Medifast Inc (MED) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Medifast Inc. fourth quarter and fiscal year 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner of ICR. Thank you, Ms. Turner, you may begin.

Thanks. Good afternoon, and welcome to Medifast's fourth quarter and fiscal year 2010 earnings conference call. On the call with me today are Michael McDevitt, Chief Executive Officer and Brendan Connors, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending December 31, 2010. If you have not received the release, it is available on the Investor Relations portion of Medifast's website at www.choosemedifast.com. This call is being webcast and a replay will be available on the Company's website.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believes, expect, anticipate and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance and therefore, undue reliance should not be placed on them. Actual results could therefore differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made at today's release or on the call posted on their website. Medifast does not comment on issues or items currently held potentially in litigation with adversarial third parties and under investigation by appropriate regulatory or law-enforcement agencies. All of the forward-looking statements contained herein speak only of as today's date. And with that, I would like to turn the call over to Medifast CEO, Michael McDevitt.

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call I will provide highlights of our fourth-quarter results, and then Brendan will review the financial results for the quarter in a bit more detail. I will then provide some closing remarks, and we will open up the call to take your questions. To begin, I would like to say that we appreciate the patience of our shareholders over the past two weeks. Due to the change in auditors, the rapid growth of our revenues, building infrastructure and recruiting experienced talent in our accounting and financial department during the fiscal year 2010, the Company experienced new challenges and needed additional time to work with our audit team reconciling previous year financials.

The Company over the past 10 years has experienced significant growth, attaining a combined aggregate growth rate of over 40% per year for the past decade. During that time, the Company has successfully worked down a large net operating loss carry forward and built a substantial infrastructure to support its operations. Our public Company evolved from an over-the-counter stock to an American Stock Exchange to the New York Stock Exchange, all with new listing standards and regulations. During the same time frame, Congress implemented Sarbanes-Oxley legislation that caused many small and regional auditors who service small cap public companies to merge with larger firms or go out of business. During this time, the Company engaged a local Baltimore firm, Wooden & Benson, a BDOC affiliate company. They then decided to exit public company auditing, thus, our Company engaged in a closely located BDO-Siedman affiliate, they then decided to up the private company auditing, and our Company engaged in a closely located BDO-Siedman affiliate Bagell, Josephs, Levine & Company LLC. During the 2009 audit, Bagell, who at the time was not a McGladrey affiliate, announced that they joined with Friedman LLP of New York City. The Company's audit committee authorized the completion of the 2009 audit and engaged Friedman to complete the audit started by Bagell, Josephs. After that audit, the Company's audit committee selected McGladrey as our auditor, primarily because they were a local company with a national presence and a strong public company experience.

Medifast from 1999 until today freely chose to change our auditors only once, while the other changes were forced upon us by the consolidation and restructuring and the auditing industry and as a result of Sarbanes-Oxley. Our thoughts towards our most recent audit is to say thank you to McGladrey for assisting us in our journey towards continuous improvement. We recently published our Board approved corporate guiding principles to our associates at Medifast, and in that plan our goal throughout our organization is to continue to be ethical, honest and transparent to our regulatory agencies and associates and shareholders. In this most recent audit, the challenges spawned from errors in prior years in recording certain business expenses in the proper period. Mainly in the area for certain freight and web advertising expenses and the fact that the Company had a significantly large net operating loss carry forward in '99 and had a large accelerated appreciation under our new manufacturing equipment which reduced the Company's tax rate and caused the Company to not have -- to have a non-normalized tax rate until 2009 while at the same time the Company experienced substantial financial growth.

This required the Company to request an automatic extension to file the Form 10-K to allow adequate time for the current year auditors to meet, discuss, review information with the prior-year auditors. The new auditors need additional time to review the book entries for the past few years to accurately determine the proper restatement of financial reports on the periods in question. No matter what the historical financial restatements may be, the Company continued to exhibit strong top and bottom-line growth for those periods and in 2010, the Company was able to report revenue growth of 52% and earnings growth of 85% for the full year of 2010. We have continued to focus on the balance of driving continued revenue and earnings growth while building the infrastructure for scalability in the Medifast weight control centers, in our web platform for Take Shape For Life and Medifast Direct, as well as adding the necessary resources, recruiting talent, making capital investments and building our infrastructure to support our operations to position the Company for a great 2011 and beyond.

Now, focusing on the fourth quarter results in some more detail. In the fourth quarter of 2010, our positive sales results were broad-based across each of our three primary distribution channels including Take Shape For Life, direct response, and our Medifast weight control centers. Our three primary distribution channels continue to provide a complementary source, personalized support for clients to connect and share Medifast clinically proven weight loss programs. Revenue in the direct sales channel, Take Shape For Life, increased 38% to $42 million in the fourth quarter of 2010. The number of active health coaches increased 50% to approximately 9,000 compared to 6,000 in the fourth quarter of 2009. We realized that despite the strong year-over-year growth, that sequential from the third quarter 2010, our health coach growth was flat. Historically, due to the seasonality of the weight-loss business during the holidays and the conservative methodology in which the Company determines its active health coach count, there's a slight slowdown in the active health coach counts as the close of the year, which is offset by the incremental growth in recruiting in the first quarter following year.

