Nutrisystem 2010 Annual Report Download - page 32

current instability in general economic conditions. Additionally, we have overhauled our eCommerce platform,
redesigned our website and initiated a concerted effort to improve lifetime customer economics, length of stay,
and overall customer satisfaction. Our product offerings have expanded to include fresh-frozen foods, and we
entered into the retail channel and the Nutrisystem D program. Further, we have taken steps to reduce our overall
operating costs.
In late December 2010, we announced that we were incorporating our fresh-frozen foods into most of our
weight loss plans and offering these plans at the lowest price in our history. Additionally, we have assembled a
Culinary Council of industry leading chefs from around the U.S. to act as an advisory board to guide us in
developing the best tasting and most desirable foods and menus going forward. We believe our customers want
great tasting, high quality foods at a low price with the ability to personalize and sustain and believe this new
Select program will aid in reaching these 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, 2010, 2009 and 2008 was $24.1 million, $30.2 million and $47.5 million, respectively. The reserve
for returns was $1.0 million and $1.9 million at December 31, 2010 and 2009, 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, 2010, 2009
and 2008, we reduced cost of revenue by $1.9 million, $2.3 million and $4.4 million, respectively, for these
rebates. A receivable of $541,000 and $1.5 million at December 31, 2010 and 2009, 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 $419,000 and $1.2 million at December 31, 2010 and 2009, respectively.
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