Medifast, Inc.
Q4 2013 Earnings Call Transcript

Published: 11 Mar 2014

[Operator:]

Greetings and welcome to the Medifast Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Katie Turner. Thank you Ms. Turner, you may begin.

[Katie Turner:]

Good afternoon and welcome to Medifast's fourth quarter and full year 2013 earnings conference call. On the call with me today are Michael MacDonald, Chairman and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending December 31, 2013 that went out this afternoon at approximately 4

[Michael MacDonald:]

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call, I will provide you with an update on our strategic initiatives and discuss areas of our business where we continue to work on generating efficiencies to improve Medifast's future growth and long-term profitability. Tim will review the financial results for the fourth quarter and the full year in more detail. Finally, I will then provide closing remarks, and we'll open up the call to take your questions. In 2013, we executed on our strategic initiatives to improve profitability and better position Medifast for long-term growth. These results were achieved despite a difficult consumer environment and a challenging year for many weight-loss industry players. We remain focused on reaching our profit objectives and managing our operational performance. In particular, our team showed strong business management skill as we generated increased operational efficiencies, resulting in an annual improvement in operating margin of 290 basis points. As many of you know, our team has a comprehensive multiyear strategic plan in place. Since I joined the company, my focus for our team has been to drive profitability, while balancing our investments and revenue initiatives, with careful expense management in order to maximize our earnings potential and cash flow generation long-term. It is clear that economic headwinds have impacted our business and our industry has limited our top-line growth over the last few quarters. However, I believe that the steps we have taken better position Medifast to achieve long-term growth and profitability across each of our sales channels. Now I will share update us on these initiatives and discuss the new and exciting products we have in the pipeline for 2014. In 2013, our net revenue was $356.9 million as compared to $356.7 million in the prior year. Despite nominal revenue growth we’re pleased to report earnings of $1.73 per diluted share in line with our full year revenue guidance. I would like to focus on our results for the fourth quarter and full year 2013. Revenue in the direct sales channel Take Shape for Life was $51.7 million which is comparable to the $51.8 million in the same period last year. The company ended the quarter with approximately 10,500 active health coaches, an increase of 300 health coaches from the fourth quarter of 2012. The average revenue per health coach per month for the quarter was $1,477 decline of 6% from $1,571 in the fourth quarter of 2012. Historically, we have seen a decrease in health coach count in the fourth quarter of each year as health coaches are less likely to grow their businesses during the holiday season. Full year TSFL revenue was $228.7 million as compared to $216.1 million an increase of 6% above the 4% DSA average across multi-level companies. Beginning of the second half of 2013 our team launched several initiatives to increase health coach growth, client acquisition and retention. Following our low attended national convention in TSFL history in July, Dr. Anderson launched his new book Discover Your Optimal Health which became The New York Times and USA Today bestseller. The leading 200 followers introduced thousands of new people to the Medifast brand and the innovative teachings of Dr. Ray and the TSFL program. In September we launched a new integrated compensation plan, health coaches have responded positively to the changes of this new plan which was designed to promote the expansion of coach teams in the field, while increasing the necessary frontline volume to drive current revenues and future organizational growth. Also in September Medifast health coaches across the country took part of the first-ever Discover Your Optimal Health Day. At Owings Mills at our corporal offices we hosted one of 250 walks that took place across the United States. We believe that this event was extremely beneficial in raising awareness that Takes Shape for Life and also continuing the position Take Shape for Life is a key player in helping people create a healthy active lifestyle. We are pleased with our initiatives in Take Shape for Life and believe they are essential in gaining traction and increasing health coach incline acquisition and retention moving forward. Already in 2014 we have launched our Stop Challenge Shoes 12 week health transformation with over 20,000 participants we kicked off the year with another media tour with Dr. Anderson that saw over 86 million impressions nationally for Take Shape for Life we also hosted successful and well attended regional events in San Diego, Portland, New York, Saint Louis and Orlando to introduce new coaches and clients to Take Shape for Life. The Medifast direct channel revenue decreased 24% to $13.9 million in the fourth quarter of 2013 and decreased 11% to $75.5 million for the full year of 2013. As you can see we conserved our advertising spend in the back half of 2013. This was a planned approach as we chose to focus on consistently driving higher operating margins as opposed to investing in fourth quarter sales growth and the expense of full year profitability. Our goal remains to maximize the efficiency of our spending and this is demonstrated by improvement in overall revenue to spending ratio, company wide we saw ratio of 41