In the fourth quarter of 2010, we experienced this seasonality in our business. As a result, the Company's conservative approach in launching our new Take Shape for Life eCommerce platform, which our active health coaches were anxiously awaiting since our Dallas annual convention last July. However, in January, the diet season started robustly as it has historically and carries through in March being the biggest and strongest month for the Company's first quarter. Also as a reminder, we take a conservative approach to calculating our health coaches and for the quarter to provide the most transparent picture of our health coach growth as a result. Medifast active health coaches represent individuals that have clients ordering in the last month of the quarter, which in this case was December. And thus, they received a commission check in the last month of the respective quarter.

In today's environment, trust and personal recommendations are a significant driver in consumer purchasing decisions, and the Take Shape for Life model of one-on-one interaction continues to excel. Take Shape For Life clients who have achieved successful results through Medifast's clinically proven and physician recommended products continue to become active health coaches. As result, we expect to generate a 42% increase in Take Shape for Life coaches to 10,100 for the first quarter of 2011 compared to 7,100 last year. The strength of the Take Shape for Life leadership and field combined with our medical, clinical heritage and our superior product and program offerings will support the continued growth of our health coach field. We are very pleased with this trend and believe our continued health coach growth increases further exhibit the strength of the Medifast brand.

In our direct response sales channel, our consistent focus on Medifast clinical research innovation has helped us generate more targeted and effective advertising, leading to a 27% sales increase for the fourth quarter of 2010. On a 27% increase in marketing and advertising expense, we generated a 2.8 to 1 revenue to spend ratio during the fourth quarter of 2010 equal to the rate in 2009. This also led to strong improvements in direct response divisional operating income for the quarter. At our Medifast weight control centers and physicians wholesale channel, our brand's portion controlled meal replacements personalized support programs continue to meet the needs of clients seeking additional support and accountability. In the fourth quarter, we generated a 60% same-store sales increase and a 10% increase in the number of clinics compared to the prior year. We opened seven new corporate clinics in the quarter, ending the year with 39 corporate and 21 franchise centers. Based on the demonstrated success and client satisfaction of Medifast weight control centers, we believe there's tremendous opportunity for growth in both new and existing markets.

In 2011 we will continue to expand the infrastructure necessary to allow for scalability in this retail model. We plan to open 25 to 30 more centers in the fiscal year 2011. With this planned expansion, we will also maintain our focus on continued comparable same-store sales growth. Our continued growth and strong financial results validate consistent growing awareness for Medifast clinically tested physician recommended products with consumers that are looking to achieve weight loss and weight maintenance. We intend to remain focused on the investment and advancement of our corporate infrastructure and personnel to increase our consumer reach in new and existing markets utilizing innovative support, communication and marketing strategies, as well as the introduction of new products through added production and manufacturing capacity to support our future growth.

In the first quarter of 2011, we added new executive talent to our team in the areas of IT, HR and supply chain. We believe these individuals will further support the Medifast increased growth and look forward to their contributions. We will continue to add extensive talents in areas where our growth has outstripped our infrastructure. In 2011 we will increase the additional talent and resources to accounting and finance departments to include an internal audit division. We consistently talk about our focus on scalability in all areas of our vertical infrastructure, and we are concentrating on this for the future.

In mid-March, we successfully launched both the Company's new eCommerce platform for our Medifast direct and Take Shape For Life sales channels and the new in-store operating system for our Medifast weight control centers. The eCommerce launch was the largest redesign and upgrade of eCommerce platforms in the Company's history. We relaunched websites for both Medifast direct and Take Shape For Life. The overall reflects Medifast's dedication to delivering high-quality websites along with state-of-the-art eCommerce platforms. The newly designed cobranded Take Shape For Life website provides health coaches the ability to customize an About Me section and create an integrated online presence including personal blogs and links to the social media sites such as Facebook, Twitter and YouTube. These websites have a fresh look and feel creative and more user-friendly experience for clients looking to learn more about the various weight-loss options we provide. Our customers can expect fully interactive, searchable sites with easy, efficient checkout processes. In addition, we launched a new operating system for Medifast weight control centers. It is complete with customer data tracking tools and is designed to provide a consumer facing, as well as employee facing system, with analytic tools that communicate a client's progress during their weight loss and maintenance journey. These tools will provide comprehensive support and data tracking functions to assist the clients in reaching their personalized weight-loss goals. We also wanted to provide you with a brief update on our strategy to continually initiate a number of events to provide opportunities for us to offer additional training at our existing health coaches and attract new health coaches.

