Nutrisystem 2009 Annual Report Download - page 32

Walgreens. Each retailer offers its unique promotional package and pricing through the use of prepaid cards.
Currently, Costco has continued to perform in accordance with our expectations, while the other retailers that
offer our program have struggled to meet our expectations. We expect to discontinue offering our program at
underperforming retailers by the second quarter of 2010 but will continually look at other major retailers to offer
our program.
In October 2009, we announced the expansion of the Nutrisystem program in Japan with a fully localized
and customized program to appeal to the Japanese market. In December 2009, we launched Nutrisystem
Jumpstart, a program for men and women designed to help those who are looking to jumpstart their way to a
healthier lifestyle. Nutrisystem Jumpstart showcased our 50 new foods and provided customers with extra tools
and support to help them reach their weight-loss goals.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting
principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements
included in Item 8.
The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Management develops, and changes periodically, these estimates and assumptions based on historical experience
and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Management considers the following accounting
estimates to be the most critical in preparing our consolidated financial statements. These critical accounting
estimates are discussed with our audit committee quarterly.
Reserves for Returns. We review the reserves for customer returns at each reporting period and adjust them
to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding
periods and changes in product offerings or marketing methods that might impact returns going forward. To the
extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of product sales
revenue recognized in the period of the adjustment. The provision for estimated returns for the years ended
December 31, 2009, 2008 and 2007 were $30.2 million, $47.6 million and $57.2 million, respectively. The
reserve for returns incurred but not received and processed was $1.9 million and $2.1 million at December 31,
2009 and 2008, respectively, and has been included in other accrued expenses and current liabilities in the
accompanying consolidated balance sheets.
Vendor Rebates. One of our suppliers provides for rebates based on purchasing levels. We accrue this rebate
as purchases are made at a rebate percentage determined based upon the estimated total purchases from the
vendor. The estimated rebate is recorded as a reduction in the carrying value of purchased inventory and is
reflected in the consolidated statement of operations when the associated inventory is sold. A receivable is
recorded for the estimate of the rebate earned. Historically, the actual rebate received from the vendor has closely
matched the estimated rebate recorded. An adjustment is made to the estimate upon determination of the final
rebate. The rebate period is June 1 through May 31 of each year. For the years ended December 31, 2009, 2008
and 2007, we reduced cost of revenue by $2.3 million, $4.4 million and $5.3 million, respectively, for these
rebates. A receivable of $1.5 million and $1.9 million at December 31, 2009 and 2008, respectively, has been
recorded in receivables in the accompanying consolidated balance sheets.
Excess and Obsolete Inventory. We continually assess the quantities of inventory on hand to identify excess
or obsolete inventory and a provision is recorded for any estimated loss. We estimate the reserve for excess and
obsolete inventory based primarily on our forecasted demand and/or our ability to sell the products, future
production requirements and changes in our customers’ behavior. The reserve for excess and obsolete inventory
was $1.2 million and $796,000 at December 31, 2009 and 2008, respectively.
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