure to introduce your host, Mr. Brendan Connors, Vice President of Finance for Medifast, Incorporated. Thank you, Mr. Connors. You may begin.

Thank you very much. Good morning. My name is Brendan Connors, and I am Medifast's VP of Finance. I am joined today by Michael McDevitt. our CEO and CFO. I would like to welcome you to Medifast's fourth quarter and year end conference call for the period ended December 31st 2007. Before we begin I would like to read the following statement. This release contains forward-looking statements within the meaning of the section 27A of the Securities Act of 1933. As amended Section 21E of the Securities Exchange Act in 1934 as amended in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by use of phrases or terminology such as intend or other similar words or the negative of such terminology. Similarly, descriptions of Medifast objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements.

Medifast believes this release should be read in conjunction with all of its filings with the United States Securities and Exchange Commission and cautions its readers that these forward-looking statements are subject to certain events, risks, uncertainties and other factors. Some of these factors include, among others, Medifast's inability to attract and obtain independent associates and members, stability in the pricing of print , TV and direct mail marketing initiatives. (inaudible) in the cost to acquire customers, increases in competition, litigation, regulatory changes in its plan growth and new domestic and international markets and new channels of distribution. Although Medifast believes that the expectations statements and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of these risk factors (inaudible) cautionary statements carefully in evaluating each forward-looking statement in this release, as well as those set forth in its latest annual report on form 10K and quarterly report on form 10Q and other filings filed with the United States Securities and Exchange Commission. including (inaudible) reports on form 8K.. All these forward-looking statements contained herein speak only as to the date of this release.

Now I would like to go over the financial results. The three months ended December 31st, 2007, Medifast reported revenue of $19.8 million versus $15.3 million for the same period in 2006, representing an increase of 29%. The direct marketing sales channel accounted for 52% of total revenue, Take Shape for Life 38%, doctors 4%, and clinics 6%. As compared to the fourth quarter of 2006, the direct marketing sales channel revenues increased by 6%. Take Shape for Life sales which are fueled by person to person recruiting and support increased by 32% year over year. The company's clinic division which began operating under the Medifast Weight Control Center name in late 2006 increased sales by 32% as compared to the first quarter of 2006 and sales to doctors decreased by 10%. The company has selling, general and administrative expenses of $13.5 million in the fourth quarter of 2007 which was an increase of $2.4 million from the prior year.

The largest increases in SG&A expense were attributed to increased advertising, increased Take Shape for Life commission expense that directly relates to sales, as well as additional salaries. Advertising expense for Q4 of 2007 was approximately $3.3 million compared to $2.6 million for the same period last year. An increase of $700,000. The fourth quarter the company ran advertising tests on television, print and online media, highlighting our celebrities at the beginning stages of their weight loss program. Because it's proven effectiveness, the company invested in a new campaign the first quarter of 2008 which showcases the woman's significant weight loss on the Medifast program. Take Shape for Life commission expense which is directly related to sales growth increased by $900,000 as compared to the fourth quarter of 2006.

Salaries and benefits increased by approximately $300,000 as compared to the fourth quarter of 2006, as the company hired additional expertise in critical areas in order to assist in future growth. Salaries are attributed to investing of internal abilities to improve capabilities of the company moving forward. These internal teams are associated with the building of several areas included the additional major enhancements of the company's website, ERP system, call center, nutrition and R&D. The company believes that the enhancements to these critical business functions will significantly improve the customer intensive strategies, while positively impacting the lifetime value of consumers and providing clearer future revenue expectations from recurring customers. In the fourth quarter of 2007 the company reported net income of $601,000 or $0.05 per basic share, $0.04 per diluted share, compared to $252,000 or $0.02 cents per basic share, $0.02 cents per diluted share in the fourth quarter of 2006. Fourth quarter of 2007 represented the company's 33rd consecutive quarter of profitability.

For the year ended December 31st, 2007, Medifast had revenue of $83.8 million representing a 13% increase compared to $74.1 million reported for the year ended December 31st, 2006. The company had selling, general and administrative expenses of $56.6 million for the year ended December 31st, 2007. Which was an increase of $8.1 million from $48.5 million in 2006. As already discussed, the majority of the impact resulted from increased advertising expense, increased Take Shape for Life commissions expense related to sales growth and additional personnel expense. The company reported net income of $3.8 million for the year ended December 31st 2007 with $0.30 per basic share, $0.28 per diluted share versus $5.2 million or $0.41 per basic share, $0.38 cents for diluted share in 2006. The company's balance sheet remains strong with stockholders equity of $32.4 million and working capital of $10.4 million at December 31st, 2007. Compared to 27.9 million and $9.6 million at December 31st, 2006 respectfully. Now I'd like to turn the call over to Medifast's CEO, Michael McDevitt.