[Timothy Robinson:]

Thanks Mike. I’ll now review our financial results for the fourth quarter and the full year ended December 31, 2013 in more detail. For the fourth quarter, net revenues decreased 7% to $77.3 million from net revenue of $83.2 million in the fourth quarter of the prior year. The Take Shape for Life sales channel accounted for 66.9% of total revenue. Medifast Direct accounted for 18%. Medifast Weight Control Centers and Wholesale Physicians accounted for 15.1% of total revenue. Gross profit for the fourth quarter of 2013 decreased 8% to $57.7 million compared to $62.8 million in the fourth quarter of the prior year. Our gross profit margin decreased 80 basis points to 74.6% versus 75.4% in the fourth quarter of 2012. The decrease in gross margin during the quarter was primarily due to refunds related to the closure of 8 corporate clinics in the fourth quarter and increased shipping charges related to the transition to our new WMS platform, which acquired shipping from a single location for a brief period during the changeover. Selling, general and administrative expenses in the fourth quarter of 2013 were $50.6 million versus $59.2 million in the fourth quarter last year, a decrease of $8.6 million. As a percentage of net revenue, selling, general and administrative expenses improved to 65.5% from 71.1% in the fourth quarter of 2012. Take Shape for Life commission expense, which is variable based on sales, decreased by approximately $600,000 in the fourth quarter, while revenue was in line with the prior year. The integrated compensation plan was primarily phased in during the fourth quarter of 2013. Sales and marketing expense decreased $3.9 million in the fourth quarter of 2013 as compared to the fourth quarter of 2012. This is reflected in a significant change in the revenue-to-spend ratio in the fourth quarter. Operating income was $7 million or 9.1% of net revenue compared to $3.6 million or 4.3% of net revenue in the fourth quarter of 2012. Our effective tax rate was 21.3% compared to 48.8% in the fourth quarter of 2012. Decrease in the effective tax rate resulted from our ability to claim research and development credits, which became effective in early 2013 and applied to prior years. Additionally, we were able to take advantage of Maryland multi-state apportionment methodology during 2013. Fourth quarter of 2013 net income includes $1.6 million after-tax charge related to the closure of 8 corporate-owned Medifast Control Centers. Fourth quarter net income was $5.3 million or $0.39 per diluted share based on approximately 13.6 million shares outstanding compared to net income of $1.9 million or $0.13 per diluted share for the comparable quarter last year based on approximately 13.8 million shares outstanding. The fourth quarter 2012 net income includes a $2 million net of tax sales tax accrual. Excluding this item, net income in the fourth quarter of 2012 would have been $3.9 million or $0.28 per diluted share. Turning to our full year results, net revenue was $356.9 million for the fiscal year ended December 31, 2013 compared to net revenue of $356.7 million in 2012. Net income for the fiscal year 2013 increased $8.1 million to $24 million or $1.73 per diluted share based on approximately 13.8 million shares outstanding compared to net income of $15.9 million or $1.16 per diluted share for the comparable period last year based on approximately 13.7 million shares outstanding. Fiscal year 2013 net income includes the aforementioned $1.6 million after-tax charge related to the closure of the clinics in the fourth quarter. Fiscal year 2012 net income includes a $3.7 million charge from the previously disclosed FTC charge in the second quarter of 2012 and also the $2 million after-tax sales tax accrual. Excluding these items, net income for fiscal year 2012 would have been $21.6 million or $1.57 per diluted share. Our balance sheet remains strong with stockholders’ equity of $98.4 million and working capital of $64.9 million as of December 31, 2013. Cash, cash equivalents and investment securities for the fourth quarter of 2013 increased $7.8 million to $67.8 million compared to $60 million at December 31, 2012. As we communicated earlier this year, the company paid off the remaining value of its outstanding long-term notes and remains free of interest-bearing debt. And now to review our guidance briefly, we expect first quarter net revenue to be in the range of $86 million to $88 million and earnings per diluted share to be in the range of $0.32 to $0.35. Our first quarter guidance assumes that we will not convert any corporate-owned clinics to franchise clinics in the first quarter. We expect full year 2014 net revenues to be in the range of $340 million to $380 million and earnings per share, diluted share are expected to be in the range of $1.80 to $1.90. This range of revenue guidance is probably dependent on the timing of the transition of our corporate-owned clinics to franchise model, which will reduce revenue, while improving profitability. Our guidance includes our expectation that the effective tax rate will be in the range of 33% to 34% in 2014. As you can see, we anticipate a continued pressure on revenue in 2014. We plan to focus on continued profit delivery while we put the elements in place that Mike mentioned throughout this call in order to position Medifast for long-term success. That concludes our financial overview. Now, I’d like to turn the call back over to our Chairman and CEO Mike MacDonald.

