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  • What Weight Watchers Needs To Succeed [View article]
    Interesting piece Ben, I agree with many of the points you make.

    Management have been too slow in anticipating the competitive threat from wearable fitness devices, and too quick to dismiss these devices in a similar fashion to the Atkins Diet and other fads diets that temporarily threatened WTW back in 2003-2005.

    Management could be accused of having blind faith in their product, borne out of their experience with the Atkins Diet, South Beach other fads diets that temporarily were perceived has seriously threatening WTW’s competitive position back in 2003-2005.

    The question is though, are the wearables devices another fad, or are they really a game changer from a health and fitness point of view?

    From a general technology/fashion perspective, I believe wearables are here to stay – but from a health and weight-loss perspective I’m not so sure. Why? Because for the real end users that WTW’s products are aimed at (and that have worked for over the past c. 50 years), conveniently tracking calorie consumption or the number of miles you’ve just run, or what your heart rate is haven’t been the key factors behind successfully losing weight. These applications tend to work for people who are moderately overweight, those that need to lose a few pounds, but not for people with real weight/health concerns.

    The solution to successful weight loss for many people with real weight problems is good habit formation and behaviour modification, which are very difficult to initiate and maintain by oneself – remember people with weight problems often have poor self-discipline and bad habits which is why they develop weight problems in the first place. This is where WTW’s support network and meeting format becomes so important, and why I believe WTW’s programme is the only weight management programme that has been scientifically found to work.

    I always think of the following gym analogy when thinking of WTW’s business model, and it perhaps best captures why WTW’s group support format has proven to be so successful over the last 50 years.: Like someone going to the gym and lifting weights on a the bench press, it is more difficult to push yourself to maximum effort by yourself – it is easier to complete a routine of exercises when with a friend or colleague alongside you, as the other person encourages you and pushes you to finish a routine, as well as often stimulating competition when one sees that friend finishing their own routine. Similarly, with the WTW system, when a member is part of a group or community of people who are all pursuing the same goal, are encouraging each to reach that goal, and are motivated by an accessible leader who has already successfully achieved that same goal, it is more likely that the member will achieve push on to achieve that goal themselves. This network or community habit approach is therefore key for successful and lasting weight loss. This is something that the fitness apps and fitness monitors by themselves cannot offer. A further point to consider is the longevity of fitness apps and wearables - how long do people typically stick with them to achieve weight loss – anecdotally, I know of people giving up after a month or so, and the wearables become a disused gadget that was just trendy at the time of purchase. (of course, these work for some people, but again not for people that require behaviour modification and the necessary support to achieve weight loss). By contrast, a behaviour oriented offering with a community/network element like WTW’s is likely (and has proven) to have much greater sticking power.

    The fact that WTW’s offering has been scientifically proven to work, in a market characterised by fads and gimmicks is WTW’s competitive advantage. It has built and maintained (to date) its market-leading brand and position on this fact.
    The question is have fitness devices disrupted WTW’s business model and started a gradual and permanent erosion of its competitive advantage? I don’t believe so, but as you correctly highlight, there are a number of clear remedial actions that management need to take to steady the ship and reconfigure their product offering. I think it’s also worth remembering that we live in a hot moment for all things tech, and Mr. Market is the most enamoured he’s been with tech since 1998-2000. In such a period, it’s easy to feel that the latest innovation in a market will render the incumbent’s product or service obsolete.

    As a shareholder I am concerned by WTW’s current status, but I do not believe the proverbial fat lady is singing just yet. Yes management have a lot of work to do in implementing a successful refresh of the brand and product offering (along the lines you suggest I believe), and the urgency around this is all the more critical given the overleveraged balance sheet. At current pricing, I think WTW’s is an attractive play, but the outcome is ultimately dependent on management’s ability to turnaround the business. I think the core product still works, it just needs the right innovators to refresh it.

    (I hope I haven't sounded like a cheerleader for the stock given I'm a shareholder - I think the business has real, but fixable, problems in terms of management and execution, but ultimately think the model is still valid and there is demand for the products and service).

    Would welcome your thoughts and counter points in response.
    Mar 21, 2015. 05:51 AM | 5 Likes Like |Link to Comment
  • Update: Breaking Down Crossroads Trading [View article]
    Ultima70 - Can you explain where you get the 25% dilution arising from the $12m Series H preferred stock funding round? I read the S-1 filing and there is no mention of number of shares to be issued or of how many (if any) warrants will be attached? Thanks
    Sep 26, 2014. 10:10 AM | Likes Like |Link to Comment
  • Viacom Holds The Most Value Compared To Media Content Peers [View article]
    Do you think a reason why Viacom trades at a discount to other content providers is because its content portfolio is weaker than competitors? For example, MTV and VH1 are no longer the dominant music assets they once were - the internet has effectively killed their platform. The one issue that stands out with Viacom is that it doesn't have an ESPN or a HBO type asset that provides it with a competitive advantage. It just seems that Viacom's content is less valuable than others'?
    Aug 3, 2014. 03:18 AM | Likes Like |Link to Comment
  • Weight Watchers International: Cutting Through The Fat - Q1 FY14 Update [View article]
    vpg999 - Please explain why you think the "stock is wiped out in the end" ? You have not presented any argument or facts other than referring to a transaction that happened two years ago?
    May 5, 2014. 09:34 AM | Likes Like |Link to Comment
  • Weight Watchers International: Cutting Through The Fat - Q1 FY14 Update [View article]
    John, I agree - group leaders are a key asset of this business, and the effective management these is key to a successful turnaround of the meetings business, just as much as product innovation, in my view. I was surprised that there was no mention at all about leader engagement on the call - I note from the November '13 investor presentation that management intended to invest an incremental $15m in leader compensation in 2014. It is too early to tell from Q1 results whether any leader investment/engagement is working, given the recent recruitment trends, but it will be interesting to see if further stabilisation occurs in Q2 - if so, it may suggest that leaders are being fairly treated and incentivised, but I will be on the look out for specific commentary from management in this regard. Very surprised that this issue wasn't picked up on the earnings call by analysts.