Thank you very much, Brendan. The year of 2007 was one focused on building the infrastructure platform that would allow the business to both generate and properly scale its vertically integrated structure with expected future growth. While placing the multi-distribution channel structure into a momentous swing for the beginning of weight loss season for the upcoming year of 2008.

With the execution of this strategic plan for 2007, there were several highlights that I feel are very visible, such as year-over-year revenue growth. of 13%. And there were many positive initiatives that will not be fully witnessed until the upcoming year, such as the the investment in the creation of new and improved products and product lines that were not for sale until early 2008. It is the combination of these two types of initiatives along with the many others achieved throughout 2007 that have placed the company into a strong profitable growth pattern in the fourth quarter of 2007 which we believe will carry into the upcoming year and beyond. In the fourth quarter of 2007, the company continued to experience the positive revenue growth momentum that was previewed on the third quarter call, while continuing to invest in the needs of the business to both continue to enhance the trending which we were experiencing throughout the business, while improving and refining the effectiveness of our advertising platform.

New to this seasonality experience in the weight loss business during the fourth quarter, the company placed a major emphasis on enhancing its remarketing capabilities. Over the past years the Medifast current and former customer list has continued to grow, therefore focusing on the retention of current and the reactivation of former customers has become an increasing opportunity and a major focal point. The proven efficiencies in these retouch campaigns and proving the age old saying, it is cheaper to keep a customer than acquire a customer, causes these initiatives to represent only a small portion of the overall ad spend with a larger one of revenue drivers. In addition to the retouch campaigns that were utilized in the fourth quarter, the company continued to show improvements in advertising efficiency. Throughout the year we significantly improved our capabilities to reach the desired consumer and track the effectiveness of each dollar spent which has placed the company in an opportune position at the close of 2007, being very well prepared for increases and direct response profitability as the gun goes off for the weight loss season in January of 2008. Throughout the year of 2007 the company made significant strategic investments in the business revenue drivers as well as its internal capabilities to best capitalize on and retain future growth.

We have spent significant time and materials investing in the future growth capabilities of the Medifast business. This included building internal technical and personnel abilities, strategic alliances with industry leaders and large investments in future advertising campaigns. We have also invested in several new programs targeted at potentially increasing lifetime value of consumers and driving new revenue. These programs included a newly in-house call center, the launch of the consumer auto ship program and enhanced customer web platform for ordering, an improved version of the My Medifast support community, and successful launch of several new products and product lines to include new replacements and supplement offerings. We believe the near future impact of all these investments will push the complete Medifast business into a momentous shift of increasing the Medifast brand awareness leading to strong revenue growth in the multiple distribution channels of Medifast in 2008 and beyond. Our direct sales model Take Shape for Life which represents over 30% of our total income is a physician-led network of health coaches that provide client support, as well as an opportunity for clients to become health coaches themselves and become compensated for supporting the additional clients that they introduce and support on the program.

In this model we have found that there is roughly a three-month education period from the time an individual becomes a health coach until they begin to produce noticeable revenues. On the third quarter call we spoke on the recruiting rates of health coaches in the months directly following the national convention in July. Being up significantly from the same time of that month's prior year. We are pleased to say that this increase in recruiting was directly shown in the fourth quarter revenue growth in Take Shape for Life which was up over 30% from the fourth quarter of the prior year. I believe the recruiting rates to be very strong indicator of the future revenue growth in this business and throughout 2007 Take Shape for Life experienced 54% year over year growth in health coach recruiting with the majority of that occurring in the latter half of the year.

Current trending shows this recruiting growth should continue throughout the upcoming year which we believes places Take Shape for Life in a tremendous position to witness strong revenue growth potential in 2008. To help ensure this trend continues, the company will continue to launch many new tools and services to the health coach field throughout the year of 2008. These additional tools will focus largely on the technology and recognition aspects of the business to include a newly updated website and shopping cart experience with the clients and updated back office software platform to assist in the health coach's management of their business and multiple event and incentive launches to promote the building of health coaches and client acquisition. We must give thanks to our TSFL leaders for their continued commitment and increasing level of leadership and communication as their business continues to grow in supporting thousands of individuals successfully lose weight and regain their health.