As a reminder, in the beginning of 2010, we launched a new series of quarterly hosted regional events called Take Shape For Life regional events which are strategically planned, based on geography as well as a complementary event to our leadership functions. These events can best be described as many annual conventions and will be held at different locations across the country. In the first quarter of 2011, we hosted seven Take Shape For Life regional events across the country. The regional events attracted on average 500 health coaches per event. Potential new health coaches are focused on both training and recruiting new health coaches at our regional events, and the response of the coaches that have attended these events thus far is speaking for itself and their increased activity in the first quarter of 2011. We believe that as our base of health coaches continues to grow, the need for increased outreach and training will be critical to our success. We have also increased focus on our two leadership events. Go Global this spring for emerging leaders and Sundance in the third quarter for our established leaders. Our Go Global event which is held in April has been successful at getting our leadership excited for growth while also training them on new initiatives to better build their business. In July, our TSFL annual convention will be held in Orlando and we will have many new exciting products and training launches for our health coaches in attendance. At these events, leaders are taught skills and techniques to help further develop their own team and health coaches that they mentor. As our leaders continue to develop their training skills, we will be able to more efficiently and effectively recruit new health coaches.

In the past 31 years, over 20,000 doctors have recommended our products to more than 1 million clients who have lost and maintained their weight. The credibility of our products and the results they produce continues to resonate extremely well with new and existing clients. This credibility, our strong team members and our superior product offering create the foundation that supports every channel within the Medifast business. As a result of our credibility, Villanova's College of Nursing has partnered with Take Shape For Life Foundation supported by Medifast and the MacDonald's family in the formation of a flagship obesity center.

The MacDonald's obesity -- The MacDonald Center for Obesity Prevention and Education, or COPE, as we call it, the overreaching goal of this partnership is to provide academic and scientific support to all organizations who desire to combat the obesity epidemic in the United States. We are working with Villanova's nursing school to provide course material and training for nurses and medical professionals in our industry and in our Company. We intend to develop, with the help of the COPE, a certification program to enhance the professional education of our health coaches, our Medifast weight control center counselors and our Medifast medical practitioners who provide support to our Medifast customers. Supporting the Take Shape For Life foundation and the COPE will continue the Medifast tradition on education, training and research to provide the best class of products and support services in our history.

We are delighted to support the Villanova University nursing school vision to provide the best education and training for nurses and preventive and clinical care in the world. Being the first university training medical professionals and nurses about the condition of obesity and the US will advance the strategic plan of Medifast. Going forward, we are confident that our vertically integrated operations and increased capacity will allow us to continually improve the long-term leverage of our business model for long-term profitable growth. Now, I would like to turn over the call to our Chief Financial Officer, Brendan Connors, to review our financial results in more detail.

Thanks, Mike. Revenue for the three months ended December 31, 2010, increased 32% to $63 million compared to $47.3 million in 2009. Take Shape For Life sales channel accounted for 67% of total revenue. Direct response marketing accounted for 23%, Medifast weight control centers and doctors wholesale accounted for 11% of total revenue. Focusing on our sales channel in more detail, our direct response sales channel -- direct sales channel Take Shape For Life experienced revenue growth of 38% to $42 million compared to the same period last year. Growth in revenues for Take Shape For Life was driven by increased customer product sales as a result of an increase in active health coaches. The number of active health coaches increased 50% to approximately 9,000 compared to 6,000 in the fourth quarter of 2009.

The Direct Response sales channel revenue increased 27% to $14.4 million, in part due to a 27% increase in advertising dollars spent as Medifast continues to experience a more effective advertising message through more targeted advertising based on extensive analytical research and improved call center closing rates. As Mike mentioned earlier, we achieved a 2.8 to 1 revenue and spend ratio in the fourth quarter of 2010 equal to the revenue to spend ratio in 2009. Revenue in the Medifast weight control center and physician wholesales channel increased by 27% to $6.7 million in the fourth quarter of 2010. The increase in revenue is due to comparable store sales increasing 16% for units open greater than one year, as well as 39 corporate centers being opened in the fourth quarter of 2010 compared to 27 in the fourth quarter of 2009. Operating income for the fourth quarter of 2010 increased 27% to $5.2 million compared to $4.1 million in the same period a year ago. This improvement was due to strong net revenue growth, it helped drive improved gross margin, increased leverage of sales and marketing expenses associated with our vertically integrated business model. Fourth-quarter net income was $3.4 million, or $0.23 per diluted share compared to $2.4 million, or $0.17 per diluted share for the fourth quarter of 2009, an increase in diluted earnings per share of 35%.

