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Medifast (MED) Up More Than 75% YTD: Will Momentum Stay?

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Medifast, Inc. (MED - Free Report) appears to be in a solid position, mainly due to its robust OPTAVIA performance. This was evident in the company’s third-quarter 2020 results, wherein both top and bottom lines grew year over year and beat the consensus mark. Strength in OPTAVIA was a major driver, with average revenue per active earning OPTAVIA coach increasing both year over year and sequentially.

The company’s programming initiatives, together with improvements to the organization, helped it witness solid progress in the third quarter. The company remains committed to making further investments to improve its infrastructure in order to aid growth. Further, Medifast is well placed to encash on the opportunities arising from consumers’ rising inclination toward health and wellness in the United States as well as other parts of the world.

Driven by such upsides, the company’s shares have surged 77.3% year to date against the industry’s decline of 0.6%. Let’s delve deeper into the factors bolstering this Zacks Rank #3 (Hold) company and helping it counter cost-related challenges.

OPTAVIA — a Major Growth Engine

Given the evolving consumer interests in health and wellness, Medifast’s OPTAVIA lifestyle solution and coaching support system bodes well. OPTAVIA follows a holistic approach by focusing on six key areas of a human being — weight, eating and hydration, motion, sleep, mind, and surroundings. Further, OPTAVIA combines scientifically-proven programs, effective products and guidance from its coaches to help consumers lead a healthier lifestyle. The OPTAVIA product line is sold through its community of independent coaches who offer support and guidance to their clients.

Markedly, OPTAVIA-branded products formed 83% of consumable units sold in the third quarter, up from 78% in the year-ago period. Incidentally, total active earning OPTAVIA coaches jumped 30.7% to 42,100. Further, average revenue per active earning OPTAVIA coach came in at $6,329, up from $5,715 in the same period last year. Also, the same grew 8.2% from the preceding quarter, marking the third straight quarter of sequential growth.

Productivity was backed by a rise in the number of clients as well as elevated average client spend compared with the second quarter. Coach productivity improvement was a result of the company’s constant focus on developing tools and programs to increase the efficiency of coaches. Also, the relevance of the company’s offerings amid an environment where consumers are choosing health and wellness options has been an upside.

Other Growth Initiatives

Medifast has been speeding up its long-term supply-chain efforts to ensure that it is able to manage the expected growth in the next few years. Further, it has made certain moves to expand capacity in powder and bar manufacturing as well as distribution. The company has achieved this via its ties with an expanding network of coal manufacturers whose facilities are qualified to produce Medifast’s products. This new manufacturing capacity came online in October and is likely to keep scaling as the company moves into the next year. This is likely to ultimately double its existing manufacturing capacity by the end of 2021. Apart from this, Medifast is focused on making technological investments, as part of which it opened a new technology center in Utah at the beginning of the year. However, increased investments entail a high-cost burden for the company.

Cost Woes Likely to be Offset

Medifast notified that it intends to make further investments in the fourth quarter, related to supply chain, coach incentive programming and technology, which are expected to affect its operating margin in the quarter. Other than this, the company has been seeing high SG&A expenses for the past few quarters. In the third quarter of 2020, SG&A expenses increased from $122.7 million to $159.5 million, mainly accountable to escalated OPTAVIA commission costs, stemming from higher OPTAVIA sales and greater salaries and benefits.

Nevertheless, we expect the abovementioned upsides to help Medifast overcome these hurdles and remain on the growth trajectory.

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