Nutrisystem 2007 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 and fitness products and services. Our pre-packaged foods are sold to
weight loss program participants directly via the Internet and telephone, referred to as the direct channel, and
through independent commissioned representatives, the field sales channel, through independent center-based
distributors, the case distributor channel, and through QVC, a television shopping network. In 2007, substantially
all of our revenue was generated domestically. In January 2008, we expanded operations into Canada and expect
to enter the United Kingdom and Japan by 2009.
Revenue consists primarily of food sales. For the year ended December 31, 2007, the direct channel
accounted for 94% of total revenue compared to 5% 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 all media channels. New media channels are
tested on a continual basis and we consider our media mix to be highly 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. In 2007, we continued to focus on these metrics and expanded our efforts with
integrated database marketing, increased market segmentation with women, men and seniors and new and deeper
marketing channel exploration. We focused not only on the acquisition of customers but also on the retention and
reactivation of customers. We looked to improve the online experience with the member section of our website
which, we believe, should provide a more valuable, effective and interactive experience and increase the level of
weight loss support that we offer with our program to our customers.
In December 2007, we launched NutriSystem Advanced, a new weight-loss and health and wellness
platform, that replaced NutriSystem Nourish, which was our core weight loss program since 2004. We believe
this program to be easier and healthier than NutriSystem Nourish and will aid in our reactivation efforts as it
gives our lapsed customers a reason to try us again. In order to transition from NutriSystem Nourish to
NutriSystem Advanced, we incurred approximately $3.7 million of costs in the fourth quarter of 2007 primarily
associated with inventory, higher shipping costs and less efficiency in our fulfillment operations and spent
additional marketing dollars directed toward the launch of this new program.
In the fourth quarter of 2007, we committed to a plan to sell our subsidiary, Slim and Tone, a franchisor of
women’s express fitness centers. In accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” this subsidiary has been treated as
a discontinued operation. Accordingly, the operating results of this discontinued operation have been presented
separately from continuing operations. In accordance with SFAS No. 144, we compared the fair value of Slim
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