Nutrisystem 2008 Annual Report Download - page 33

Overview of Distribution via a Television Home Shopping Network
We distribute our proprietary prepackaged food through QVC, a television home shopping network. In
2008, this channel represented 6% of our revenue as compared to 5% of our revenue in 2007 and 6% in 2006. 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 $41.6 million in 2008,
$41.1 million in 2007 and $31.3 million in 2006. QVC sales are a function of the number of shows and the sales
per minute on each show.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Year Ended December 31,
2008 2007 $ Change % Change
(in thousands)
REVENUE ............................................ $687,741 $776,767 $(89,026) -11%
COSTS AND EXPENSES:
Cost of revenue ..................................... 338,658 363,874 (25,216) -7%
Marketing ......................................... 175,027 178,700 (3,673) -2%
General and administrative ............................ 75,703 65,527 10,176 16%
Depreciation and amortization ......................... 8,508 5,812 2,696 46%
Total costs and expenses ......................... 597,896 613,913 (16,017) -3%
Operating income from continuing operations ......... 89,845 162,854 (73,009) -45%
OTHER EXPENSE ..................................... (1,145) (39) (1,106) 2836%
EQUITY AND IMPAIRMENT LOSS ...................... (9,458) (800) (8,658) 1082%
INTEREST INCOME, net ................................ 757 3,803 (3,046) -80%
Income from continuing operations before income taxes .... 79,999 165,818 (85,819) -52%
INCOME TAXES ...................................... 33,572 60,871 (27,299) -45%
Income from continuing operations ..................... 46,427 104,947 (58,520) -56%
LOSS ON DISCONTINUED OPERATION, net .............. (174) (795) 621 -78%
Net income ........................................ $ 46,253 $104,152 $(57,899) -56%
% of revenue
Gross margin .......................................... 50.8% 53.2%
Marketing ............................................. 25.4% 23.0%
General and administrative ................................ 11.0% 8.4%
Operating income from continuing operations ................. 13.1% 21.0%
Revenue. Revenue decreased to $687.7 million in 2008 from $776.8 million in 2007. The revenue decrease
resulted primarily from a decrease in customer starts due to the weakening economy. In 2008, direct revenue
accounted for 93% of total revenue compared to 6% for QVC and 1% for the other channels. In 2007, the
comparable percentages were 94%, 5% and 1%, respectively.
Costs and Expenses. Cost of revenue decreased to $338.7 million in 2008, from $363.9 million in 2007.
Gross margin as a percent of revenue decreased to 50.8% in 2008 from 53.2% in 2007. The decrease in gross
margin was primarily attributable to increased food and freight costs. We are continuing to experience pressure
on gross margins but are focusing on these costs and are working on a full supply chain optimization effort. In
addition, we increased prices on October 1, 2008, to help mitigate these pressures during 2009.
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