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Medifast (MED) Troubled by High SG&A Costs, Gross Margin Woes
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Medifast, Inc. (MED - Free Report) looks troubled by escalated costs and margin pressure. The company has been seeing high SG&A expenses for a while now, mainly due to higher OPTAVIA commission costs. However, management expects its pricing strategies, productivity programs and scale-related efficiencies to fuel the gross margin enhancement in the long run.
In the fourth quarter of 2021, the company’s SG&A expenses came in at $231.4 million, up 43.5% year over year. The increase in SG&A expenses was a result of higher OPTAVIA Coach compensation expenses, higher salaries and benefits-related costs. Increased costs related to continued investments in IT and distribution and a rise in credit card fees were also a drag. As a percentage of revenues, SG&A expenses expanded 40 basis points (bps) to 61.3%. The persistence of this trend may pose concerns for the company’s margins.
Moving on, Medifast’s gross margin has been contracting year over year for the past few quarters now. In the fourth quarter of 2021, MED’s gross margin contracted 150 bps year over year to 73.7%. The gross margin decline was mainly a result of the adverse impact of inflation on product and shipping costs. Medifast has been undertaking pricing actions to combat raw material and transportation-related inflation. On its fourth-quarter 2021 earnings call, management stated that it expects short-term margin pressure due to continued investments related to technology and supply-chain infrastructure.
Apart from this, Medifast is not immune to the competitive landscape in the evolving health and wellness industry. The company operates in a highly competitive market, with several other players providing products and services that include weight management programs, surgical procedures, dietary supplements and other healthy lifestyle services. Moreover, companies have to constantly engage in innovation to keep pace with the rapidly changing customer dynamics related to weight loss management and supplement formulations.
The Zacks Consensus Estimate for MED’s current financial-year earnings per share (EPS) has declined from $16.19 to $15.41 over the past 60 days.
Image Source: Zacks Investment Research
Conclusion
Although high costs related to OPTAVIA are weighing on Medifast, the company’s revenues have been largely benefiting from the OPTAVIA lifestyle solution and coaching support system. In the fourth quarter, total active earning OPTAVIA Coaches jumped 35.3% to 59,800. The average revenue per active earning OPTAVIA coach increased 6.6% to $6,321. The uptick could be mainly attributed to the continued growth in the active earning OPTAVIA Coach count along with rising productivity per active earning OPTAVIA Coach.
However, the abovementioned headwinds cannot be ignored, at least in the near term. Shares of this Zacks Rank #4 (Sell) company have declined 3.4% in the past six months against the industry’s growth of 4.9%.
A popular pick from the broader Zacks Consumer Staples sector is Altria Group, Inc. (MO - Free Report) , which has been benefiting from its strong pricing power and a focus on oral tobacco products, such as on!. For 2022, Altria envisions 4% to 7% growth in the bottom line, which is likely to be more weighted toward the second half. This tobacco giant currently carries a Zacks Rank #3 (Hold). Shares of MO have increased 17.5% in the past six months. The Zacks Consensus Estimate for the company’s current financial-year EPS suggests growth of around 5% from the year-ago reported figure.
Tyson Foods, a renowned meat products company, sports a Zacks Rank #1 (Strong Buy) at present. Shares of Tyson Foods have jumped 15.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.
Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2 (Buy). Shares of Flowers Foods have risen 6.7% in the past six months.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 9%, on average.
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Medifast (MED) Troubled by High SG&A Costs, Gross Margin Woes
Medifast, Inc. (MED - Free Report) looks troubled by escalated costs and margin pressure. The company has been seeing high SG&A expenses for a while now, mainly due to higher OPTAVIA commission costs. However, management expects its pricing strategies, productivity programs and scale-related efficiencies to fuel the gross margin enhancement in the long run.
Let’s take a closer look.
MEDIFAST INC Price, Consensus and EPS Surprise
MEDIFAST INC price-consensus-eps-surprise-chart | MEDIFAST INC Quote
What’s Weighing on Medifast?
In the fourth quarter of 2021, the company’s SG&A expenses came in at $231.4 million, up 43.5% year over year. The increase in SG&A expenses was a result of higher OPTAVIA Coach compensation expenses, higher salaries and benefits-related costs. Increased costs related to continued investments in IT and distribution and a rise in credit card fees were also a drag. As a percentage of revenues, SG&A expenses expanded 40 basis points (bps) to 61.3%. The persistence of this trend may pose concerns for the company’s margins.
Moving on, Medifast’s gross margin has been contracting year over year for the past few quarters now. In the fourth quarter of 2021, MED’s gross margin contracted 150 bps year over year to 73.7%. The gross margin decline was mainly a result of the adverse impact of inflation on product and shipping costs. Medifast has been undertaking pricing actions to combat raw material and transportation-related inflation. On its fourth-quarter 2021 earnings call, management stated that it expects short-term margin pressure due to continued investments related to technology and supply-chain infrastructure.
Apart from this, Medifast is not immune to the competitive landscape in the evolving health and wellness industry. The company operates in a highly competitive market, with several other players providing products and services that include weight management programs, surgical procedures, dietary supplements and other healthy lifestyle services. Moreover, companies have to constantly engage in innovation to keep pace with the rapidly changing customer dynamics related to weight loss management and supplement formulations.
The Zacks Consensus Estimate for MED’s current financial-year earnings per share (EPS) has declined from $16.19 to $15.41 over the past 60 days.
Image Source: Zacks Investment Research
Conclusion
Although high costs related to OPTAVIA are weighing on Medifast, the company’s revenues have been largely benefiting from the OPTAVIA lifestyle solution and coaching support system. In the fourth quarter, total active earning OPTAVIA Coaches jumped 35.3% to 59,800. The average revenue per active earning OPTAVIA coach increased 6.6% to $6,321. The uptick could be mainly attributed to the continued growth in the active earning OPTAVIA Coach count along with rising productivity per active earning OPTAVIA Coach.
However, the abovementioned headwinds cannot be ignored, at least in the near term. Shares of this Zacks Rank #4 (Sell) company have declined 3.4% in the past six months against the industry’s growth of 4.9%.
A popular pick from the broader Zacks Consumer Staples sector is Altria Group, Inc. (MO - Free Report) , which has been benefiting from its strong pricing power and a focus on oral tobacco products, such as on!. For 2022, Altria envisions 4% to 7% growth in the bottom line, which is likely to be more weighted toward the second half. This tobacco giant currently carries a Zacks Rank #3 (Hold). Shares of MO have increased 17.5% in the past six months. The Zacks Consensus Estimate for the company’s current financial-year EPS suggests growth of around 5% from the year-ago reported figure.
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Some better-ranked stocks are Tyson Foods (TSN - Free Report) and Flowers Foods (FLO - Free Report) .
Tyson Foods, a renowned meat products company, sports a Zacks Rank #1 (Strong Buy) at present. Shares of Tyson Foods have jumped 15.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.
Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2 (Buy). Shares of Flowers Foods have risen 6.7% in the past six months.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 9%, on average.