Now focusing on our results for the full year in more detail. For the fiscal year ended December 31, 2010, net revenue increased 52% to $257.6 billion, net revenue of $169.7 million in 2009. Each of the Company's three primary distribution channels, Take Shape For Life, direct response marketing and Medifast weight control centers and wholesale physicians contributes to strong year over year revenue increase. Gross profits for the full year 2010 and increased 55% to $192.5 million compared to $124.4 million the prior year. The Company's gross profit margin increased 140 basis points to 74.7% in 2010 versus 73.3% in 2009. Selling, general and administrative expenses increased $55 million, or 52% to $160.8 million in 2010. As a percent of net sales, we were able to maintain selling, general and administrative expenses at 62.4%, equal to fiscal year 2009 despite the added expenses in fiscal 2010. Largest increases in SG&A expense were related to higher variable expenses such as Take Shape For Life commission expense as directly related to product sales, as well as personal expense to support the growth.

Fiscal year 2010 operating income increased 71% to $31.7 million compared to $18.4 million in the same period a year ago. The operating margin expanded 140 basis points to 12.3% from 10.9% for the same period last year. Net income for the fiscal year 2010 was $19.6 million, or $1.35 per diluted share compared to net income of $11.4 million, or $0.77 per share for the comparable period last year, an increase in diluted earnings per share of 75%. The Company's balance sheet remains strong with stockholders equity of $72 million and working capital of $44.7 million as of December 31, 2010. Cash, cash equivalents and investment securities increased 111%, or $18.1 million to $34.4 million as a result of improved operating cash flow.

Now, focusing on a few items as it relates to our financial outlook for the first quarter and fiscal 2011. We expect first-quarter revenue to be between $73.5 million and $74 million, representing an increase in the range of 21% to 22% from the first quarter of 2010. As Mike mentioned, we anticipate health coach growth of approximately 42% to 10,100 active health coaches at the close of the first quarter 2011 compared to the prior year period. The Company anticipates the advertising spend to increase by 20% to 25% as compared to the first quarter of 2010 while maintaining a revenue to spend ratio of 2.8 to 1. Similarly, for the full year, we expect to increase their advertising spend by 20% to 25% while maintaining a 2.8 to 1 revenue to spend ratio. Gross profit margin improvement is expected to be in the range of 25 to 50 basis points compared to the prior year due to the continued manufacturing efficiencies with full-year expectations of a 50 basis point improvement versus the full year of 2010.

The first quarter of 2011, we plan to open two additional Medifast weight control centers in new and existing markets with a proven model of providing one-on-one support by a personal counselor and personalized program with expectations to open 25 to 30 new corporate centers opening throughout the year. We expect the Medifast weight control center same-store sales open greater than a year to increase approximately 10% as result of the accelerated unit growth in fiscal 2011. The full year tax rate is expected to be approximately 38% to 39% and full-year diluted shares outstanding of approximately 15 million. That concludes our financial overview, now I would like to turn the call back over to our CEO, Michael McDevitt.

Thank you, Brendan. I would like to conclude by our -- our prepared remarks by reiterating the management team's confidence and excitement about Medifast outlook for fiscal 2011. We appreciate the hard work and dedicated efforts of our employees, health coaches, franchise partners our valued clients for their continued support. Now, we like to open up the call to answer your questions. Operator? Thank you.

Thank you. We will now be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Scott Van Winkle with Canaccord Genuity. Please proceed with your question.

Hi, thanks. I didn't see a fourth-quarter income statement. Was the fact that you were stated prior years, was is a catch-up from prior quarters that we saw in the fourth quarter? Or are there restated quarters as well?

We deemed the restatement 2010 to be immaterial to the quarters. So, you would see a slight catch up to the fourth quarter rolling through on the 10-K we will be filing.

Okay, so expenses are higher than normal in the fourth quarter as reported?

Exactly.

So, the first quarter, I guess as I try to think about what's coming forward, I have a couple of questions. One, to get your revenue guidance I have to assume a fairly dramatic decline in revenue per health coach. Does that sound accurate?

I would say as far as the revenue for health coach, what we've seen over the past year was we saw about a 3% drop year over year average. When you're having that kind of large recruiting rates, when you're going from 6,000 to 9,000, having so many of the health coaches be the beginning of their stages and taking time to get up and running, you do usually see a little bit of a drop in the average. It's almost like looking at it like a same-store sales perspective. But I will be honest, I think from our perspective how we've seen the first quarter play out, it's almost as if there really are two different first quarters. One pre-launch of our eCommerce platform, one post launch for eCommerce platform. And what we've been able to see since that successful launch come in March has really provided us a great insight of how I think the rest of your is going to shape up, and we are very excited about how that's going to look.

Yes, okay Mike, I appreciate that, but if I look at the numbers, you're giving a flat revenue to spend and 20% to 25% growth in spending on the first quarter, so we can figure out what direct response is pretty easily. Clinic business should be relatively simple to forecast, and it's not a huge percentage of revenue. But I'm coming up in the something in the 10% to 15% decline in revenue per health coach, and it seems a little odd. Was the -- when you say post-launch business with stronger, was the recruiting skewed pretty heavily towards the back half of the quarter and that's why I would see a decline in revenue per average distributor?

