Medifast Gains on Strength in OPTAVIA, Cost Concerns Stay
Medifast, Inc. MED is benefitting from strength in its OPTAVIA lifestyle solution and coaching support system. Moreover, the company’s growth-oriented efforts amid the coronavirus outbreak are noteworthy. However, escalated costs and stringent margins are headwinds.
Let’s delve deeper.
Factors Working in Favor of Medifast
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, namely weight, eating and hydration, motion, sleep, mind and surroundings.
Further, OPTAVIA combines scientifically-proven programs, effective products as well as guidance from its coaches to help consumers lead a healthier lifestyle. In partnership with OPTAVIA coaches, franchise partners, resellers and its Scientific Advisory Board, Medifast offers comprehensive wellness products and programs that focus on creating sustainable change by helping people learn to incorporate healthy habits into their lifestyles.
Incidentally, solid demand and engagement among OPTAVIA coaches as well as clients boosted the company’s second-quarter 2020 results, with the top and the bottom line increasing year over year as well as beating the Zacks Consensus Estimate. Notably, Medifast’s number of active earning coaches was the highest in the second quarter, with productivity increasing significantly from the last quarter. Markedly, OPTAVIA-branded products formed 83% of consumable units sold in the quarter, up from 75% in the year-ago period. Also, total active earning OPTAVIA coaches rose 19.3% to 36,500. In fact, management remains impressed with OPTAVIA’s relevance even amid the coronavirus outbreak.
Additionally, Medifast is undertaking a number of measures to drive growth amidthe pandemic. During the second quarter of 2020, the company introduced a key initiative, which brought together co-skilled development, incentives and product-related promotions for new clients. The program ran from March to May and fueled major increases in the company’s core growth metrics — new client acquisitions and co-sponsorships.
Also, the company remains focused on driving demand for its products and services in the third quarter of 2020. To keep pace with the changing scenario, management has altered its programs for the second half of 2020 — including the development of a digital-first approach. Apart from these, Medifast is impressed with its supply-chain investments. Notably, shares of Medifast have surged 48.7% year to date against the industry’s decline of 0.6%.
Is all Rosy Medifast?
Medifast has been seeing high selling, general and administrative (SG&A) expenses for the past few quarters. In the second quarter of 2020, adjusted SG&A expenses increased 14.5% thanks to escalated OPTAVIA commission costs, stemming from higher OPTAVIA sales and greater coach incentives. Incidentally, the company’s operating margin contracted 120 basis points (bps) in the second quarter. Further, its gross margin contracted 280 bps due to increased promotional activities and elevated production costs.
Well, it is yet to be seen if strength in OPTAVIA as well as other growth efforts can help this Zacks Rank #3 (Hold) company to overcome such cost-related hurdles.
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General Mills GIS, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7.5%.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.