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Medifast to close 8 corporate-owned weight-loss centers

Owings Mills-based Medifast Inc. is closing eight corporate-owned Medifast Weight Control Centers, effective Dec. 31, the company has announced.

The company, which manufactures weight-loss products and runs weight-loss programs, also said it expects to sell the assets of 10 to 15 corporate-owned centers to an existing business partner in the first half of 2014 as part of a transition to a franchise model.

It’s not clear which business partner that will be, or if all 10 to 15 centers will be sold to the same owner. Spokeswoman Tonja Paylor said Friday that a decision is still in the works.

At Medifast Weight Control Centers, which are located in 14 states, counselors help customers design personalized weight-loss plans and administer the Medifast Program, a diet regimen consisting of packaged, portion-controlled meals. At the end of the third quarter, Medifast had 83 corporate-owned centers and 36 franchises.

The actions announced Friday are part of a strategy announced in August to increase profits in Weight Control Centers by selling corporate centers and expanding into new markets using the franchise model over the next year and a half.

“We will continue our efforts to identify new franchise partners and continue to invest resources in the remaining corporate centers during the transition period,” Michael MacDonald, Medifast’s chairman and CEO, said in a news release.

The company said it expects to incur a one-time charge of about $2.5 million in the fourth quarter of 2013 related to the center closures.

The company originally said it could close up to 20 corporate centers if it can’t find a buyer for those locations, said Kurt Frederick, an analyst with Wedbush Securities Inc. who watches Medifast. He added that he thinks the overall strategy is a good one.

Several years ago, Medifast started adding corporate-owned centers at an accelerated pace because its existing ones were doing well, Frederick said, but most of the new centers were either unprofitable or not very profitable.

“They were spending too much money to open the centers but not enough time selecting the location sites,” he said.

The franchise-owned centers were the ones bringing in the most revenue, so when MacDonald took over as CEO at the beginning of 2012, the company decided to focus instead on the franchise model, Frederick said.

“That brings us to today, when they took that first step in picking out the [corporate-owned] centers that weren’t doing well at all for whatever reason — they were in a bad location or whatever — and are closing those because they can’t sell them,” Frederick said. “The others are in locations where they can sell them to a franchisee and hope they’ll have better success that way.”

Medifast also closed three corporate centers during the third quarter because their leases expired.

Weight Control Centers are the smallest revenue channel for the company. Direct sales make up about 65 percent of its revenue and direct marketing sales about 20 percent, Frederick said.

But that could change.

Last year, Medifast made a deal with Medix, a Mexican pharmaceutical company, to add about 30 Weight Control Centers throughout Central and South America over the next few years. And last month, Medifast announced formal agreements with current franchise partners to add 37 more Weight Control Centers in six states over the next three years.

“So they’re going from 36 franchise centers to more than 150 franchise centers within three years, so profitability-wise, that channel is going to become a much bigger portion of the company than it is now,” Frederick said. “As they expand into new markets via franchises, it has potential to be a nice contributor for them.”

Frederick added that even if the company is forced to shutter, rather than sell, more corporate-owned centers during that period, it’s not uncommon for a company to close unprofitable locations while simultaneously adding locations that are anticipated to be more successful.

Medifast posted “disappointing” earnings during the third quarter, Frederick said. Revenue was down, and gross profit was $64.8 million, a 5 percent decline compared to the same period last year. During the first nine months of 2013, though, the company performed better than during the first three quarters of last year.

“Their quarter wasn’t very good, but I think the steps they’re taking are the right steps,” Frederick said. “It’s a little lumpy right now — one quarter is good and then the next quarter isn’t so good. But after you get through this transition and more centers open up, I think you’re going to see some nice progress for the company.”

Medifast share prices increased by about 2 percent Friday, closing at $26.55.

Filings with the Securities and Exchange Commission show that since Nov. 1, two company executives and a director have sold some of the Medifast shares they own, notably Margaret MacDonald Sheetz, president and chief operating officer. Sheetz sold 53,000 in four different transactions for a value of about $1.3 million. Paylor, the company spokeswoman, said this was due to normal tax reasons.