[Michael MacDonald:]

Thanks Tim. We believe our multi-channel healthy living business model allows us to benefit from the overall more diversified go-to-market approach in U.S. and abroad. We will continue to work to deliver our profit objectives as we gain a greater share of the broader and growing health and wellness industry through our innovation in new products, programs and technology. In closing, I am pleased with our team’s consistent ability to deliver results in 2013. Going forward, we remain intently focused on managing the controllable aspects of our business model, introducing initiatives to drive sales across our vertically integrated business model and further enhancing shareholder value. Our Medifast team continues to be optimistic about our long-term growth prospects and we will continue to execute our strategic plan. We appreciate your interest in Medifast. And with that overview, Tim, Meg and I are available to take your questions. Operator?

[Operator:]

Thank you. (Operator instructions). Our first question is from Scott Van Winkle of Canaccord Genuity. Please go ahead.

[Scott Van Winkle:]

Hi thanks good evening.

[Michael MacDonald:]

Good morning Scott.

[Scott Van Winkle:]

Hey Tim can we start with the gross margin commentary in Q4? You said refund and then shipping issue, can you go back to that again, I apologize.

[Timothy Robinson:]

Sure, not a shipping issue. So we convert it over in Q4 our distribution center to the new warehouse management system. As you know we ship the West Coast customer from our Texas location and we ship kind of East Coast, (inaudible) East Coast customers from our Eastern Shore, Maryland location. So we had to shut our Maryland location down and ship to the whole country from Texas and of course the cost of shipping over to the East Coast, we don’t charge the customer for that that was the cost born by us. So we have additional shipping charges for a couple of weeks while we shutdown Eastern Shore and did that transition. The other things Scott is obviously the clinic closure; we took a charge, an expense charge of about $2.1 million mentioned before tax, $1.50 million after-tax for closure of clinics. But in addition to that part of it was the customers that are in the middle of their cycle and in fairness new customers we refunded money to customers that they had paid for us for joining the program that we're no longer got to deliver those services or we may have let them (inaudible) the food. So we just thought that was the right thing to do to customers that signed up on the program.

[Scott Van Winkle:]

Yes, now and then what happens when you refranchise unit and based on one has prepaid the service component of their program do you end up transferring that to the franchisee?

[Timothy Robinson:]

Yes. The customers not affect at all. So, whether we're operating the center or the franchisee is operating a center, the customer is certainly entitled to that service, that they paid for so no effect. This was for either just for the eight centers that closed.

[Scott Van Winkle:]

So, as we get into Q1 we should see a more normalized gross margin I would assume?

[Timothy Robinson:]

Yes. Right.