You're going to see two different types of recruiting numbers. Of the number of health coach recruiting, when we talk to health coaches that come on board, that was definitely skewed toward the back half of the quarter. At the same time, client acquisition, if you look at a health coach and what their job is, their main core job is to help support their clients to health. Prior to the launch, a lot of or health coaches are out there spending a lot of time teaching our clients how to actually place the order online. Now that that's such an easy user intuitive type of a process, our coaches are actually now being more successful in the acquisition of clients as well. So, we are seeing some good trending in both the acquisition of coaches as well as clients areas as of the back half of the month.

Fair enough. So Brendan, on the margin, if I just back of the envelope this, it seems like post the correction of the accounting in the past, it's probably like 50 basis point lower operating margin run rate than what I had assumed on the past numbers. So, should I consider that when the first quarter last year, as you reported it, the first-quarter 2010, you had about a 13.5% operating margin? Should I assume that's more like a 13% because we are accelerating expenses more than in the past?

It would probably be a little bit closer to 13.25%, Scott. You'd definitely see the result of the restatement. There's a slight increase in shipping expense in that first quarter. So I would say about 25 basis points, if I were to estimate the impact.

Okay. There's been a lot of talk from both of you about the diet space this year. Strength in some, weakness in others. Your direct response business would indicate that you are seeing pretty robust results. Is it a function that you are not advertising some of the same channels as everybody's been concerned about with Nutrisystem and the results of maybe some competition with Weight Watchers, et cetera? What are you seeing for that Direct response to be up 20% to 25% Q1?

We've actually seen great response in our direct response from both the acquisition of customers as well as the continuum of the customer. I think as the Medifast brand continues to become larger and all three channels really help to drive that Medifast brand, that Medifast direct response website has continued to pick up customers from all over the different branding awareness that we've done out there, we continue to have great success with the launch in additional pieces of our radio and our TV. But we still have the majority of the web spend which has been just terrific for us. I've seen a lot of it is been just a quick force protection a lot of competition start to shift their spending left and right. Of course, I don't know what their exact strategic plans are, but we are seeing a great response in everything we're putting out there right now, so we're going to continue to grow that until we start to see different.

Okay, and the new website -- and sorry, one more question and I'll pass it off to someone else. The new website, first of all, kudos, it's a dramatic improvement, was there any initial disruption or are there any metrics we can kind of sink our teeth into? I know it is pretty early obviously, as far as the website you've seen down the comments you had earlier?

No, I appreciate the comments, I think the marketing team who put so much work into that for that look and feel and also the user experience in there would love to hear that, so I will pass on. No, a lot of times when you can have new website, is such a dramatic shift in how the look and feel goes, there can be some concern because your client basis in kind of in shock when they come to it, they're not sure how to react. We didn't have any of that immediate. I think ours has just moved from where was to where it is. It's such more of a user intuitive aspect to it, we didn't have that initial drop up that some sites I know have been concerned about. We've seen, as far as metrics, we are tracking a lot of different metrics in our website from the areas of closing rates from the areas of return rates. And we continue to see stability. I don't think you are going to have that automatic jump right out of the gate. That's going to come with a little bit of time and letting our customers be more used to that site.

Okay. I'm sorry, one more question. I'm sorry, I've just got to ask, it's probably a topic to everybody on the call. What changes now from the standpoint of financial controls, two years of restatements, and I understand the inner city auditor progression. What's going to be done differently in the future, or is it just that we are set now with McGladrey and we've got a quality auditor in there that's done a deep dive and took it through the wringers?

Yes, I think it was a great experience, the audit, it was very long, it was very hard. And now as we continue to grow with the business, we want to continue to provide more confidence to our shareholders that we are taking all those right steps. We as an organization just really continue to focus on building the needed in-house and out-house excellence to be successful. A lot of the challenges this past time have come with our growth of the business in the way that we've grown. Taxes have always been that of a confusing issue for us, a very complex one. We continue to utilize out third-party tax experts from the Company to help us, because I think the tax is something that evolves much like the end tail shifts, it changes very quickly. So, we are going to continue to build up our assets from people internally and externally to make sure we have all the right pieces of the puzzle moving forward.

All right, thank you.

Thank you. Our next question comes from the line of Kurt Frederick with Wedbush Securities. Please proceed with your question.

Good afternoon.

Good afternoon.

I had a question on the weight control centers. As far as Q1, I know there's a lot of snowstorms and I was wondering how much you were impacted by that in the first quarter?

That's a great question. There was a lot of up and down the east corridor, the snowstorms. Where our centers are largely located, not so much of an impact because we are yet to really pile up into that Philadelphia, New York, Boston area. The Florida stores, they weren't impacted. Texas stores, they did have a cold winter down there in Texas, so for our distribution channel , it did have some challenges out of the gate. But as far as our stores, nothing from the weather from this past year had much of an impact at all. And the folks up there in Minneapolis, they are used to all that weather.

