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Shares of Weight Watchers (WTW) the provider of weight management services tumbled in Thursday's trading session, ending the day 12% lower. On Wednesday after the close the company announced its second quarter earnings and revised its full year guidance downwards.

Second Quarter Earnings

Weight Watchers announced a surprise revenue contraction in the second quarter. Revenues fell 0.3% to $484.8 million, coming in short of analysts expectations of $494 million. Excluding currency headwinds resulting from a strong US dollar, revenues grew 2.3%. Operating income fell 1.2% to $153.5 million, up 1.1% on a constant currency basis.

While net income fell 11% to $77.5 million, earnings per share rose 16% to $1.36 as a result of a previously announced tender offer and share repurchase programs. The strong US dollar impacted earnings by approximately $0.06 per share. On average, analysts were expecting the company to report earnings of $1.36 per share.

David Kirchhoff, CEO of Weight Watchers commented on the results, "second quarter 2012 results were in line with our expectations, benefiting from 11% total paid weeks growth in the quarter versus the prior year. Yet, since June we have seen a weakening in our trends so we are taking a more cautious view of our business for the second half of the year in light of difficult macro-economic trends."

Segmental Information

North American revenues fell 6.8% to $209.0 million driven by a 9.9% decline in attendances and a 5.5% decline in paid weeks. International revenues fell 11.8% to $104.0 million driven by a weak performance in the UK. Revenues for the UK division came in at $39.9 million, down 15.1% on the year. Continental European revenues fell 6.2% to $50.6 million, but were up 4.9% on a constant currency basis as a result of new marketing programs in France and Germany. The online weightwatchers.com business performed strong. Revenues rose 28.3% to $135.6 million as the company now has 2.3 million online subscribers.

Outlook

On the back of the strong US dollar and the more cautious outlook given the macro-economic circumstances, the company now anticipates to earn between $4.00 and $4.20 per share for the full year of 2012. This guidance is down from the previously issued guidance of $4.60-$4.80 per share. Analysts were on average expecting the company to guide for full year earnings of $4.61 per share.

Management has poor visibility on the short term nature of the business. When Weight Watchers published its first quarter results in May of this year, the company actually raised its full year earnings forecast. In addition the company now anticipates high-single digit declines in attendances and paid weeks for the second half of 2012.

Valuation

Weight Watchers ended its second quarter with roughly $91 million in cash and $2.49 billion in total debt for a net debt position of roughly $2.40 billion. For the first six months of 2012 the company generated $988 million in revenues on which it net earned $132.1 million, or $2.01 per diluted share. Based on Thursday's market value of $2.4 billion, the market values the firm at 1.2 times annual revenues and about 10 times earnings.

Currently Weight Watchers pays a quarterly dividend of $0.17 for an annual dividend yield of 1.6%.

Investment Thesis

Today's correction further increased year to date losses to around 22% after shares peaked at $83 in March of this year. Shares already fell almost 20% on the 2nd of May after the company announced its first quarter results which came in as a disappointment to investors.

As early as January of this year I warned that the company's valuation was getting a bit "fat" and urged investors to re-evaluate their long thesis. Unfortunately I did not act upon my own advice myself. Given the deterioration in the underlying business and the relatively high levels of debt, I think it is too early to start aggressively picking up some shares. On the other hand, most "short" potential has already been squeezed out of the stock.

At these levels I stay on the sidelines.

Source: Weight Watchers - Stock Continues To Lose Weight