[Scott Van Winkle:]

Okay. So with that, I have this weird little quandary, I have trouble getting down to your Q1 guidance. But to be quite honest I have trouble getting up to your full year guidance based on the revenue. Is there something, we should expect to really be delevered in Q1? And then as we go through the remainder of the year, what gives you confidence that revenue growth is going to re-accelerate?

[Michael MacDonald:]

Yes. Scott, we really look at it, a lot of our investments, a lot of our product launches and as an example, we just opened today four new centers in Seattle. A lot of our activity happens towards the middle of the year. So we see the compare being much better through the second half of the year for us. So, we feel there is an opportunity in the second half as we go through with all the things that we're doing and it's significant, the amount of things we're going to announce. So that's why we sort of have that plan. So and in even in our operating plan, we did plan that in our planning assumptions, because the other thing we did do in the beginning of this year we did go out, January and February with the full spending on advertising that we have not done in the fourth quarter. And again, by the way we did not see great effectiveness, especially on the Med Direct advertising. So we did cut that a little bit back going into the March time period, but we basically feel like, with all the product things that we’re coming out with all the different launches that it really is going to have a bigger impact in the back half of the year.

[Scott Van Winkle:]

Okay. So, you’ve got a quite a bit of spending in Q1 and may be not expecting to see that kind of translate into direct to consumer revenue here in the first quarter?

[Meg Sheetz:]

Well I think the new product launches we have going on throughout March and beyond through mid-year are going to be significant in the sense of incremental revenues that outside of our current base.

[Michael MacDonald:]

Lot of these products are not just traditional meal replacement Scott, like the 3 Lean & Green meals are going to be microwaveable, their meals we haven’t sold before. So as an example we’re going to launch some new meal replacements too, but generally the meal replacements might cannibalize another meal that somebody is using.

[Scott Van Winkle:]

So, are those Lean & Green substitutes, are those frozen or are they shelf stable?

[Meg Sheetz:]

They’re shelf stable. And we’re obviously as we continue to grow Medifast, we continue to explore multiple options for that Lean & Green meal as well.

[Scott Van Winkle:]

Okay. And then last question for me, advertising in the fourth quarter, did I hear correct that the revenue you spend was like 41 or something?

[Timothy Robinson:]

You heard correct.

[Scott Van Winkle:]

So, you’re still less than $2 million in advertising in the fourth quarter?

[Timothy Robinson:]

That’s right. It’s [just odd too].

[Scott Van Winkle:]

Well and that’s all-in, I mean across all segments that you will spend against?

[Timothy Robinson:]

Well, yes. Let’s say the real segment that benefits from the advertising really is Med Direct, Take Shape for Life is not really an advertising model so when you look at things like spending or you look at Google search things and so forth that really is not impact on Take Shape for Life at all it’s really Med Direct. So that’s really where most of the spend is. There is certainly some spend in the clinics as well. But as we came out of the third quarter and entered the fourth quarter we mentioned we were going to closely monitor that spend. We were focused very much on profitability, but also kind of measuring out the last history to see when we spent the money on the advertising what was the lag effect from the spend and what was the result. And in the fourth quarter it’s kind of a tough time to really build momentum with advertising, with all the holidays and everything. So we decided that a better time to do that would be in the first quarter and we pulled back on our spend in the fourth quarter.

[Michael MacDonald:]

The other thing Scott when you look at it, we look at the advertising now Take Shape for Life really our brand advertising does some things to help that. But clearly if you looked at it say for the full year we spent $26 million or so in advertising, you are spending that on a hundreds of millions. So advertising spend on a percentage against what we really are targeted to is still pretty good spend.

[Scott Van Winkle:]

So then you come in, in January, February kind of turning the facet back on so to speak in advertising and you don’t get a return I hope, not putting words in your mouth on that spending. What do you think it is? I mean it’s, look at the terrible weight loss mass market weight loss environment out there I think everybody knows that sees it, is it just the environment.