Okay. Then looking at the balance sheet, it looks like the inventory's been building up throughout the year, and I was wondering why that is and what we should expect maybe at the end of the Q1?

That's the usual trending in the fourth quarter. What we do is we build up inventory expecting a nice uptick in the first quarter sales volume as a result of the diet season. So, you will see that probably thing flatter if not going down with efficiencies we are gaining, as well as additional people we're hiring internally here that are going to help us drive additional efficiencies in the supply-chain to see that gross margin improvement and 2011 and beyond.

And we did give ourselves a bit of a buffer with the buildup of that Texas distribution center rather than really going ahead and splitting inventory A&B, just from a safety perspective when we have a new buildout like that. We did up the number of inventory to have a bit of duplication process. There is no real risk to that inventory becoming obsolete with Medifast having 18 to 24 month life fame, but we thought we'd be safer with that Texas distribution center being put up.

Okay, so at the end of Q1 it will probably decline and then we'll see it build again throughout the year?

Yes, I'd say it'd at least be flat if not down at the end of Q1. A lot of it depends on sales volume we are seeing in trending into the second quarter and third quarter.

And at the same time, with commodities jumping the way they are going, our purchasing department is looking for the best deals out there for economies of scale. If we see an opportunity we think something is going to rising, we might build up on that specific product for that short periods of time, just anticipating a rise in the market coming soon.

Okay, talking about the quantity cost, what are you seen as far as the fuel side of it? I know the DC is supposed to be cutting down against usage of fuel, I curious what the net impact has been thus far.

From the fuel side, we are able to pass a portion of that onto our consumers who do pay for their shipping. We had a change in our shipping rules last year which did allow for some consumers to have free shipping. It's probably split down the middle what we are seeing right now. Nothing as far as any kind of major impact for cost of goods coming from the commodity side as of right now.

Okay. That's it for me, thank you.

Thank you. Our next question comes from the line of Chris Krueger with Northland Capital Markets. Please proceed with your question.

Good afternoon.

Good afternoon.

Hi. So, if I understand you correctly, is it safe to say that the sales momentum you saw exiting the first quarter and after your eCommerce platform was put in place or the sales momentum entering the second quarter should be stronger than it was in the early part of the first quarter?

Yes, if you're looking from a trending perspective, we are very excited about how the first quarter closed out for us. Those numbers which -- we wanted to get the numbers in front of you due to the delay in the announcement of our full-year numbers. We had the opportunity to have a great view as far as how the quarter is shaping up. You will recall last year around this time frame in March, we did have a bit of an eCommerce hiccup which caused us a bit of momentum. We have successfully launched a much more stable, much more scalable eCommerce platform, so we have reduced our risk significantly as far as those types of hiccups, and we are very excited to see how this new platform can take us to the next level.

Okay. Can you give us an indication what your January growth rate versus your March growth rate was or a range of improvement you saw?

Can't get into the details on that one, being too young in the quarter as of right now, but I will say that we were excited about how the quarter closed out.

Okay. I think on Scott's question about your operating margin in the first quarter, I know it is a little bit below the prior year. If we were to look out to the remainder of the year, would you look for that to return to positive leverage?

Yes. That is correct, Chris.

Okay. And I ask this every time, but in the past, you've talked about your seven largest markets being the lion's share of your Take Shape For Life sales base. What's the story there now?

Actually, I'm glad you asked that because I forgot to mention that in the call. I'm proud to announce we do have two new dots on the map that have just been on fire as of late for Take Shape For Life. I won't give specifics in the cities as of right now, but in the state of Washington, we are seeing just tremendous growth coming out of the gates of the year, but also in the state of Texas we are seeing tremendous growth. The leadership from Washington and Texas have been on fire as of late, and we are excited to say we've got some new dots on the map.

So, we'd call it nine dots now?

We can call it nine dots, hopefully on the way to many more.

All right. That's all I have got for now, thanks.

Thank you.

Thank you. Our next question comes from the line of Ian Ellis with MicroCapital. Please proceed with your question.

Good afternoon, gentlemen. I've got two questions, if I may. First one I think should be fairly straightforward. And that's what sort of increase or changes in conversion rate have you seen on the direct response side of the business as result of the new website launch?

Out of the gates, I would say I'm proud to say that it has been stable. We haven't seen any massive large uptick, we haven't seen any downshift. We talked a bit earlier, a lot of times when a new website goes live, you'll see a downtick because consumers aren't really sure about where to go. We've been very pleased with the order rates, as well as what we're looking to see is also the increase in the average order rates. This website does have capabilities that allow it to have a bit more of a consumer upsell piece to it. So, we will be tracking all of the metrics from average order and closing rates moving forward, and I'm just ecstatic to say out of the gates with no hiccups after that launched.

Okay. That's good news. And then my second question is more complicated, and it is going off Scott's first question here about health coach productivity in Q1 versus a year ago. It appears to me that you've got a smaller proportion of new health coaches in Q1 in 2011 versus 2010. So, if that's the case, your health coaches are this year more season than last year and therefore, decline in average productivity is all the more surprising. Is that the correct conclusion?

