Nutrisystem Inc has a market cap of $609.7 million; its shares were traded at around $19.43 with a P/E ratio of 19.2 and P/S ratio of 1.2. The dividend yield of Nutrisystem Inc stocks is 3.6%. Nutrisystem Inc had an annual average earning growth of 89.2% over the past 10 years.NTRI is in the portfolios of Chuck Royce of Royce& Associates, David Dreman of Dreman Value Management, John Buckingham of Al Frank Asset Management, Inc., Paul Tudor Jones of The Tudor Group, Jim Simons of Renaissance Technologies LLC, George Soros of Soros Fund Management LLC, Steven Cohen of SAC Capital Advisors.
Highlight of Business Operations:In the six months ended June 30, 2010 and 2009, the direct channel represented 96% and 94%, respectively, of our revenue. Net sales through the direct channel were $136.3 million and $287.0 million in the three and six months ended June 30, 2010, respectively, compared to $122.8 million and $273.8 million in the comparable periods of 2009. The increase in 2010 is primarily attributable to an increase in customer starts and retail revenue, which was partially offset by a decline in reactivation revenue. Revenue is primarily generated through customer starts, reactivation of former customers and the customer ordering behavior, including length of time on our program and the diet program selection. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, as well as the price and availability of appropriate media.
We distribute our proprietary prepackaged food through QVC, a television home shopping network. In the six months ended June 30, 2010 and 2009, this channel represented 4% and 6% of our revenue, respectively. On the QVC network, we reach a large audience in a 50 minute infomercial format that enables us to fully convey the benefits of the Nutrisystem diet programs. Under the terms of our agreement, QVC viewers purchase Nutrisystem products directly from QVC and are not directed to the Nutrisystem website. Retail prices (including shipping and handling) offered on QVC to consumers are similar to prices offered on the website. We generate a lower gross margin (as a percent of revenue) on sales through QVC relative to the direct channel, but QVC sales require no incremental advertising and marketing expense and, management believes, exposure on QVC raises consumer awareness of the Nutrisystem brand. Net sales through QVC were $5.2 million and $13.1 million for the three and six months ended June 30, 2010, respectively, compared to $7.9 million and $18.5 million in the comparable periods of 2009. QVC sales are a function of the number of shows and the duration of each show. The decrease in QVC sales can be primarily attributed to a decline in the number of customers placing a second order through QVC and a decrease in quality air time and sales per minute.
Marketing expense increased to $37.2 million in the second quarter of 2010 from $35.4 million in the second quarter of 2009. Marketing expense as a percent of revenue decreased to 26.3% in 2010 from 27.0% in 2009. Substantially all marketing spending during the second quarter of 2010 promoted the direct business. The increase in marketing is primarily attributable to increased spending for advertising media ($2.1 million) and increased marketing consulting ($639,000) partially offset by a decreased spending for television production ($674,000). In total, media spending was $32.5 million in the second quarter of 2010 and $30.4 million in the second quarter of 2009.
General and administrative expense decreased to $19.7 million in the second quarter of 2010 compared to $20.9 million in the second quarter of 2009. General and administrative expense as a percent of revenue decreased to 13.9% in the second quarter of 2010 from 16.0% for the first quarter of 2009. The decrease in spending is primarily attributable to reduced spending in professional, outside and computer services expenses ($1.5 million) and telephone and internet expense ($262,000) due to our continued focus on cost containment. Additionally, 2009 was impacted by $1.2 million in charges to right size our organization and streamline work processes. These decreases were partially offset by increases in compensation and benefit costs ($1.1 million) and in non-cash expense for share-based payment arrangements ($983,000).
Income Taxes (Benefit). In the second quarter of 2010, we recorded income tax expense of $7.4 million, which reflects an estimated annual effective income tax rate of 36.8% compared to an income tax benefit of $591,000 in the second quarter of 2009. The abandonment of our investment in Zero Water provided a prior year income tax deduction for the entire original $14.3 million tax basis investment in Zero Water and reduced 2009 income tax payments by approximately $5.0 million.
Costs and Expenses. Cost of revenue decreased to $133.9 million in the six months ended June 30, 2010 from $135.8 million in the comparable period of 2009. Gross margin increased to 55.4% in the six months ended June 30, 2010 from 53.6% for the comparable period of 2009. The increase in gross margin was primarily attributable to decreased food costs, a reduction in the use of food-based promotions and a reduced level of returns.
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