Nutrisystem 2008 Annual Report Download - page 30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, this Report on Form 10-K contains certain forward-
looking statements that involve substantial risks and uncertainties. Words such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” or similar words are
intended to identify forward-looking statements, although not all forward-looking statements contain these
words. Our actual results, performance or achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Factors that could cause or contribute to such differences include
those set forth in “Risk Factors.” Accordingly, there is no assurance that the results in the forward-looking
statements will be achieved.
The following discussion should be read in conjunction with the financial information included elsewhere in
this Annual Report on Form 10-K.
Background
We provide weight management products and services. Our pre-packaged foods are sold to weight loss
program participants directly primarily via the Internet and telephone, referred to as the direct channel and
through QVC, a television shopping network. In 2007 and prior, substantially all of our revenue was generated
domestically. In January 2008, we expanded operations into Canada.
Revenue consists primarily of food sales. For the year ended December 31, 2008, the direct channel
accounted for 93% of total revenue compared to 6% for QVC and 1% for the other channels. We incur
significant marketing expenditures to support our brand. We believe that our brand is continuing to gain
awareness as we continue to increase our purchases of media in certain media channels. New media channels are
tested on a continual basis and we consider our media mix to be diverse. We market our weight management
system through television, print, direct mail, Internet and public relations. We review and analyze a number of
key operating and financial metrics to manage our business, including the number of new customers, revenue per
customer, total revenues, marketing per new customer, operating margins and reactivation revenue.
While 2008 proved to be very challenging from an economic perspective, we continued to focus on
expanding our capabilities and strengthening our business. During 2008, we enhanced our ecommerce platform
and redesigned our website, entered into the retail channel with our national launch in Costco and extended our
business across borders into Canada. We initiated a concerted effort to improve lifetime customer economics,
length of stay and overall customer satisfaction. In the face of weakening new customer demand, it was crucial to
improve each and every customer interaction with an eye toward customer success and business profitability, and
in 2008 we have seen marked improvement in the key metrics of customer satisfaction, length of stay and
revenue per customer. We enhanced the customer experience with newly designed packaging, on-boarding
efforts and customer service. We initiated new standards for order fulfillment and new operating procedures that
delivered significant improvements in our overall order accuracy, which, we believe is a key driver of future
customer satisfaction and re-order rates. In the face of increased food costs and margin pressure, we undertook a
complete review of our entire supply chain management function. That comprehensive review entailed detailed
studies on product cost improvements, vendor productivity, warehouse efficiencies and key cost center
opportunities. The results contributed to a reduction in overall product costs, delivery costs and packaging costs.
This effort also resulted in improvement in our inventory management as we proceeded to reduce the number of
outside distribution centers during 2008.
We also expanded our product offerings in 2008 and in early 2009 with our introduction of NutriSystem
Select, our first program to incorporate a new, fresh-frozen line of menu items. We also introduced NutriSystem
Flex, our newly launched “weekends off” program, which provides a less restrictive option to meet the needs and
lifestyle of an important segment of dieting consumers. In addition, we have rounded out our offering to include
fresh food delivery with our acquisition of NuKitchen in 2008.
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