The Medifast Weight Control Centers, which represents approximately 6% of the Medifast overall revenues, closed the year operating in 10 locations in Dallas and Orlando. In the year of 2007 this division of the company experienced revenue growth of 37% versus the prior year. This was done with a mixture of improvement in advertising efficiency and a heavy focus on improving the daily operations of the business. The average monthly revenue per clinic also witnessed significant growth in 2007 up over 64% compared to the 2006. In the estimated $40 billion weight loss and healthy living industry, the brick and mortar clinic model has always made up a significant portion of overall sales. Medifast has created its highest level of consumer support through it's medically supervised clinic model with the creation of the Medifast Weight Control Centers. The recent growth in this clinic division has proven that the model is in high demand from a select portion of the weight loss consumers. Therefore, throughout the fourth quarter the company invested in the beginning stages of expansion of this model into several new locations in existing cities as well as expansion to a new major market. This investment allowed for Medifast Weight Control Centers in the first quarter of 2008 to open three new centers in the Houston market with a fourth to be opened by the close of the first quarter. Also on February 18th, 2008, the company announced it sold the rights to open four franchisee clinics in the greater Baltimore metropolitan area..

The company believes the clinic model will be a major driver of revenues and profits for the Medifast business as it continues to expand. Several of the larger clinic operators in the United States has recently shown signs of financial concerns which has led to the closing of many clinic locations. We believe this is largely due to operational issues per business model and not a reflection on the economic outlook for a clinic model as a whole which we believe has been proven and confirmed through our recent trending in Medifast weight control centers. We feel that our newly offered Medifast Weight Control Center franchisee model represents a tremendous opportunity for those individuals who have been in the clinic industry, understand its operations and are currently or feel they may soon be looking for a new weight loss clinic business opportunity and wish to partner with a growing business model that is backed by a tremendous amount of history and credibility in the weight loss industry. Throughout the year of 2007 the company has significantly improved in its ability to understand and improve our key performance metrics. Launch Enterprise Resource Planning System gave us the ability to better track our advertising success rates while also better track the success of our consumers once on the program.

We were able to take this increased knowledge and awareness and focus on improving the building blocks of the major drivers of the company's revenue to include the future direct response advertising campaigns, the development of the . direct sales team, the expansion of the medical clinic model and overall infrastructure enhancements to better support these initiatives. We have done this through many venues to include bringing on celebrity talent, partnering with the industry's top direct response production and execution teams, creating the needed infrastructure build-outs such as auto ship and in-house call center, improving recruiting and retention capabilities and investing in clinical studies to include the Johns Hopkins two year diabetes study which was recently published in Diabetes Educator. We believe that all these initiatives have assisted in increasing the overall consumer awareness of the Medifast brand. These initiatives have successfully created an umbrella of branded support to all of our distribution channels, all of which are experiencing positive trending, moving into the weight loss season of January 2008. We believe that the most exciting aspect of our business strategy is the diversified opportunity our extensive business platform presents.

We are experiencing growth in all aspects of our business and our continuously improving marketing efforts impact all channels of our business. Our platform is a sustainable model that is less impacted by the many fads of the weight loss industry as our clinically proven products and programs continue to yield more effective results with doctor recommended weight loss of two to five pounds per week. Medifast is a safe and simple solution that is growing in popularity for both weight loss as well as long-term weight maintenance. Our extensive choices in consumer support and highly effective programs set Medifast apart from our competition. I believe that a major strength of our diversified business model proves to be beneficial towards a powerful subject matter when you discuss a topic that has been on the minds of the American public, which is the anticipation of an economic downturn in consumer spending. Our business is by no means recession proof; however, I feel our diverse structure puts us in a very strong position for growth even with an economic downturn.

First, look at our direct sales division of Take Shape for Life. History has shown that the direct selling due to potential to earn an incremental income benefits in economic downturn. Should inflation or unemployment become more of a significant issue for the consumer, the potential to earn incremental income through distribution of a product that appeals to the consumer can offset potential negative impact on consumer spending. Also, the Medifast direct business is one that offers a mere replacement product, a food at an average cost of $8 per day. The purchase and home delivery process of the Medifast meals can require what can be perceived as a large up-front cash outlay for two weeks or a month's supply at a time as opposed to day by day grocery shopping. However, this is simply requires a different mind-set on the spending habits, not a larger food expense. As a total spend on food with Medifast, it is less than what most consumers spend on food in their normal day.

