Nutrisystem 2011 Annual Report Download - page 35

We continued to react with discounted sales promotions thus reducing average selling prices and gross margins
partially offset by increased marketing efficiency. Additionally, we incurred severance and other related charges
of $2.7 million during the first quarter of 2011, which were more than offset by reductions in general and
administrative expenses throughout the remainder of 2011.
In December 2011, we launched SUCCESS, our most comprehensive program to date and teamed with new
celebrities for new national ad campaigns. The SUCCESS program is designed to help take the weight off and
keep it off through frequent, portion-controlled, balanced nutrition and low Glycemic Index eating. It offers our
largest ever assortment of signature fresh-frozen meals including new artisanal Chef’s Table™ dinner entrees,
developed by Nutrisystem’s Celebrity Chef Culinary Council using revolutionary advanced steamer technology;
new chocolate, vanilla, strawberry and coffee advanced protein shakes; the introduction of a personalized “My
Daily 3™” physical activity program; and increased personalization and flexibility through transition and
maintenance plans that help consumers manage their weight on their own. SUCCESS replaced our Nutrisystem
Advanced program resulting in additional costs during the fourth quarter of 2011 primarily for marketing,
packaging and increased reserves for excess and obsolete inventory and returns.
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, 2011, 2010 and 2009 was $12.9 million, $24.1 million and $30.2 million, respectively. The
decrease in the provision during 2011 was due to the decrease in revenue and a decrease in the return rate due to
system improvements which offset the additional reserve for the new program launch. The reserve for returns
incurred but not received and processed was $726,000 and $1.0 million at December 31, 2011 and 2010,
respectively, and has been included in other accrued expenses and current liabilities 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, introduction
of new products, future production requirements and changes in our customers’ behavior. The reserve for excess
and obsolete inventory was $769,000 and $419,000 at December 31, 2011 and 2010, respectively. The increase
in the reserve was due to the new program launch in December 2011.
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and the
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