Shares of Weight Watchers International (NYSE:WTW) are in the spotlight after the company issued a weak forecast for the rest of the year. The company warned investors that fewer people are signing up for its weight loss programs in 2013 than anticipated.
The company, which competes with Nestle's (OTCPK:NSRGY) Jenny Craig, Nutrisystem (NASDAQ:NTRI) and Medifast (NYSE:MED), said it expects full-year earnings of $3.5 to $4.0 per share. Analysts on average were expecting $4.75 per share
The company's shares fell more than 17 percent on the news.
Weight Watchers said its marketing strategy has not been effective in an increasingly competitive environment with its diet meetings business losing steam in North America and the United Kingdom.
One of Weight Watchers' concerns going into the new year was what impact falling off the fiscal cliff would have on U.S. consumer confidence. While the worst of that was avoided, the payroll tax holiday expired and consumers saw their paychecks shrink by mid January. Indications are that consumer confidence dropped significantly in January, which is the macro indicator most closely correlated with Weight Watchers recruitment.
Moreover, Weight Watchers said a new program launched in early December failed to sustain momentum in 2013. The company was also weighed down by higher marketing expenses related to first-time TV campaigns in several countries and online ads targeting men in the United States.
Weight Watchers also reported that it earned $58 million, or $1.03 per share, for the fiscal fourth quarter that ended on December 29. That's compared with $63.7 million, or 86 cents per share, earned in the same quarter of the prior year. While net income fell in the most recent quarter, earnings per share were higher because a tender offer and share repurchases by the company reduced the number of shares outstanding by over 30 percent.
Weight Watchers reported a 2 percent increase in its revenue and reported gains in its online business and declining attendance at the in-person meetings.
Weight Watchers trades at 11 times trailing earnings. The company's expectations are for ~$3.75 in EPS for the current fiscal year, and the current stock price of $44.90 is 12 times that figure, compared to its peer average of 11x. Weight Watchers has a stable cash flow generation, and when I look at the enterprise value implied by the current stock price, it is 10x trailing EBITDA, slightly higher than the rest of the industry.
The current ratio is below 0.50; Moreover, Weight Watchers significantly leveraged balance sheet also remains a concern.
In fact, Weight Watchers has the lowest current ratio in the entire Specialized Consumer Services Industry.
It is my view that after the weak earnings forecast, the risk to Weight Watchers' fundamentals has overwhelmingly skewed to the downside, which presents a very clear and intriguing investment opportunity on the short side. I will wait for a dead cat bounce to the mid-to-high $48-$50 level, as the shares present an attractive risk/reward there.