I believe that proper marketing can help consumers see that Medifast is not a discretionary purpose, but a replacement cost of a daily need. It is due to the strength of our business model, our strong medical and clinical history, the many strategic initiatives that we have made throughout 2007, the knowledge which we have acquired in approving effectiveness of our advertising spend and the positive trending we are witnessing thus far in the first quarter of 2008 that we are estimating full year revenue growth of eight to 10% and diluted earnings share growth of 30 to 35% for the year ended December 31st, 2008. We have acquired a tremendous amount of knowledge and experience and have begun applying these tools of our business in a very effective manner that we believe will allow us to acquire consumers cheaper, and keep customers longer and continue to grow the Medifast brands a proven and medically backed healthy weight loss company for the future. And now I would like to open up the call for questions.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS).

Our first question is from the line of Laura Richardson with BB&T. Please proceed with your question. (inaudible) Scott could get ahead of me, but anyway, my big question for you guys is, the guidance for 2008 seems so different from what you reported in the fourth quarter, you know, the revenue growth is a lot slower and the expense growth also a lot less. So can you explain to me the thinking behind that, like why you're thinking you're going to be in the first quarter growing revenue eight to 10% coming off this great recruiting you just had in Take Shape for Life as one example?

Of course. What I'll do is paint a picture of what growth we're expecting, the many different distribution channels of Medifast.

And by quarter if it's different too, Mike, that will be helpful.

I'll speak annually out of the gates and we can dive into quarters if you still have additional questions.

Okay.

What we're expecting in the business of both Take Shape for Life and Medifast Weight Control Centers is roughly 20 to 25% growth year over year. The reason that the overall growth rate is less than that, is because these two businesses, although 20 to 25% is substantially higher than the overall eight to 10, that's because of the weighted average of their total sales in the business, (inaudible) representing 30%, Medifast Weight Control Centers representing 6%. We look in almost doubling the number of clinics corporately owned inside the Medifast Weight Control Centers throughout the year.

However, these are going to be breaking into new markets and they're going to be done throughout the year so you're not going to get the full effect (inaudible) benefit. Therefore as an unknown for us, breaking into new markets, we're being consecutive in the growth rate of Medifast Weight Control Centers to see what the effectiveness of advertising will be in these new markets.. The Medifast direct response business which is the largest piece of our revenue as we mentioned before we're anticipating an advertising spend that is equal to that was spent this past year, roughly 18.5 to $19 million. Where we're expecting the profit growth to come from largely is the more effective spend on the advertising.

The metric that we're using most frequently in-house to track the effectiveness of our advertising is a revenue to spend number. In 2007 that revenue to spend number was 2.5 to one. We're anticipating that revenue to spend number increasing to a 2.6 to one in 2008. Which is a minimal increase in revenue to spend. What that does for the bottom line is roughly $2 million in additional revenue with no additional expenses associated to that except for the variable expense of cost of goods. So if you see a 20% to 25% growth rate in TSFL, Medifast Weight Control Centers, in that $2 million increase in revenue for the direct response on no additional spend, that's how we're coming with the forecast of eight to 10% for revenue growth as well as 30 to 35% for bottom line growth.

It's all from that advertising?

That is. If you're looking at rough-- It's a mixture of both the growth of those two other divisions plus that advertising piece. If you're able to spend-- if you're able to acquire $2 million in revenue with almost no advertising growth associated to it, what that does for the bottom line is very powerful.

Huh. Okay. And why would you not want to increase the ad spend?

Of course if we prove the advertising spend effective, we can increase that throughout the year which will acquire us-- require us to update guidance. However, what we saw last year, we want to make sure we come out of the gates spending wisely and continue to ramp that up only if and when it is proven successful.

Okay. And so the bottom line guidance-- I assume you're expecting proportionate increase in commissions for that Take Shape for Life sales growth and what's the margin differential again between that and direct?

I'm sorry. What was the question?

Okay. On Take Shape for Life.

The margin difference?

Yeah. Well, there's commissions, Brendan mentioned that in his SG&A comments.

The commission expense for Take Shape for Life is completely variably: It pays out roughly about 41 to 42% of the total sales inside that division. And the margin for that business of Take Shape for Life and the Medifast direct response are equal as long as the cost to acquire and the revenue to spend maintain around that 200 to 225 cost to acquire and that 2.5 to one return to spend.

Okay. So that -- let's see. I still don't see how this adds up to only eight to 10% revenue growth again off of 29% in the fourth quarter.