[Michael MacDonald:]

I see it as more the environment because I think we are working with Google, we are even experimenting with lots of different processes, we even went Scott and what we decided to do in the beginning of the year as we mentioned in the script we have done more like free shipping. We have done more certain discounting. So we are actually trying many things not just the advertising but also the offers along with the advertising. So we’ve been really working a lot more too on the offers to make sure, we are being aggressive enough thinking maybe, like example, our general customers generally somebody 30 to 65, 65% female $50,000 income, or maybe some of the people’s income have dropped a little bit and if you go after bringing someone back in as new customers. So we are really trying to experiment with the different things, but I see it more as an environment thing than I do see it as, I think we can spend more money and still not really get the returns.

[Scott Van Winkle:]

I think what I am trying to do too is to figure out where is the most affective place of spend, so the same dollar spend in two places is kind of a very different result and in some of the places where we traditionally spend digitally have become very expensive, just become crowded space?

[Meg Sheetz:]

Yes. I mean as you know we were one of their early ones to get into web and investing on the web and now that certainly crowded space, the web investments are going up and so that price per lead or price per customer’s going up.

[Scott Van Winkle:]

Okay, thank you very much.

[Michael MacDonald:]

Welcome.

[Operator:]

Thank you. The next question is from Mitch Pinheiro of Imperial Capital. Please go ahead.

[Mitch Pinheiro:]

Yes, good aftertoon.

[Michael MacDonald:]

Hi, Mitch.

[Timothy Robinson:]

Hi, Mitch. How are you?

[Mitch Pinheiro:]

Okay. So let me ask a couple of questions. In the fourth quarter, where was the expense, the charges for the closure of the company owned weight loss centers?

[Michael MacDonald:]

Yes. So Mitch to spread out a little bit, you will see in the release and other income, you will see a good portion of it there, you will see in depreciation, accelerated depreciation from the clinical assets are there and there is -- some of it was in netted out was in our deferred revenue, because you have to do -- basically eliminate deferred revenue. So, it’s spread a few different places in the income statement.

[Mitch Pinheiro:]

So, is that going to be to delineated in the K?

[Timothy Robinson:]

Yes, it’s all (inaudible) clearly in the K.

[Mitch Pinheiro:]

Okay. There was some revenue impact you are saying…

[Timothy Robinson:]

Revenue wasn’t a real material mix, but it -- there was some revenue impact. Yes.

[Mitch Pinheiro:]

Yes, okay. And then second, what are you doing; I mean, where do you think health coaches grow to if at all in 2014?

[Meg Sheetz:]

Yes, I definitely I think we’ll continue to see moderate health coach growth. I think that we obviously have the new compensation structure. Our [overall] compensation went live, other went live in the fall, all the grandfathering is complete and as of January 1 this year, the new comp plan is all that everyone is in, they were watching coaches adjust; we’re seeing a lot of coaches who used to have high frontline volume trying to convert to more structure and were thinking who had only structure trying to create more frontline volume. So as we see those behaviors, we will start to see most likely some more health coach growth. We also have a couple of different initiatives that were running in the first quarter that will also help encourage the incentive to help encourage the growth of health coaches as well.

[Mitch Pinheiro:]

Will you see health coach growth in the first quarter sequentially?

[Meg Sheetz:]

Over the fourth quarter of last year to the first quarter of this year, yes we should see health coach growth.

[Mitch Pinheiro:]

Okay. So when you look at your first quarter revenue, I mean where is the decline coming from, I mean how do you parse that out?

[Michael MacDonald:]

Certain parts of the decline are coming from the fact that last year we did shutdown 13 total Weight Control Centers. You had revenue decline there. The other thing is we offered higher incentives to our franchisees who are now opening. As just saw we had, I think it was five in December and then we had another four and then we just opened today, by the way 4, 1 opened in Seattle, and in Washington. So, basically, we're up to 49 franchise centers now operating. But we used percentage of our revenue to help make it an attractive preposition for them to expand. So we’ll see some revenue decline because of that. So, you’re see some of the decline come from things we’re doing intentionally to drive franchise opportunity. So clearly we have 49 franchises now and we convert the other 15 that we’re working on for Medifast centers, we’d have 59, 64 hopefully by the time we get to the end of the second quarter.

