Weight Watchers: Bull Or Bear?

Jul.15.14 | About: Weight Watchers (WTW)

Summary

The current decline in WTW's stock price could signal a bargain buy.

The bull side of the story is WTW's long-standing history, loyal customer base, and proven weight loss results.

The bear side of the story is continued decline in meeting revenue, threats from mobile competitors, and the threat from Tesco.

The weight-loss industry is comprised of fads and staples. Weight-loss fads are ideas that intrigue consumers, capture their pockets for a brief moment, but dissipate when the consumer sees no results. Weight-loss staples are companies with historically successful programs and strong management teams that adapt to emerging trends in the industry. Weight Watchers (NYSE: WTW) is a staple.

Past fads and economic downturns have affected WTW's stock performance, but operating income has never dropped by more than 10% year over year over the past 10 years (with the exception of 2009). Unstructured market sentiment from Seeking Alpha and Motley Fools sees the current decline in the stock price as an opportunity to buy WTW at a bargain. However, over the past month, WTW's mentions on Stock Twits have mostly been bearish due to subpar earnings performance. Therefore, investors should approach with caution as future earnings turnaround is still uncertain.

WTW's business is centered around weekly meetings, which make up 54% of total revenue. Meetings are facilitated by over 10,000 "Leaders" in North America and Europe, and take place in WTW owned locations, community centers, or fitness locations. Meetings range from $10-$14/week and consist of an hour of group discussions and product demonstrations. Members weight themselves to keep track of progress. These meetings essentially provide a social support system for members.

Free mobile weight-loss apps have emerged as a substitute for WTW's PointsPlus system, but their effectiveness at helping customers lose weight is still unproven. App users complain that apps do not motivate users to stick to a strict diet. By contrast, WTW's weekly meetings creates a social environment that provides users with internal and external motivation to change to a healthier lifestyle. Losing weight is not an easy task; it requires discipline and motivation. The app could be valuable to self-motivated individuals who only need to track what they eat, but for those that cannot lose weight alone the app is useless.

WTW Financial Performance FY 2013 (Source: 2013 WTW 10-K)

  • Total revenue has declined by 6%; however, Internet sales (including advertisement and Weight Watchers Online products) increased by 4%.
  • EBITDA has declined by 12% since 2011, driven by the investments in mobile technology.
  • Earnings declined 20%, caused by refinancing of the business, mainly through renewing debt and pre-paying existing debt, used to repurchase approximately 18 million shares outstanding, of which 9.5 million were repurchased from Artal to keep Artal's percentage ownership constant.
  • Earnings per share dropped 15%.

2014 Q1 Results (Source: 2013 WTW 10-K)

  • Revenue declined 17% over 2013 Q1 results.
  • Gross profit declined 21%.
  • Net profit declined by 34% after adjusting for loss on Brazilian acquisition.

Operating Performance

2011

2012

2013

2011-2013

Revenue

1,832,494

1,839,432

1,724,123

% Change

0.38%

-6.27%

-5.91%

EBITDA

577,323

547,445

505,661

% Change

-5.18%

-7.63%

-12.41%

Operating Income

546,328

510,805

460,757

% Change

-6.50%

-9.80%

-15.66%

Net Earnings

304,867

257,426

204,725

% Change

-15.56%

-20.47%

-32.85%

Click to enlarge

Source for data: WTW 2013 10-K

The Bull Story: Loyal Customer Base, Long History, and Discount Valuation

WTW has 60 years of history and the most known brand in weight management. Its brand image is furthered by celebrities such as Jennifer Hudson, Jessica Simpson, and Charles Barkley. WTW's customers typically have positive reviews due to the success of the program. Through the model of using past members who have lost weight with WTW as Leaders, WTW is able to use the tagline "If I can do it, you can do it too" as a way to continue to grow that customer base. By using past credibility, WTW also creates a strong barrier to entry for any new entrants in this market.

While meetings and products sales revenues have declined by approximately 10% in 2012, online sales and advertising revenue increased by 26%. Management has clearly caught on to this opportunity with the acquisition of Wello, an online fitness startup that has tremendous potential as the next mainstream app. With the recent 5.75% tax imposed on fitness centers, Wello could be in a position to disrupt the fitness market.

2011

2012

2013

Revenue

Meeting fees, net

990,296

934,933

851,626

% Change

-6%

-9%

Product sales and other, net

442,703

400,161

350,271

% Change

-10%

-12%

Internet revenues

399,495

504,338

522,226

% Change

26%

4%

Net Revenues

1,832,494

1,839,432

1,724,123

% Change

0%

-6%

Click to enlarge

Source for data: WTW 2013 10-K.

WTW has also selected the mobile tech guru Kony to streamline WTW's business operations on mobile platforms. This makes the existing Weight Watchers Online tool much more convenient for customers as they can book meetings and access personal process information on mobile. This also makes finding meetings much easier.

Relative to NutriSystem (NASDAQ: NTRI), which is in many ways an identical business albeit much smaller, WTW trades at 7.1x TTM earnings while NTRI trades at 60.7x TTM earnings. Even with the forecast sales decline, assuming that management does not make any advancements in the mobile and online space, WTW still holds much greater value compared to peers.

Projected Growth Rates

Projected FY 15

Projected FY 16

Revenue

-1.72%

3.76%

EBIT

1.86%

1.68%

EBITDA

1.45%

2.01%

Net Income

1.07%

8.70%

EPS

1.23%

7.88%

Click to enlarge

Source for data: Thomson Reuters.

The Bear Story: An Uncertain Future

Investors would feel more confident in WTW if management is implementing foreseeable changes. However, at this point the turnaround story is vague. How management will stop the decline of meetings revenues is the central question surrounding WTW's future performance. Even with technological upgrades and product add-ons, weekly meetings are still the core driver of WTW's business.

WTW's performance in the U.K. and Europe exhibits the same decline in meetings revenue with 17.6% and 4.4%, respectively. Therefore the decline in meeting sales is not just a North American phenomenon. The global market seems to be shifting.

More threats are on the horizon as Tesco has recently launched its own dieting services with calories controlled meals. If the trend of grocery chains expanding into dieting services continues, WTW could see a decrease in market share. Although the success of Tesco has yet to been seen, due to their sheer size and channel of distribution, a decrease in WTW's product sales may follow.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.