I believe if you back into the numbers, I think the Take Shape for Life end of the year roughly add about a $27 million year. If you take that on a 20% growth rate, if you take the Medifast direct business, which end of the year, roughly, about $45 million, I believe, in sales, and get that to the 46 to 47 number, and then the Medifast Weight Control Centers which ended the year roughly around 4.5 to $5 million and knock that up to the 20% revenue growth and keep the doctor's business flat, which is 5% of sales. I believe that comes in into that $92 million figure for the year which is about that 10% growth rate.

Okay. I'll work on my numbers and then just a couple other questions for you. So in terms of the infrastructure, do you think there's anything that needs to be added in 2008?

I believe if you look at capital infrastructure, buildup for 2007, it was roughly $5 million, with the increase in clinics that we're looking to do, roughly 10 over the course of the year as well as some additional IT enhancements on the websites you're probably going to see roughly about a 40% decrease in CapEx over the course of the year, looking to come in at the total about 3 million, $3.5 million over 2008, so nowhere near as much. However, you of course going to continue to invest in the business to make it scalable for the growth rates expected.

And how about the people side of infrastructure?

People side we are happy with where we currently sit. We invested heavily in the top management over this last year and we're starting to see the benefit of those individuals this current year. So we are very excited about that number staying roughly flat. Of course when you get in the areas of distribution, which are since we are integrated, you add variable expense based on revenue rates but that is a very small percentage of our overall payroll. Manufacturing employees are included in cost of goods.

And then the last question, so what do you expect the inventory growth to be?

Inventory growth should be stable as what it is in the first quarter. We ramped up in the fourth quarter to prepare ourselves for revenue increases, potential that can always occur.. So we avoid what occurred back in 2006 with that PR hit inside people. That number should be maintaining but actually if anything, decreasing throughout the year due to just in time inventory enhancements as with our new ARP system.

Inventory should grow less than sales.

Inventory should grow less than sales, yes.

And roughly how much would you say.

I would say maintain that number that it is current as of right now as a fixed figure for inventory. Regardless of what sales is. What we need to do is maintain about a three month supply of product.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Adams. Please proceed with your question.

Hi, guys. A couple of questions. Can you hear me okay.

Doing great. How are you doing today?

I'm doing all right. So I want to dive into that direct revenue assumption for next year as well. What's happened to the lifetime value of a customer? Is it still running over $600?

Again when I speak to lifetime value I'll speak on the different models. Inside the direct response business, I believe we roughly stated it was around $500 in the past and that's about maintaining. We're seeing that number slightly, maybe turn on the positive side increase with the new auto ship program but we're still working all the kinks out of the auto ship program as well as the additional support pieces.

Inside the Take Shape for Life business that lifetime value is well over $700, probably about $725 due to the additional support and what we're really looking to focus on in 2008 is there's two very distinct customers in the Medifast direct response business. That is those consumers who simply order one time and really opt in for no support whatsoever. Their lifetime value is around $250 figure. Then there are those consumers that do offer to opt in for the support we offer, whether it be our nutrition team, our My Medifast, any of the above and their lifetime value is roughly $725. That's how we're coming up with that $500. It's right in the middle of those two different numbers and the goal is to allow consumers to understand the different support opportunities we have, to allow them to be successful long term.

Okay. And spending, what are you seeing in the first quarter if you said this, I apologize. But what are you seeing in the first quarter on your ad spend for the direct business? Was it slow in January and then building throughout the quarter or how is that playing out this far?

It's actually playing about stable throughout the course of the first quarter. We've done a twist in our trending as far as where we put that money. Back in 2007 you saw roughly about a 40% web, 40% print, 20% TV. We are now moving more of our spend to the web to capture those consumers at that point of sale. What we're expecting the first quarter is going to be about a 50% web, 35% print, only about a 10% TV and almost about a 5% direct response mailing.

And total spending, probably similar to what we saw last year in the first quarter.

I would say a little bit higher from what we saw in the first quarter last year. Last year we spent roughly 4.3 in the first quarter, I'm looking to spend about $5 million in the first quarter of this year. Where we spent our money majority last year was in Q2 and Q3. And some of that money which got a 1.5 to #2 million was unaffected advertising. That's where we think the real benefit is going to come in, in the second and third quarter of this year, continuing to spend that money in an effective manner from what we've learned over the past year.

Okay. And I think you said you're looking for though to acquire somewhere in the 200 to 225 range. Did I get that correct?