Yes, it is a great topic to speak to. We are very excited about our big focus this year to increase the training capabilities for our field. As your field continues to get larger, as you can imagine, you can have a more consistent way of training them on a consistent basis about the basics, the blocking and tackling all the way up to leadership skills. We also have seen some just great success out of our health coach division in the first quarter. As you remember, back in 2009 we had very large growth rates out of our health professionals, which drove up the average revenue per health coach quite quickly. What we are seeing now is just the health coach division has been doing very well. The eCommerce platform is more focused on the health coach than it would be really on the health professional because of the way that it works. So, we are probably going to see a bit of an uptick in that health coach percentage moving forward.

Right. Okay. And then slightly similar in target on this following question, your executive director is a very important part of your structure, or at least from my understanding in the documents that you make available publicly in the Take Shape For Life website. Would you -- are those mid-level health coaches who are getting a substantial portion of their income from structure rather than from front line volume, are they starting to see a significant decline in the income based from structure as a result of the lower average health coach volume?

No, we are not really seeing any impact as far as the run rates there. We do have quite an amazing field structure in that the top-level of the field continues to have just very strong front line volume revenue per health coach figures. In our income disclosure statement, which we do post on our website, you will see a very different to the a lot of the other parts of the industry in that even as you continue to climb and rank through our organization, the average front line volume of our health coaches continues to be very strong. In fact, we see roughly about, probably two-thirds of the total volume in that business coming from the front line volume of levels four -- I'm sorry, levels three through level 10. Meaning that we do continue to see our leaders continue to work the streets and continue to acquire new customers and continue to do what got them in the business in the first place. So, you're not really seeing any kind of fall off as you move up that path more in the front line piece.

Yes, no, I understand that, and I think that's tremendous strength. I'm more concerned about the income that those higher-level health coaches are receiving from the structure declining as result of average health coach productivity contraction, maybe at the lower-level.

No, nothing that I've seen this far, as for us to drop off in percentage of income coming at the higher-levels.

Okay, that's good. That's encouraging. Thanks, Mike.

Thank you.

Thank you. Our next question comes from the line of Julie Bryan with an MKG Financial Group. Please proceed with your question.

Thanks, good afternoon. A couple questions. First one pretty straightforward. Do you have the -- what the capital expenditure and the D&A end up for the year and what you're looking at for 2011?

Sure, CapEx will be around $12 million for 2010, and you will see 2011 CapEx in the $13 million to $15 million range based on our budgets at this point.

We do approve the CapEx on a quarterly type basis, and we always like to see year-over-year efficiency in how the capital budget expenditure is put in place. So, what we spend this year will depend largely on what it is, how the year turns out throughout the course of the year.

Okay, great. And then, do have D&A by chance?

Yes, D&A is going to be around $6 million for 2010.

Okay. And then can you talk a little bit about the distribution, the facility in the manufacturing facility? Both of those were coming on, I think towards the end of the year. And as we go through 2011, should we -- will there be economies of scales improvement in expenses as we go through the quarters? Or can you just give a little bit of color on that?

Of course, we were very successful in launching our Texas distribution center towards the middle of the year last year and then continued to ramp that up until the point of the beginning of this year. It was basically shipping roughly about half of our packages. Now, whenever you have a new distribution center like that up and running, it does take some time to really get to the point where it is producing to the bottom line like you wished for it to. We did see efficiencies last year. I think we saw basis points growth last year of roughly about, a little over 100 basis points. We are anticipating this year in cost of goods continuing to see 25 to 50 basis points throughout the course of the year. And the training we've seen thus far would lead us to believe that it's on the higher of that end -- the higher of those numbers.

Okay, great, thanks. And then lastly, can you talk a little bit about the consumer out there? Because I'm sure you've heard between Nutrisystems and Weight Watchers, there's not a lot to talk about what the consumer is willing to spend, what they are not willing to spend, what type of support that they want. Can you give a little color on what you all are seeing out there? Are your customers, for instance, ordering more individual items, or are they ordering in the two or the four week groups and making that spending commitment at a time -- are you seeing any changes at all out there?

It's a great question, and it is something we always like to speak to. Really, the purpose of our business model, having the Take Shape For Life person-to-person coach, the Medifast weight control centers for the one-on-one accountability in a mortar and a do-it-yourself direct response business really is about the consumer, and it is about how they choose to support themselves on a weight-loss program. All three different channels to include our doctors channel as well, our wholesale channel, provide the same clinically proven Medifast meal replacements that for over 30 years have provided tremendous weight loss success, as well as improvements in health to consumer. How they choose to go about that, that's changing and evolving at all times. One year it might be the hot item to do it online, the other year it might be the hot item to do it in a center. Medifast has built itself a very diversified business model that's really built around what the consumer chooses. We are seeing success and all three of our categories right now.