[Mitch Pinheiro:]

Okay, that was helpful. So for the full year, a wide range, $340 million to $380 million on revenue; at the $340 million level, what does that assume as far as company owned weight-loss center to franchise conversion?

[Timothy Robinson:]

It assumes, the majority of them convert over.

[Mitch Pinheiro:]

Okay. And $380 million assumes no conversion?

[Timothy Robinson:]

$380 million assumes the 10 to 15 that we’ve already announced.

[Mitch Pinheiro:]

Okay. And then last question from a gross margin perspective; is the Lean & Green microwavable meals, are they at the same margin level or is that a lower margin than your typical product?

[Michael MacDonald:]

It’s a lower margin than our typical products, still very healthy margin but it’s a lower margin than our -- the products that we manufacture for the meal replacement.

[Mitch Pinheiro:]

Are the other new products sort of similar to the current margin?

[Meg Sheetz:]

We have several new products coming out. So there are some of those new products that are manufactured by us and our planned they would have the same margin and others that are outsourced or co-manufactured.

[Timothy Robinson:]

It’s a mix Mitch of things that are traditional margins than at somewhat of a lower margin.

[Mitch Pinheiro:]

Okay.

[Timothy Robinson:]

Still very healthy margin.

[Michael MacDonald:]

Still healthy margin.

[Meg Sheetz:]

Right.

[Michael MacDonald:]

We don’t see margin being a big problem for us.

[Timothy Robinson:]

And they’re all incremental, obviously were incremental dollars at the 6 meal today we only sell the first 5 meal, so there will be incremental dollars, but again a slightly lower margin.

[Mitch Pinheiro:]

Right. And then just last question, so what should we expect for advertising spend in the coming year?

[Timothy Robinson:]

So our plan for the year advertising spend was to ramp spend back up to more traditional level for us which in our Med Direct area, it’s typically around 30% of revenues and we’ll gauge that, monitoring that closely, and we spend the dollar if we don’t see a return, we’ll reinvest that dollar in the promotions or other things. And then in our clinic model, we advertise roughly about 15% of our revenues in that model. So, that’s kind of been somewhat of the traditional approach here at Medifast last year was a departure from that but that’s baked into our plans.

[Mitch Pinheiro:]

Okay. All right, thank you very much.

[Michael MacDonald:]

Thank you.

[Operator:]

Thank you. The next question is from Kurt Frederick of Wedbush. Please go ahead.

[Kurt Frederick:]

Hi, thanks. Just a few questions, one is on the share buyback activity. What is the current share authorization?

[Timothy Robinson:]

It’s just over 1.3 million shares total. That includes the additional 1 million shares just recently authorized.

[Kurt Frederick:]

Okay. So when are you free to buy, could you be out buying tomorrow?

[Timothy Robinson:]

We could be free out buying -- yes, not tomorrow but yes this week. Yes.

[Kurt Frederick:]

This week, okay. And then does your guidance include any additional share repurchases?

[Timothy Robinson:]

Yes, we are expecting to do some share repurchases Kurt, so we have baked some into the guidance.

[Kurt Frederick:]

Okay. And it’s been I guess a little over a year since you laid out the five year plan; a lot of stuff has happened I guess since then. I just wonder if you could maybe talk about where you are kind of at or ahead or behind plan and kind of what your expectations are?

[Michael MacDonald:]

Yes, let me cover that with you Kurt. I think we’re starting to see -- by the way Medix is starting to have higher activity in Mexico as they are starting to ramp up. So we feel good that they are making improvements in Mexico. We just started with our first two websites in Canada opening up today. So, we are now in Canada; we started -- we are in Colombia now in Bogota with a clinic, in Mexico City with a clinic. And Medix feels very good about their plans to expand their clinics as we go through the year. So, I think we are making progress there. And I think we will see improved revenue performance. Also we have created M&A committee within Medifast with our Board and we are going to be looking at adjacent opportunities to expand into healthy living. So, we are with our cash position and our health, and we have tremendous cash generation as you saw again in 2013. We see -- there is opportunities out there that maybe good opportunities for Medifast especially given the need for us to expand our marketplace beyond just purely clinical weight loss into other segments of the opportunity around healthy living.

