Nutrisystem 2015 Annual Report Download - page 31

We believe these new product and program innovations are resonating well with our customers. We provide an
increasing diverse array of weight loss solutions for our customers through an effective and expanding portfolio
of products. Our customers now have greater flexibility in choosing between ready-to-go and frozen options,
with no restrictions. We had an effective acquisition marketing campaign with increased pricing and reduced
promotional incentives which drove increases in customer activations, average selling price, length of stay and
gross margins in 2015 as compared to 2014. Revenue for 2015 increased 15% from 2014 to $462.6 million. We
have continued to attract more customers to our brand at our targeted marketing efficiency through the use of
expanded media channels. Our revenue growth was attributable primarily to increases in new customers, on-
program revenue, retail revenue and reactivation revenue. QVC revenue also increased in 2015 as compared to
2014. Reactivation revenue increased due to higher volumes building off of recent increases in customer counts
and marketing efforts to former customers. Retail revenue growth was primarily from expanded product
offerings and product placement.
On December 17, 2015, we acquired the SBD brand for a cash payment of $15.0 million. We will begin
developing South Beach Diet meal programs, products and services as a distinct brand with the intent to launch
in both the direct-to-consumer and retail channels in 2017. The acquisition will provide consumers with
additional quality choices and enable us to capture an even more significant share of the commercial weight loss
market as we further leverage our expertise in product development, marketing, ecommerce, supply chain
logistics, and retail.
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 revenue
recognized in the period of the adjustment. The provision for estimated returns for the years ended December 31,
2015, 2014 and 2013 was $13.2 million, $12.7 million and $10.8 million, respectively. The reserve for estimated
returns incurred but not received and processed was $870,000 and $762,000 at December 31, 2015 and 2014,
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 $1.3 million and $460,000 at December 31, 2015 and 2014, respectively. The
increase in the reserve was due to the change over to the 2016 product and packaging redesign and increased
inventories.
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