As we mentioned, we saw growth of I think over 25% and 30% at all three channels over the course of last year. We anticipate the consumer continuing to want to go back and forth, and we are going to be there to provide whatever the consumer wishes and how they want to be supported. As far as the spending traits of the consumer, we are seeing continued improvement in what we are seen as far as the average order from our consumer base. So, last your lifetime value increased in all three different channels of our business, and we're going to go out there and continue to support as best we can because I'm a very firm believer, if a consumer is successful in their weight-loss once, they are going to continue to come back to your business time and time again. So, even if they are successful for their short-term weight loss goals, when it comes time for them to lose weight again, because so many consumers do gain it back, if you drove them to success one time, they are going to come back to you again next time because it worked. And we're just going to keep doing whatever we can to make the consumer successful. That's what has been driving our business success over the past 10 years.

Okay, terrific. Thank you so much.

Thank you. Our next question comes from the line of Ryan Thibodeaux with Mapleleaf Partners. Please proceed with the question.

Hey, good afternoon. Question on the Medifast weight control centers. It looks like the last three quarter's revenue there has been around $6.7 million per quarter. Yet you've got 10 more centers in Q4 than you did three quarters ago. I was wondering if you could comment on the --

Yes, of course. It's really important to understand the timing of when those centers went up. Those centers were really put up in the fourth quarter for a preparation for the first quarter to have all of the kinks out of the new center and the employees hired for that. The majority of those centers all went up in the last two to three weeks of the year. Therefore, they are in the counts, because they technically have to be in the counts. But they were really put there just for the first-quarter to get them up and running for the weight-loss season and not miss that kickoff time.

Okay, great. So, there's no real correlation we should draw from the difference between same-store sales and kind of the average monthly revenue per clinic growth rates?

Not as of right now, no same-store sales of our clinics have been open for over a year, so they would not have been incorporated in that number.

Okay, thank you.

Thank you. Our next question comes from the line of Josh Goldberg with G2 Partners. Please proceed with a question.

Hey guys, how are you doing? Benefit come how are you guys doing?

Good, Josh.

Just so I have the exact number, because the fourth quarter numbers weren't on the statement, what was the average revenue per coach in the fourth quarter?

The average revenue per coach in the fourth quarter was going to be around that 1,550 figure, which of course, as you know, in the weight-loss season, we are not immune to seasonality. People choose to sometimes take little breaks. So, fourth quarter always usually does have a bit of a dropoff in that figure.

Okay. And based on what you're seeing, do you think that number trends up now or stays around that level as you added more coaches?

I believe that with the weight-loss season, the acquisition of new clients come January is much easier to do come -- than it is compared to the November through December timeframe. So, I believe with the new website, it's going to take some time for that to really settle in. Right now, you have a alot of coaches out there learning about their new system and really understanding all the things and the nuances it can do for them. But long-term, I'm very confident we could continue to seek slight growth net figures as we go forward.

Okay, so I understand, you expect March to be roughly flat with December on that?

I can't get into that number as of right now, it's still too early in the game for that piece.

Okay. And the clinic revenue, I think the last caller asked, it was $6.7 million in the fourth-quarter?

In the fourth quarter, clinic revenue was also about $6.7 million.

Okay, great. And the gross margin came down a little bit in the fourth quarter this year. What happened there?

No big change there, just the usual inventory revaluation and also just a little bit of additional cost in terms of transportation between two distribution centers as we got Texas up to speed.

Okay. And Brendan, I think you said that you expect a 50 basis point improvement and the first quarter on gross margin?

That was not for the first quarter, we are looking at 50 basis points for the full year.

For the full year, okay.

First quarter we're expecting about 25 to 50 basis points.

Is that number off of the fiscal 2010 number or the first quarter of '10?

That's based off the full year of fiscal 2010.

Okay, okay, got you. And you said that the convention this year will again be in July in Orlando?

Correct.

Okay. I guess last year you guys had a nice increase based on the convention and with some of the new states now coming into play, I'm not sure if Florida was one of your nine dots at that point, but is it fair to say that the convention, along with the new website, could bring some increased awareness and interest in the latter half of the year?

I think without a question. If you look at the year as a whole last year, at convention last year in 2010, one of our major launches at that time was our new eCommerce platform, a preview of what was coming on the corner. Just because of the complexities of that, it took some time to get it up and running, it's not up until this March. You didn't really have that huge push after convention that we've had the past. This year for convention we've got a lot of great things planned, all of which we're very confident are going to be ready to roll from the time of convention. So, we could see a great second half of the year as we have sometimes in the past with the Take Shape For Life business.

Right. Okay, fantastic. Thank you.

Thank you. Ladies and gentlemen, that is all the time we have for questions today. I would now like to turn the floor back over to management for closing comments.

Thank you very much for your participation today. We look forward to sharing our progress with you on the first quarter in more detail on our next conference call. Thank you all very much.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.