MusclePharm makes headway in cutting costs, dumping unprofitable SKUs
The company, which has a line of pre- and post-workout products, has been going through a rebuilding process following a period of excess both in terms of promotional contracts and executive perks under the leadership of former CEO and founder Brad Pyatt. The company had shown a meteoric rise in sales, but the costs of those sales rose even faster.
Pyatt was forced to step down after following questions from key investors about the firm’s corporate governance and a federal investigation that disclosed unreported perks. Pyatt was replaced as CEO and chairman by Ryan Drexler, who holds $6 million of the company’s debt. Pyatt, a former NFL player, founded the Denver, CO-based sports nutrition firm in 2008 and guided it to strong growth that in 2014 earned it a recognition from GNC as one of its best performing vendors.
The products featured highly visible lime green packaging that seemed to play well with consumers. Pyatt followed a strategy of high profile athlete endorsements including NFL quarterback Colin Kaepernick and golfer Tiger Woods. And he also engineered a deal for a suite of products co-branded with well known strength athlete, movie star and former California governor Arnold Schwarzenegger.
Cleaning up the products list
Drexler said when he took the reins the company had an inefficient and expensive way of producing its products, and it had significantly overpaid for its athlete endorsement contracts. The company had at one time more than 400 SKUs, according to Drexler.
“The company was able to achieve tremendous top line sales growth, [but] it became increasingly unprofitable. Had this trend continued, MusclePharm would have gone out of business. Against this backdrop, my team and I initiated a major corporate restructuring in 2015 which was largely completed in late 2016. Coming out of this period, we significantly reduced the operating cost and cut our products SKUs by as much as two-thirds, eliminating many of the niche products that were simply never going to be profitable,” Drexler told analysts during an earnings call. The call was posted in transcript form on the site seekingalpha.com.
Settling accounts
Unwinding those endorsement deals has led to a series of lawsuits with former endorsers and with the company’s contract manufacturer. The most recent lawsuit to settle came in the company’s second quarter, results for which were reported yesterday. MusclePharm agreed to pay $3 million to City Football Group, an Abu Dhabi-based holding company that operates soccer teams in several markets, including Manchester City Football Club in the UK and New York FC.
Drexler has pursued a strategy of diversifying the company’s distribution channels. Online sales through Amazon rose to almost 18% of overall sales in the quarter, and the company launched a Natural Series line of products that is now being distributed in Sprouts Farmers Markets.
Earnings details
The company’s net revenue was $26.2 million, compared to $32.9 million in the same period in 2016. Net revenue was flat compared to Q1 2017. The company reduced its net loss by 25% to $3.1 million and increased gross margin to more than 29%, compared to 25% in Q1 2017. MusclePharm’s stock continues to trade at between $1 and $2 a share, which is off from a high of more than $14 a share in 2014.
