Nutrisystem 2014 Annual Report Download - page 31

retail revenue, which offset decreased reactivation and QVC revenue. Retail revenue growth was primarily from
an increase in the number of stores carrying our product and expanded product offerings. On-program revenue
increased in 2014 as compared to 2013 as it benefited from the increase of new customers, partially offset by a
decline in the number of paid days a customer stayed on the program. Additionally, we had a higher average
selling price in 2014 as compared to 2013. Reactivation revenue decreased as a result of the decline of new
customer starts in previous years and QVC revenue decreased due to fewer shows and air time.
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, 2014, 2013 and 2012 was $12.7 million, $10.8 million and $10.4 million, respectively. The returns
percentage has increased primarily due to the increase in revenue and the tiered pricing strategy. The reserve for
estimated returns incurred but not received and processed was $762,000 and $637,000 at December 31, 2014 and
2013, 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 $460,000 and $725,000 at December 31, 2014 and 2013, respectively.
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 respective
tax bases and operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization
and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many
factors when assessing the likelihood of future realization of our deferred tax assets, including our recent
earnings and expectations of future taxable income and other relevant factors. At both December 31, 2014 and
2013, we had a valuation allowance of $800,000 recorded against our deferred tax asset generated for charitable
contributions. We estimate the annual effective income tax rate at the beginning of each year and revise the
estimate at each reporting period based on a number of factors including operating results, level of tax exempt
interest income, charitable contributions and sales by state, among other items.
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