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Why Is Medifast (MED) Up 27.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Medifast (MED). Shares have added about 27.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Medifast due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Medifast Q1 Earnings & Revenue Beat Estimates

Medifast delivered splendid first-quarter 2021 results. The company posted earnings of $3.46 per share, which crushed the Zacks Consensus Estimate of $2.72 and surged a whopping 121.8% on a year-over-year basis. Net revenues of $340.7 million soared 90.9% year over year and beat the Zacks Consensus Estimate of $287 million. Markedly, OPTAVIA-branded products formed 88.9% of consumable units sold in the quarter, up from 79% in the preceding quarter. Incidentally, total active earning OPTAVIA coaches jumped 61% to 52,500.

Further, average revenue per active earning OPTAVIA coach came in at $6,454, up from $5,333 in the same period last year.  Certainly, the relevance of the company’s offerings amid an environment where consumers are choosing health and wellness options has been an upside. We note that management intends to sunset its Medifast-branded product line by the second-quarter end, as part of its brand and business strategy.
 
Gross profit jumped 83.8% to $248.5 million, while the gross margin contracted 280 basis points year over year to 73%. The gross margin was hurt by the burgeoning demand for OPTAVIA-branded products, as it resulted in high use of co-manufacturers and led to the need for accelerated shipments to cater well to customers before the company’s  fulfillment capacity goes completely online. We note that costs associated with these factors, along with inventory write-offs associated with the sunset of the Medifast-branded product line, weighed on the company’s gross margin.

Moving on, SG&A expenses flared up 75.2% from $111.7 million to $195.7 million in the quarter, mainly accountable to escalated OPTAVIA commission costs, elevated credit card fees and greater salaries and benefits for employees stemming from increased sales. As a percentage of revenues, SG&A expenses declined 510 basis points to 57.5%.

Income from operations jumped from $23.5 million to $52.8 million, thanks to higher gross profit and sales, along with a decline in SG&A expenses (as a percentage of sales). As a percentage of sales, income from operations expanded 230 bps to 15.5%.

Other Financial Updates & Outlook

The company concluded the quarter with cash, cash equivalents and investment securities of $212.9 million and total shareholders’ equity of $174.9 million. Notably, management did not have any interest-bearing debt on its balance sheet as of Mar 31, 2021. The company, on Apr 13, 2021, entered a credit agreement that provides for a senior secured revolving credit facility worth $125 million, along with a letter of credit sublimit worth $20 million. Apart from these, the credit agreement provides for an additional facility, which allows the company to escalate its senior secured revolving credit facility by up to $100 million. No amounts were used under the credit agreement as of May 4, 2021.

Management paid out a quarterly cash dividend of $1.13 per share on Feb 5, 2021. Further, Medifast unveiled a 26% hike in the quarterly dividend on Mar 18, 2021, taking it to $1.42 per share, which is payable on May 6. The company used $7.5 million for share buybacks during the first quarter. It has shares worth roughly 2.3 million remaining under its buyback plan.

Management anticipates revenues for the full year 2021 to come in the range of $1.4-$1.475 billion. Full-year earnings per share are envisioned to be $12.69-$14.14.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 17.42% due to these changes.

VGM Scores

Currently, Medifast has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Medifast has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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