I believe so, yeah. What we're looking to see is now we're focused on retouching customers, a little portion of our spend is going on to retouching customers which is not a benefit of a cost to acquire, it's more of a reactivation. That cost to acquire number which was $200 over the course of 2007 might creep up a bit in 2008 just because we're going after acquiring less new customers and looking at lifetime value a little bit more.

Let me ask you this, Mike. If you've got a $500 lifetime value of a direct customer with -- I don't know, contribution margin, somewhere below your gross margin, call it,-- call it 70 before your spend, you're getting about, what, $350 per customer on a 200 to 225 spend? Does that sound right?

That's about right, less the expenses of cost of goods of course and the additional STPs associated with that but it's a very profitable model.

That's an incremental. A this level today, with your G&A spend, I just wondered, do you need to be a little faster on the growth to get that incremental margin to drive the whole profitability higher, not that your level of profitability is a negative. I'm just -- I guess I'm coming back to the same question as Laura was getting to, is it seems a little -- it doesn't seem very aggressive.

It is a bit probably more conservative. I believe if you listen to the talks of some of the competition, they're having issues right now with their marketing spend. We're not seeing those exact same issues. Our closing rate on the website is maintaining what it was all throughout last year as well as I think our cost to acquire revenue spend is very positive out of the gates in 2008. We know that we made -- we got a bit too aggressive in the second and third quarter of last year which really cost us a range per share, and I think that this year the goal is of course to get our business both scalable and to prove that model before we look at the launching of the advertising expense there. So I agree that we do have opportunity being only an 18 to $20 million spend we're far from reaching the point of saturation in the market. We just want to make sure the American consumers are opting in to listen to what it is we have to put out there. So I believe we do have tremendous potential for growth moving forward out of the gates in 2008 we wanted to make sure we were able to prove that spending before we actually moved forward with it.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Harris Baronholt] from (inaudible) Advisors Please proceed with your question.

Hi. Great quarter. I had a question on the gross margins. You made a point in the release of talking about the fourth quarter decline in the gross margin and you attributed it to inventory writedown.

Not as much a writedown as a re-evaluation of (inaudible) value.

What does that mean revaluation.

Basically throughout the year 2007 if you recall we purchased new manufacturing equipment. That new manufacturing equipment, which our equipment had not been updated for probably the past 15 years, caused us to win a very positive thing, gain significant efficiency in our cost of goods sold. When we did the read-- when we did the inventory re-evaluation at year end, because of a lower cost of goods, you have to reprice your inventory value which of course lower the overall inventory value making cost of goods increase. Moving forward, what's that's actually going to do is actually provide us a more aggressive and more positive cost of goods figure. Moving from what was 75% gross margin to probably about 75.5 to 76% gross margin in 2008. So it was a very short one time hit. We had -- we always do inventory re-evaluation,but having not bought new equipment in that period of time we were not aware what that was going to do to the total cost of goods figure.

Was that the total explanation for the slippage of the gross margin in the fourth quarter, that are-evaluation or where there other factors..

There were no other factors associated with that. There was minimal inventory writedowns nothing different than on the (inaudible) annual basis..

So I'm looking at your annual numbers, your gross margin last year was 74.3% versus 75.3 the year before. Is that a -- Right. So if you get the 74.3 back to 76, even to 75.3, you're talking about five, six, $0.07 a share incremental earnings, separate from all the leverage you'll get from the SG&A spending. Is that a fair statement?

That is a very fair statement. We were conservative in the overall forecasting for cost of goods mainly due to the expenses that could be increasing in fuel, shipping is a number that is included in our cost of goods figure and with more consumers opting to go with that larger purchase price of over $200 on auto ship, more consumers are seeing free shipping which is not a revenue source for us, so we were conservative in the cost of goods forecasting throughout this year. We think we'll see a benefit from the new machines. However, we want to make sure that's not off set by the increase in fuel prices.

Got you. Okay. So the general sense of things is while you're being superconservative, if I sit back here and look at the numbers as much as you're talking about a 30, 35% growth which on its own is dramatic and positive, just wonderful, it is conceivable to be more than that? That's my conclusion.

We believe we've have I bright future in front of us for 2008.

Fair enough. Thanks so much.

Thank you.

Great job.

Thank you very much.

(OPERATOR INSTRUCTIONS) Gentlemen, it appears we have no further questions at this time.

Thank you very much. We appreciate you taking the time to hear us share our vision for the company. We're excited by where we are today and the opportunities for the future. We thank you for your continued support and look forward to speaking with you when we announce our first quarter numbers in May of 2008. Good day.

Ladies and gentlemen, this concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.