Execution of business has not been flawless resulting in disappointing numbers of new subscribers. The strategic plan of the new CEO makes sense and during the upcoming diet season this can start making a difference.
Fundamental Reasons to Buy Weight Watchers
The fundamental reasons why the company is attractive that I listed in my earlier article are still valid. The most important positives:
1. Capital Light Business Model
Weight Watchers' has a very capital-light business model, which is very attractive because it protects the company in downturns and allows it to grow fast if the circumstances are right. It profits from licensing, franchising, royalties, meeting fees, internet fees and product sales.
2. Weight Watchers Brand
The Weight Watchers brand is trusted to such an extent that large food companies and restaurants are starting to license the brand to advertise their products.
A trusted brand is an extremely valuable asset in a fragmented market. It can also be leveraged very easily when the opportunity arises. Weight Watchers licenses its brand to consumer products to firms like Kraft (NASDAQ:KRFT) and General Mills (NYSE:GIS) and restaurants like Applebee's (DIN).
No competitor - Like Life Time Fitness Inc or NutriSystem, Inc (NASDAQ:NTRI) - has a Weight Watchers like support infrastructure with 12,000 leaders who hold more than 45,000 weekly meetings in which members discuss weight-loss challenges, set goals and monitor how they are progressing. It has to be said that increasingly consumers are moving to the internet channel, yet right now this is still a strong channel.
4. Obesity Still Spreading
According to the Centers for Disease Control and Prevention, 70% of the adult population of the United States is overweight, with 35% considered obese. Worldwide, nearly 1.6 billion people are considered overweight or obese. Increasingly inactive lifestyles and the prevalence of unhealthy food are often blamed for the growth of the number of overweight people. Weight Watcher's market is expanding.
Why is Weight Watchers Going Down?
The guidance for the second half of 2013 is disappointing for investors. On the conference call the CEO warned that the problems are going to continue for a while as it takes time to implement changes and to make an impact on the bottom line.
The pressing problem is management's challenge with enrollment of new customers which is of vital importance to revenue growth.
Nicholas P.Hotchkin CFO:
The key challenge for our business remains attracting new members. This has been the case in meetings for some time and during the quarter, we experienced heightened pressure in our weightwatchers.com business.
Why do you maintain Weight Watchers is a good investment?
The fundamental strengths of the company: Strong Brand, Capital Light Business Model, Growing Market and the Strong Infrastructure are all still intact.
However the company appears to also have fumbled integrating online business with its real world business. Weight Watchers is struggling but this also puts them on sale.
Weight Watchers Fumbled
The Motley Fool discusses how Apps threaten the business model of Weight Watchers. The author talks in particular about the leading app Myfitnesspal:
It has a free calorie counter and an online diet and fitness community, all completely free, and claims to have 40 million members. Consumers can do it for themselves and at no cost. That's a powerful threat to Weight Watchers' monthly charges for membership; the company's online program costs $18.95 per month.
Apps are a force to be reckoned with but the effectiveness of free apps should not be overstated. There are fundamental psychological reasons behind the design of the Weight Watchers program and it has a proven success rate.
The threat of many online apps and websites is that they lure away customers and perhaps even disenchant them with the idea of weight loss by offering or even selling them ineffective programs.
On the other hand, online programs or apps are very easy to sign up for and it can be an effective channel to recruit subscribers to more effective paid programs. This development can turn into an advantage once Weight Watchers transitions into an integrated strategy.
The new CEO of Weight Watchers addresses this exact issue in the conference call as follows:
I think, as Nick referenced, we think there's a lot of competition for trial and forces distracting the enrollment mechanism associated with free apps and with activity devices in general.
But I think it's critical to make a distinction between competition for trial and alternatives to our proven and effective program. And as a stand-alone activity with consumers, we're reasonably confident that these things are not going to change the trajectory of the obesity challenge.
Turning that around and looking at them as the potential additives to a strong program like ours, we think through time, there are real opportunities for us to strengthen our offering on the basis of what we're seeing have a real appeal for consumers.
Competition is a major issue for Weight Watchers and the UK business has been under particular pressure during 2013. The CEO points to an aggressive local competitor as the key factor of their lost revenue in this market.
Note that over the past few weeks, both Jim and I have been to the U.K. to assess the situation firsthand, and the team is aggressively focused on what it will take to reverse the recent trend. We have appointed Jeanine Lemmens who previously led the turnaround of our Benelux operations and restored that region to growth, to lead the U.K. effort.
That competition is most likely the unlisted Slimming World (info from WikiInvest):
- Slimming World: In Britain, Slimming World is bigger than Weight Watchers, with 7,000 groups run by 2,700 self-employed weight loss Consultants who have all lost weight following an eating plan based on the principles of satiety. The plan encourages members who attend group to choose healthy, filling foods without having to count, weigh or measure and was started by Margaret Miles-Bramwell in 1969.
Can Weight Watchers Turn its Business Around?
Can Weight Watchers turn the disappointing subscriber numbers around? There are a few positives that might contribute to a turnaround.
The big opportunity to change the trajectory of the business is in the winter diet season.
The best season for diet products is the winter season. People become less active and spend more time indoors. The holidays are traditionally a time that consumers put on weight and the interest in weight loss programs increases.
The new CEO James Chambers has spent his career supporting consumer facing businesses. Half of his working years have been in general management but he also worked in marketing, operations, corporate planning and head of information technology. He worked for OREO, Trident and Remy Martin and other consumer brand companies.
James Chambers has been frank about challenging conditions and his plans for the company's strategy make sense.
Focus to reimagine core offerings
Strategically Weight Watchers is well positioned but it is failing to leverage into a growing number of subscribers. The CEO addresses this as follows:
Our marketing and engagement with consumers must continue to evolve. We need to more aggressively innovate and evolve our offerings to improve the relevancy and expand their consumer reach. As such, over the past several months, one of my priorities has been to further immerse the team in the understanding of the consumer in our category, both members and nonmembers. We believe there is an opportunity to reimagine our core offering to better deliver on what consumers need and to evolve our brand to become even more inclusive.
I've concluded that running our businesses in an integrated fashion, not as separate .com and meetings businesses, can release tremendous value, allowing us to better innovate against consumer needs and leverage our significant assets. Accordingly, I will be realigning our business to eliminate the boundary between the meetings and online divisions.
I highlighted key parts of the comments by James Chambers. Weight Watchers should be able to use the advantages it has established and leverage these into superior performance.
Integrating the .com and meetings business into one business is an essential step. Then it's crucial to redesign the offerings to pinpoint what consumers are looking for these days. These are execution problems and the company is likely to solve them at some point.
The fundamental strengths of the company remain but performance has been disappointing. The two main reasons being increased competition driven by IT and marketing execution.
A new CEO has been appointed and I like the strategy he is embarking on with the company. Guidance for the near term painted a bleak picture. This may be reflected in the stock price already as management was quite upfront about poor conditions.
I still think Weight Watchers is an attractive company and expect its stock return to beat the market's return over the long term.
I have contacted investor relations with a request for a trial of the company's product offerings and want to make a comparison between the online products and competitive offers. Follow me on Seeking Alpha or Twitter if you don't want to miss it.
As always I like to hear from you whether you agree or disagree. Disagree most of all.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.