Why Is Medifast (MED) Down 11.9% Since Last Earnings Report?

It has been about a month since the last earnings report for Medifast (MED). Shares have lost about 11.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Medifast due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Medifast Q4 Earnings Match Estimates, Sales Surge Y/Y

Medifast delivered fourth-quarter 2020 results, wherein both earnings and sales increased year over year and the latter beat the Zacks Consensus Estimate. Strength in OPTAVIA remained a major driver, with average revenue per active earning OPTAVIA coach increasing both year over year and sequentially.

Management said that 2020 was a solid year for the company, with its independent OPTAVIA Coaches attracting and retaining a solid number of new clients. Medifast saw considerable earnings and revenue growth, together with a record level of active earning coaches in 2020, despite the pandemic-led challenges. The company remains committed to making further investments to improve its infrastructure in order to aid growth. Further, Medifast is well placed to encash on the opportunities arising from consumers’ rising inclination toward health and wellness in the United States as well as other parts of the world.

The company posted earnings of $2.36 per share, which came in line with the Zacks Consensus Estimate. Notably, the bottom line surged 42.2% on a year-over-year basis. Net revenues of $264.9 million advanced 55.3% year over year and beat the Zacks Consensus Estimate of $247 million. Markedly, OPTAVIA-branded products formed 87.2% of consumable units sold in the quarter, up from 83% in the preceding quarter. Incidentally, total active earning OPTAVIA coaches jumped 39% to 44,200.

Further, average revenue per active earning OPTAVIA coach came in at $5,932, up from $5,229 in the same period last year.  Certainly, the relevance of the company’s offerings amid an environment where consumers are choosing health and wellness options has been an upside.
 
Gross profit jumped 55.6% to $199.2 million, while the gross margin increased 10 basis points year over year to 75.2%. Moving on, SG&A expenses increased from $109.4 million to $161.3 million in the quarter, mainly accountable to escalated OPTAVIA commission costs, stemming from higher OPTAVIA sales, and greater salaries and benefits. This was partly compensated by lower sales and marketing costs. As a percentage of revenues, adjusted SG&A expenses declined 320 basis points to 60.9%.

Income from operations jumped from $18.7 million to $38 million, thanks to higher gross profit, somewhat offset by a rise in SG&A expenses. The operating margin expanded 340 bps to 14.3%. Income from operations was aided by a solid increase in the number of active earning OPTAVIA Coaches, both sequentially and year over year.

Other Financial Updates

The company concluded the quarter with cash, cash equivalents and investment securities of $174.5 million and total shareholders’ equity of $157.2 million. Notably, management did not have any interest-bearing debt on its balance sheet as of Dec 31, 2020.

Concurrently, management announced a quarterly cash dividend of $1.13 per share, which was paid out on Feb 5, 2021. Additionally, it has roughly 2,323,000 shares remaining under its buyback plan. The company anticipates maintaining its quarterly dividend payment practice.

Outlook

Management did not offer any guidance due to the uncertainty surrounding the pandemic. However, the company said that the year-over-year top-line growth trend in January was in line with or even better than the trend witnessed in the fourth quarter.  Management further stated that top-line comparisons with the second to fourth quarters of 2020 are likely to be tougher than the one with the first quarter. The company remains on track to support a $2-billion revenue business by 2021-end.

Further, the company said that it plans to close its Medifast direct channel and Medifast branded products, alongside making further investments in the supply chain and technology. Such investments and decisions are likely to elevate costs and affect the company’s operating margin in 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, Medifast has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Medifast has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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