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Medifast (MED) Gains on OPTAVIA Strength, SG&A Costs Rise

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Medifast, Inc. (MED - Free Report) appears poised for growth. The company has been benefiting from the strength of its OPTAVIA lifestyle solution and coaching support system. Also, Medifast’s focus on strategic growth initiatives, including capacity expansion and technological advancements, has been working well.

OPTAVIA was a key driver for the company’s third-quarter 2021 results, wherein both earnings and sales exceeded the Zacks Consensus Estimate and rose year over year. The company is committed to making further investments to improve its infrastructure to aid growth. Medifast raised its 2021 guidance.

Factors that Enhance Medifast’s Growth

Given the evolving consumer interests in health and wellness, Medifast’s OPTAVIA lifestyle solution and coaching support system bodes well. Continued strength in OPTAVIA Coaches aided the company’s impressive third-quarter performance. During the quarter, total number of active earning OPTAVIA Coaches jumped 44.9% to 61,000. Average revenue per active earning OPTAVIA coach increased 7% to $6,773, up from $6,329 in the year-ago quarter. 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 constant focus on developing tools and programs to increase the efficiency of coaches has been yielding positive results.

OPTAVIA follows a holistic approach by focusing on six key areas of a human being, namely 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.

Medifast 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, MED is focused on optimizing and increasing its capacity by strengthening its network of co-manufacturers. On its last earnings call, management highlighted that it brought a new fulfillment capacity, completely online, during the beginning of August 2021. This move has positively benefited both coach and client experience in the latter half of the third quarter of 2021.

The company’s strategic investments toward expanding its supply chain and fulfillment capacity have helped it in supporting a business with $2 billion in the top line across the manufacturing and fulfillment capacity. Management is committed to allocating capital and investments toward infrastructure development.

Medifast is focused on making technological investments. It opened a new technology center in Utah in the beginning of 2020. It is observed 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. Further, the company announced the launch of the OPTAVIA app, which is likely to enhance Clients’ experience with Lean & Green recipes along with an access to order record, auto-ship details and account information among other things.

Medifast’s Connect App has also been working well for Coaches on the go. 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.

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Let’s Look at Q3 & Ahead

Medifast posted earnings of $3.56 per share in the third quarter, which beat the Zacks Consensus Estimate of $2.92 and jumped 22.3% on a year-over-year basis. Net revenues of $413.4 million soared 52.3% year over year and beat the Zacks Consensus Estimate of $408 million. Net revenues reflected continued growth in the number of active earning OPTAVIA coaches and higher coach productivity.

Medifast raised its 2021 guidance. It now anticipates revenues in the range of $1.51-$1.53 billion, up from the $1.425-$1.525-billion range expected earlier. Full-year earnings per share (EPS) are now envisioned in the band of $13.27-$13.96 compared with the earlier guided range of $12.70-$14.17. Full-year 2020 revenues and EPS came in at $934.8 million and $9.14, respectively. The company’s revised earnings guidance reflects solid gains from revenues and higher investments in key growth initiatives, mainly focused on supply chain and technology.

Bottom Line

Medifast has been seeing high SG&A expenses for a while now due to higher OPTAVIA commission costs. In the third quarter of 2021, SG&A expenses escalated 57.9% year over year to $251.9 million in the reported quarter. This was the result of elevated OPTAVIA commission costs, credit card fees from increased sales, consulting costs for information technology projects, higher salaries, and benefits and escalated costs related to the annual convention. As a percentage of revenues, SG&A expenses ascended 220 basis points (bps) to 60.9%.

In the third quarter of 2021, Medifast’s gross margin contracted 90 bps year over year to 74.3%. The gross margin decline was the result of promotional activities as well as elevated product and shipping costs stemming from raw material, freight and labor cost inflation. Management earlier said that it expects to effectively manage costs while investing in supply chain and technology to reach its long-term growth goals. It anticipates an improvement in gross margin over the long term through its pricing strategies and by enhancing the distribution network to name a few factors.

Shares of this Zacks Rank #3 (Hold) company have declined 25.7% in the past six months compared with the industry’s drop of 4%.

3 Consumer Staple Picks

Some better-ranked stocks from the Consumer Staples sector are MGP Ingredients (MGPI - Free Report) , The Hain Celestial Group (HAIN - Free Report) and Inter Parfums, Inc. (IPAR - Free Report) .

MGP Ingredients, the producer and supplier of distilled spirits and specialty wheat proteins and starch food ingredients, currently sports a Zacks Rank #1 (Strong Buy). Shares of the company have rallied 35.2% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for MGP Ingredients’ current financial-year sales and earnings per share (EPS) suggests growth of 55.5% and 61.4%, respectively, from the year-ago period’s figures. MGPI has a trailing four-quarter earnings surprise of 117.6%, on average.

Inter Parfums develops, manufactures and distributes prestige perfumes and cosmetics. It currently sports a Zacks Rank #1. Inter Parfums has a trailing four-quarter earnings surprise of 29.7%, on average.

The Zacks Consensus Estimate for IPAR’s current financial-year sales and EPS suggests growth of 55.9% and 100%, respectively, from the year-ago period’s figures. Shares of the company have surged 40.2% in the past six months.

The Hain Celestial, which provides various natural and organic foods as well as personal care products in North America and Europe, carries a Zacks Rank #2 (Buy) at present. It has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of The Hain Celestial have moved up 4.1% in the past six months.

The Zacks Consensus Estimate for HAlN’s current financial-year EPS suggests growth of 14.5% from the year-ago period’s reported number.