[Meg Sheetz:]

So, I think from a strategy perspective, the difference in the strategy previously was it was [turned ] around expansion with the current weight loss products that we have, and I think what’s great about our newer updated strategy over there, we feel we can accomplish really good things over the five years is more around the healthy living which definitely puts us in a broader market place than just weight loss.

[Kurt Frederick:]

Okay. And just one just to know (inaudible) weather on the call, I just wonder if you can maybe comment kind of what you’re seeing maybe across the different segments in Q4 and Q1?

[Michael MacDonald:]

I mean clearly we haven’t had good weather but we’ve had a lot of centers shutdown and all those kind of things, but I don’t want to use natural events as any reasons for anything happening. So, I am sure there is issues out there but from our standpoint, I mean I think the real issue is we’ve got to execute very, very well in the core business, while we are trying to focus on other growth opportunities and growth areas. And we are also going through a very complicated transition from shutting down clinics and taking our revenue down to improve our profitability. And in the longer term when we exit the transition, we are going to be in a tremendous place with less SG&A and improved profitability and we feel the track we’re on is good one. Would I like to have higher growth like I had 20% growth in 2012, yes, but I don’t think we’re running the business any differently and the one thing I would say, Kurt for last year I gave guidance of 170 to 180 and never left it despite the fact we probably missed our plan in revenue by $40 million.

[Kurt Frederick:]

Okay. All right, that’s helpful. Thank you.

[Operator:]

Thank you. The next question is from Michael Halen of Sidoti & Company. Please go ahead.

[Michael Halen:]

Good afternoon. With soybean prices down year-over-year, do you expect some improvement in gross margin in 2014?

[Meg Sheetz:]

We were always looking for improvements in gross margin, I’d say that this as much as that’s gone down, there are other areas that have gone up significantly from a raw material perspective. So I think at this point, we would think that they would be pretty stable as to what they are today.

[Michael MacDonald:]

Yes, we didn’t expect Mike in our guidance, in our plans for next year, we're not expecting a decline in raw materials cost overall.

[Michael Halen:]

Okay. Thanks and how much of the decline in Med Direct year-over-year revenue is cannibalization by Take Shape for Life?

[Michael MacDonald:]

I don’t really think there is a whole lot of cannibalization. I mean to be honest Mike, I go to most of the major Take Shape for Life meetings and I just get back from one of the recognition trips they had and we don’t really hear a lot about that. I mean they’re complaining once in a while that you put a more aggressive promotion on Med Direct versus Take Shape for Life and we try to make sure we have the right programs in both channels to drive the business, but…

[Meg Sheetz:]

And if you remember the Take Shape for Life model obviously is more relationship based and so often times the customers don't overlap and must be too slim to overlap. So on every Med Direct order, we ask them if they want a health coach and investigates and we take the first order in the Medifast Direct channel and move them over to Take Shape for Life under coach for their second and beyond orders. So currently I don't think that's an issue, I think it's clearly -- there is some price sensitivity out there in all channels related to the weight-loss program and buying food. And I think, we're all encountering that and we're trying to do our best here to find what the customer will buy the product for and maintain our margins.

[Michael MacDonald:]

And I think, if you look at it, Mike our leadership in Take Shape for Life, Dr. Andersen and Dan Bell, our Presidentials, we have terrific leadership out there. I think they are fully engaged and energized and feel good about the business. But the one thing you do have to remember is for years we had no competition in the multilevel space. And now some of the other multilevel companies are selling in the multilevel weight-loss space against us. So, we're seeing more competition than we saw before, but you still have to look at 6% growth last year was, [urban life] I think had about 8% growth in the United States in multilevel and they amounted in the highest and we grew right up there. So, we still had good performance when you look at the U.S. market and most of those other multilevel level firms had huge growths in China and other parts of the world.

