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Medifast's (MED) OPTAVIA System a Key Driver, SG&A Costs High

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Medifast, Inc.’s (MED - Free Report) OPTAVIA lifestyle solution and coaching support system has been benefiting from consumers’ growing inclination toward health and wellness options. Medifast is also gaining on its strategic growth endeavors like capacity expansion and technological advancements. These upsides are likely to continue working well for Medifast, which remains somewhat troubled by high costs.

Major Drivers

Medifast’s OPTAVIA lifestyle solution and coaching support system is a key driver. In the second quarter of 2021, OPTAVIA-branded products contributed 94.1% of the consumable units sold, up from the preceding quarter’s 88.9% and the year-ago quarter’s 83%. The total active earning OPTAVIA Coaches jumped 62.2% to 59,200. The average revenue per active earning OPTAVIA coach increased 13.9% to $6,662, up from the year-ago quarter’s $5,851. Certainly, the relevance of the company’s offerings amid an environment where consumers are choosing health and wellness options has been an upside. Medifast’s continued focus on developing tools and programs to increase the efficiency of coaches has been yielding results.

OPTAVIA combines scientifically-proven programs, effective products as well as 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. In fact, Medifast’s second-quarter 2021 performance can be attributed to exceptional growth at its independent OPTAVIA Coaches, which reached new highs, as well as the efforts to improve the productivity of these Coaches.

Moving on, the company has been speeding up its long-term supply-chain efforts to ensure that it is able to manage its anticipated growth in the next few years. To this end, Medifast is focused on optimizing and increasing capacity by strengthening its network of co-manufacturers. Apart from this, the company is focused on making technological investments, as part of which it opened a new technology center in Utah in the beginning of 2020. We note that OPTAVIA Coaches have been focused on utilizing technology, including the company’s own app-based platforms, along with social media channels and field-led training platforms. The company’s constant investments in digital tools as well as in its new, fully integrated mobile apps are likely to enhance the connection between clients and coaches.

Is all Rosy for Medifast?

Medifast has been seeing high SG&A expenses for a while now, mainly owing to the higher OPTAVIA commission costs. In the second quarter of 2021, SG&A expenses flared up 77% year over year to $232.3 million in the quarter, mainly accountable to the elevated OPTAVIA commission costs, credit card fees from increased sales, labor costs, and consulting costs for information technology projects. The company expects SG&A expenses to shoot up in third-quarter 2021 as it returns to an in-person convention in the said quarter.
The company, on its second-quarter earnings call, said that it expects the demand for OPTAVIA-branded products to accelerate in the quarters ahead. This, however, is likely to exert some pressure on the gross margin through the rest of 2021, given the planned higher-level use of co-manufacturers. The company also anticipates elevated levels of inflation in raw ingredients, freight and labor costs, which might add to the pressures on the gross margin in the second half of 2021. Well, input cost inflation has been turning things sour for a number of food companies, such as TreeHouse Foods (THS - Free Report) , Kellogg (K - Free Report) and General Mills (GIS - Free Report) among others.

Nonetheless, Medifast expects to effectively manage costs, while continuing to invest in supply chain and technology to reach its long-term growth goals. It anticipates improving the gross margin over the long term through its pricing strategies and enhancing the distribution network to name a few factors.

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