Nutrisystem 2010 Annual Report Download - page 31

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 and offer nutritionally balanced weight loss
programs based on over 35 years of nutrition research and on the science of the low Glycemic Index. Our
pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and
telephone (including the redemption of prepaid program cards), referred to as the direct channel, and through
QVC, a television shopping network.
Revenue consists primarily of food sales. For the year ended December 31, 2010, the direct channel
accounted for 96% of total revenue compared to 4% for QVC. We incur significant marketing expenditures to
support our brand as we continue to advertise across various 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.
Our mix of revenue can be divided into three categories. First, new customer revenue is all revenue within a
quarter from customers joining within that quarter. New customer revenue is the main driver of revenue
growth. Second, on-program revenue is all revenue from customers who joined in previous quarters but who are
still within their first nine months on the program. Third, reactivation revenue is all revenue generated from
customers who are more than nine months from their initial purchase.
Over the past several years, our financial performance has been adversely impacted by a number of factors,
including the economic downturn and declines in consumers’ discretionary spending. We believe these factors
have primarily driven the decline in the number of new customer starts during 2008, 2009 and 2010. The decline
in new customer starts in previous years has also hampered reactivation revenue during 2010. We are continuing
to see a challenging environment develop in 2011 as we experienced significantly reduced sales below the
comparable 2010 period throughout the month of January. Our 2011 diet season launch was ineffective in light of
intense competitive activity, bargain-focused consumer behavior and weak promotional offerings. To increase
sales effectiveness we re-launched our “Rollback” pricing strategy, which increased sales traction in the month of
February but had a significant negative impact on gross margins. These factors will have compounding effects
through 2011 resulting in decreased revenue and net income. Additionally, we will incur additional charges
during the first quarter of 2011 including severance which we expect to be more than offset by reductions in
general and administrative expenses throughout 2011.
Our eCommerce, direct-to-consumer business model provides flexibility which allows us to manage
marketing spend according to customer demand. We believe this flexibility is especially valuable due to the
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