By Dee Gill
These days, Weight Watchers International (WTW) looks like one more old-fashioned business getting killed by a smartphone app. Its sales are down, meetings attendance is down, and competitors are giving away for free the online dieting tools that Weight Watchers expected to sell. But there are several reasons that Weight Watchers will interest deep value investors now.
The current trouble can be traced to the roll out last December of a new Weight Watchers 360 program, which was meant to revitalize meetings and give members easy tools for keeping track of their prescribed consumption and activity levels. Just as Weight Watchers began collecting $5 a month from members for its online tools, thousands of dieters began downloading free smartphone apps like MyFitnessPal for the same purpose. MyFitnessPal got much better user reviews. Marketing mistakes made matters worse. The company reported double-digit recruitment declines in January and early February. Earnings and revenues have continued to fall. The company has lowered its full-year earnings guidance to between $3.55 and $3.70 a share, compared to $4.20 last year.
The trouble has pushed down valuations for Weight Watchers shares, which trade now at a forward PE ratio of about 10. More intriguingly, its free cash flow yield at 26% is now one of the highest among non-financial mid-cap stocks, according to the YCharts Stock Screener.
These seemingly attractive valuations will be suspicious to anyone who thinks the app-makers have permanently disrupted Weight Watchers' revenue stream. That cash flow won't last long if dieters really have decided their smartphones can replace Weight Watchers in-person counselors, particularly considering the high level of debt it still has to feed. Because of variable interest rate credit facilities, the company expects overall interest expense to rise by about $14 million in 2014.
But many believe that Weight Watchers' unique position of trust within the dieting business will allow the company to grow again. Unlike most of its competition, including the app makers, Weight Watchers' results for long-term weight-loss are well-studied and well-respected. There are vast numbers of insurers and employers interested in paying someone to help keep workers' health costs down, and Weight Watchers is in a good position to capture those dollars with a better marketing strategy. Even in the latest quarter, business-to-business sales were up 30%. Improving the Internet offerings also could help in raising membership as well as controlling costs.
As with many deep value investment plays, the trouble with this one is that we don't know whether there's a good plan to fix things. Weight Watchers' CEO resigned with that last round of nasty numbers. The new one, former COO James Chambers, sees this point as an "opportunity to re-imagine the core offering." He promises more clarity at an investor day presentation Nov. 6 that will focus on the strategic outlook.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.