[Michael Halen:]

Okay. And last one; excuse me if you had already mentioned it. What were the same-store sales in the corporate centers in the quarter?

[Timothy Robinson:]

Same-store sales in the corporate centers, there is -- I don't know the exact number Mike, I apologize, but the same-store sales were down 15%.

[Michael Halen:]

Okay. Thank you very much.

[Operator:]

Thank you. The next question is from Scott Van Winkle of Canaccord Genuity. Please go ahead.

[Scott Van Winkle:]

Hi, thanks. When you look at that guidance for 2014, whether low-end, high-end and the middle wherever you want, is there -- what kind of mix assumption is baked into what would appear to be margin improvement in ‘14 over ‘13 regardless of the revenue? I would think clearly clinics are going to be more profitable, we all know that from what you’ve done, but I would assume that you’re assuming the direct response segment grows at a slower rate than Take Shape for Life given current trends and I think that direct response segment is meaningfully the highest margin business, isn’t it?

[Michael MacDonald:]

Actually Scott, as you get towards, especially towards the back-end of the year your last statement about Take Shape for Life growing faster, we have a pretty easy compare I’ll say in the second half of the year for Med Direct because we’re really slow at spending so much. So we believe if we’re more consistently spending then actually Med Direct will grow healthily in the second half part of the year and of course that improves profitability. The return in that channel is high.

[Scott Van Winkle:]

Okay. And then lastly on the buyback I think you said 1.3 million shares of authorization to-date, is there any plan on how you deploy that timing is it opportunistic or are you just going to say we’re going to complete this year and I know you don’t want to tip your hand, but what can we think there, obviously you’ve gotten little more aggressive over the last quarter or two on buyback?

[Michael MacDonald:]

Yes, I mean Scott; I personally think our stock is undervalued, so we will grow aggressively in the market to buyback shares because we’re very confident in the company. So I think that’s an important signal for us and we think there is opportunity there from a company perspective.

[Timothy Robinson:]

Yes, Scott as you know we bought back 780,000 shares last year, obviously very end of the year, that’s not the strategy we expect to deploy this year. So it won’t happen right at the end of the year of course it will happen throughout the year.

[Michael MacDonald:]

Yes. As I mentioned before Scott the only reason we waited at the end last year because we couldn’t buyback because of the SEC settlement.

[Scott Van Winkle:]

On your comment about putting together an M&A team, if you have a lot of confidence in your business and its trading at six times EBITDA I don’t think you are going to find a good growth business in this environment that you can buy for six times EBITDA in the M&A market. So I would wonder why you wouldn’t think about deploying all of your capital towards buyback rather than thinking about buying an acquisition outside of your core competency.

[Michael MacDonald:]

Yes. And Scott in fact we right now we’re where you are, we haven’t found anything that we see that is attractive enough and we’ve been looking so I mean that hasn’t been something where we haven’t been and we won’t make a move unless we see it being very accretive to Medifast.

[Timothy Robinson:]

Scott, I mean obviously the reason behind that is not just add one on one and get two. So we think that the expansion the preferable kind of areas around weight loss if we can take a customer today and we do a very good job with the customer and they reach their weight goals, we certainly have a high risk of losing them, but if we could keep that customer for much longer and build confidence in Medifast brand name and take them beyond weight loss than we hold on to a customer much longer. So that initial acquisition cost of a customer and you get a much better return that’s kind of where we are thinking on that.

[Scott Van Winkle:]

Great, thank you very much.

[Operator:]

Thank you. We have no further questions in queue at this time. I’d like to turn the floor back over to management for any closing remarks.

[Michael MacDonald:]

Yes. First of all, we appreciate the support of Medifast and everybody’s participation in today’s call. We look forward with providing you with an update in our business. We are actually going to schedule our investor conference in April to go through in more detail a lot of the product plans and detail actions we are going to do to deliver the plan. We will have many of our executives there and by the way a lot of the products and information, so all of you can touch and feel what we are going to bring forward. So we look forward to that and thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.