A Nearer Look At The Disruption Of Medifast

The load loss and vitamin product firm is dealing with the GLP-1 drug tsunami

By Praveen Chawla

Abstract

• The brand new diabetes and food plan medication seem to have disrupted the corporate’s extraordinarily worthwhile enterprise mannequin.
• Medifast
  MED
  could also be going through existential points.

Weight reduction and wellness product firm Medifast Inc. (MED, Monetary) has skilled a major lower in market cap lately. The inventory is down over 80% since its peak in 2021. This dialogue makes an attempt to clarify what’s going on and assess if there may be any prospect for restoration.

On the floor, Medifast’s valuation numbers present distinctive worth with a price-earnings ratio of solely 5.03 and a PEG ratio of 0.11, as does the GuruFocus valuation chart beneath. Progress of each income and revenue has additionally been distinctive till lately.

Enterprise mannequin

Medifast sells food plan alternative merchandise by means of self-employed and commissioned “coaches,” who’re enterpreneurial people working to promote merchandise to their neighborhood members. The corporate’s enterprise mannequin depends on recruiting coaches to promote their program (branded Optavia) and merchandise, which has been profitable in producing income and dividends for buyers. It’s a multi-level advertising and marketing (MLM) promoting mannequin, in any other case generally known as community or referral advertising and marketing, which is a technique through which companies promote their merchandise by means of person-to-person gross sales.

The coaches are paid based mostly on their efficiency and the variety of purchasers they’ve. They’re compensated for shopper acquisition, staff constructing and sponsorship. They’ll additionally earn cash by means of shopper bonuses, staff development bonuses, management bonuses and shopper assist commissions, amongst different areas. Medifast coaches construct their staff by recruiting new purchasers and different coaches. Additionally they deal with constructing a neighborhood of like-minded people who share a ardour for selling well being and wellness and Medifast food plan and dietary merchandise. Principally, these coaches are promoting Medifast dietary merchandise to their purchasers. The merchandise themselves are fairly costly and sport excessive gross margins of over 70%. The coaches get a fee based mostly on gross sales in addition to gross sales of lower-level coaches who they’ve recruited. Every shopper generates gross sales of $300 to $500 a month whereas on this system. Adherence and retention of purchasers to this system is vital to each the coach’s and the corporate’s success.

In keeping with Certainly, the common hourly pay for an Optavia Coach at Medifast in america is roughly $15.95. Thus, compensation could be very low for a typical coach. A technique for a person coach to extend compensation is to construct a multilayer staff of coaches who report back to them after which they get a bit of the motion from the earnings of coaches on their staff. Nevertheless, the success of the mannequin is consistently recruiting new purchasers after which convincing purchasers to themselves grow to be coaches and recruit extra purchasers and so forth and so forth. Whereas I do not need particular numbers, like different MLM fashions, the attrition is prone to be very excessive and the retention of purchasers (and coaches) low. Most coaches make little or no cash and sure fall off the wagon quickly. There’s loads of churn. Thus, coaches are on a contant treadmill of recruiting, coaching, motivating and retaining different coaches and purchasers.

General, this mannequin seems somewhat questionable to me, however it’s laborious to argue with its effectiveness as the corporate has had loads of success with it through the years. Income per share has elevated at a compound annual development charge of over 13% per yr during the last decade and income have elevated by a CAGR of over 24% per yr. That is simply wonderful development, and but the corporate is promoting for a price-earnings ratio of about 5. Why?

MED Knowledge by GuruFocus

GLP-1 disruption

The speedy downside for Medifast’s inventory decline has been the disruption attributable to the introduction of GLP-1 medication like Ozempic, Wegovy, Muanjaro and Zapbound from Novo Nordisk (NVO
VO
, Monetary) and Eli Lilly (LLY, Monetary) for diabetes and weight reduction. These medication mimic the motion of a hormone known as Glucagon-like-peptide 1 (GLP-1), which alerts the pancreas to provide extra insulin after a meal and alerts the central nervous system that satiety is reached and no extra meals is required. The nervous system then additionally slows down the passage of meals within the gastrointestincal tract, so you’re feeling full longer. The consumption of meals for individuals on GLP-1 is drastically decreased. This causes weight reduction.

These medication have confirmed to be very efficient within the chubby and overweight inhabitants and are seemingly far superior to what the food plan trade can provide. The massive quantity of publicity in conventional and social media about GLP-1 medication has seemingly affected the recruitment of purchasers and coaches. Current coaches are in all probability seeing an affect on their revenue and their motivation and skill to recruit could have plummeted. That is actually evident within the firm’s gross sales and revenue numbers.

The chart beneath exhibits the quarterly income and revenue. The detrimental affect is evident. Within the newest quarter, income and revenue fell by 39% and 36% as in comparison with a yr in the past. That is clearly a blow.

Dividend suspended

Up till the tip of 2023, Medifast was paying a dividend of virtually 9.90%. The corporate lately suspended its dividend, although, and introduced that it has invested $20 million in a digital major care service (LifeMD) in order that its purchasers could possibly be prescribed GLP-1 medication along with dietary and food plan merchandise from Medifast. It’s unclear at this level if this suspension of the dividend is everlasting, however the market is probably going pondering it’s and has despatched the inventory down one other 20% yr up to now. My guess is the mannequin is now shifting quickly from reliance on coaches to reliance on medical professionals and GLP-1 medication.

So it does appear to be the corporate is in an existential disaster and is making an attempt to overtake its enterprise mannequin. Furthermore, brief sellers have jumped on the inventory with about 18% of the float at present shorted.

On the constructive facet, the corporate has little to no debt and insiders have been shopping for shares constantly during the last yr.

Conclusion

It’s clear Medifast’s enterprise mannequin is being disrupted and the corporate could also be going through an existential disaster. To its credit score, it’s responding quickly and shifting towards a medically assisted enterprise mannequin. How the coaches will match into this new mannequin stays to be seen. Additional, as soon as the purchasers are on GLP-1 medication, will they nonetheless want or need Medifast merchandise? Its merchandise should not low cost and the GLP-1 medication are very costly (over $1,000 a month). Not many individuals can afford GLP-1 medication until paid by insurance coverage, and if that’s the case, will the insurance coverage corporations go for it? Who can pay for the prescribing physician’s companies? After which how will the coaches earn cash and the way will the corporate retain them? To me, it’s like altering the wheels of a automotive that’s working. Not a straightforward job.

The GF Worth Line
VALU
suggests the inventory is signficantly undervalued, however I concern it could be a price lure.

I believe there are simply too many open questions swirling round relating to the viability of Medifast’s enterprise mannequin, which solely time can reply. Can the corporate survive the GLP-1 tsunami and adapt to the brand new actuality? For now, I believe it’s best to keep away from the inventory.

Disclosures

I’m/we at present personal positions within the shares talked about, and have NO plans to promote some or all the positions within the shares talked about over the subsequent 72 hours.