Nutrisystem 2010 Annual Report Download - page 34

Overview of the Direct Channel
In the years ended 2010, 2009 and 2008, the direct channel represented 96%, 94% and 93%, respectively, of
our revenue. Net sales through the direct channel were $490.8 million in 2010 compared to $495.4 million in 2009
and $639.0 million in 2008. The decrease in 2010 is primarily attributable to the decline in reactivation revenue
partially offset by an increase in retail revenue. Revenue is primarily generated through customer starts, reactivation
of former customers and the customer ordering behavior, including length of time on our program and the diet
program selection. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining
marketing effectiveness. Factors influencing our marketing effectiveness include the quality of the advertisements,
promotional activity by our competitors, as well as the price and availability of appropriate media.
Overview of Distribution through QVC
We distribute our proprietary pre-packaged food through QVC, a television home shopping network. In
2010, this channel represented 4% of our revenue as compared to 6% of our revenue in 2009 and 6% in 2008. On
the QVC network, we reach a large audience in a 50-minute infomercial format that enables us to fully convey
the benefits of the Nutrisystem diet programs. Under the terms of our agreement, QVC viewers purchase
Nutrisystem products directly from QVC and are not directed to the Nutrisystem website. Retail prices (including
shipping and handling) offered on QVC to consumers are similar to prices offered on the website. We generate a
lower gross margin (as a percent of revenue) on sales through QVC relative to the direct channel, but QVC sales
require no incremental advertising and marketing expense and, management believes, exposure on QVC raises
consumer awareness of the Nutrisystem brand. Net sales through QVC were $18.1 million in 2010, $28.5 million
in 2009 and $41.6 million in 2008. The decrease in QVC sales can be primarily attributed to a decrease in the
number of shows and quality air time.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Year Ended December 31,
2010 2009 * $ Change % Change
(in thousands)
REVENUE ............................................ $509,515 $524,618 $(15,103) -3%
COSTS AND EXPENSES:
Cost of revenue ..................................... 224,806 241,163 (16,357) -7%
Marketing ......................................... 145,868 146,426 (558) 0%
General and administrative ............................ 73,853 76,418 (2,565) -3%
Depreciation and amortization ......................... 11,773 11,177 596 5%
Total costs and expenses ......................... 456,300 475,184 (18,884) -4%
Operating income from continuing operations ......... 53,215 49,434 3,781 8%
OTHER (EXPENSE) INCOME ............................ (32) 407 (439) -108%
EQUITY AND IMPAIRMENT LOSS ...................... — (4,000) 4,000 100%
INTEREST INCOME, net ................................ 5 104 (99) -95%
Income from continuing operations before income taxes .... 53,188 45,945 7,243 16%
INCOME TAXES ...................................... 19,309 13,072 6,237 48%
Income from continuing operations ..................... 33,879 32,873 1,006 3%
LOSS ON DISCONTINUED OPERATIONS, net ............. (242) (4,083) 3,841 94%
Net income ........................................ $ 33,637 $ 28,790 $ 4,847 17%
% of revenue
Gross margin .......................................... 55.9% 54.0%
Marketing ............................................. 28.6% 27.9%
General and administrative ................................ 14.5% 14.6%
Operating income from continuing operations ................. 10.4% 9.4%
* 2009 has been reclassified for discontinued operations. See Note 12 of the Notes to the Consolidated Financial
Statements.
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