    You also raise an interesting point regarding the impact of weather. It may well have impacted results, given the double digit declines in paid weeks for Q1 - however, given that the results were better than both previous guidance and consensus, this could suggest that management's turnaround plan is possibly even more effective than initially thought, if weather was also an impediment to business during Q1. Again surprised that the analysts on the call didn't ask to what extent any declines could be attributed to the weather - after all, so many other corporations are blaming the weather for poor results in Q1.

    Thanks for reading and your comments.
    May 5, 2014. 03:20 AM | Likes Like |Link to Comment
  • Weight Watchers International: Cutting Through The Fat - Q1 FY14 Update [View article]
    Michael, many thanks for reading and for your kind words.

    I read your WTW article back in March and found it extremely helpful as I conducted my own research on the company.

    Regarding your query on WTW's Tranche B2 debt, the CUSIP is 948627AU8.

    However, I am not sure how/where one can invest in this credit - as a small private investor I do not have the capacity to invest in this issue, but I included a credit analysis in my update note as I believe the debt is a very interesting proposition and may be of interest to other SA readers. I will look into this further and let you know what I find.
    May 4, 2014. 09:00 AM | Likes Like |Link to Comment
  • Weight Watchers International - Is The Fat Lady Singing? [View article]
    75% monthly pass statistic taken from page 3 of 2013 10-K, in "Our Meetings" section:

    "In fiscal 2013, on an aggregate basis across the markets where we offer Monthly Pass, well over three quarters of our meeting paid weeks, and approximately three quarters of our member attendances, were attributable to Monthly Pass."

    Based on the above disclosure, this applies to meetings business globally, not just NACO.
    Apr 23, 2014. 04:42 PM | Likes Like |Link to Comment
  • Weight Watchers: Excellent Business At A Fire Sale Price [View article]
    Thanks for your response. A couple of thoughts:

    Regarding your point on interest tax benefit, while I understand your logic, I don’t believe this adjustment is necessary - you say that “By the way, "free-cash-flow" is always in reference to equity since the cash payments which belong to debt holders are not "free." The word choice for free-cash-flow comes from the notion that it is what is "free" to be allocated where-ever (including distribution to the equity)” – This is not correct.

    True free cash flow generated by a business is the free cash flow to the FIRM, regardless of capital structure, and therefore available or free to ALL investors. Think of it as free cash flow to the enterprise, rather than equity - the true earnings power of the business is not distorted by the capital structure, which is ultimately a decision or choice by management/owners (clearly a choice in WTW’s case, given Artal’s position). Remember, free cash flow is the cash generated by the business which is available for a number of corporate purposes, – M&A, dividends, share repurchases, and … debt repayment. These various uses for FCF are at the decision of the management or the owners (think of Buffett's owner earnings conception of free cash flow). Therefore while I understand why you offer your definition of free cash flow, I do not believe it is accurate.

    So what is relevant in assessing WTW’s free cash flow for the purpose of valuing the business is ALL free cash flow generated by the business, before any interest or debt payments, and therefore no adjustment for tax shield on interest is necessary (A decision by management to change capital structure would immediately change the tax bill anyway).

    Regarding your point on conservatism, yes it may be more conservative by virtue of it being a lower number, but it still doesn’t approximate the true historic free cash flow for this business.

    All that said, I do not mean any of my points to be criticisms of your analysis – I enjoyed your article, agree with your view on the company and have broadly similar conclusions regarding its valuation and potential upside. Just wanted to share some thoughts that may be helpful.
    Apr 17, 2014. 05:08 PM | Likes Like |Link to Comment
  • Weight Watchers: Excellent Business At A Fire Sale Price [View article]
    Good article, thanks for posting. Just one observation I have with regard to your discussion of FCF in the context of debt obligation - true FCF (to the firm) for WTW in FY13 was actually $364m, NOT the $260m you cite. Your $260m number is net of interest expense of $103m, and therefore reflects PARTIAL debt servicing, and therefore this is understates free cash flow available for debt servicing.

    To assess true free cash flow available to service debt, you need to add back the interest expense ($103m in FY13) to the conventional calculation of OCF-capex-capitalised software expense as reported on WTW's cash flow statement, as their reporting format works from net income (which nets off interest expense) to OCF. Just something that I've noticed a few analysts miss recently.

    Correctly applying this interest add-back adjustment to OCF over the last 10 years track record, actually implies a significantly stronger cash generation ability than the reported OCF-capex/capitalised software calculation would suggest. Hope this is useful for your analysis.

    Thanks for your article and insight, and agree with your conclusions.
    Apr 16, 2014. 07:05 PM | Likes Like |Link to Comment
  • Weight Watchers: A Bargain Price In A Pricey Market [View article]
    Michael, I've read all the articles you refer to, as well as your own - all interesting and worthwhile analyses on a real value opportunity in my view, worth approx. $30 conservatively, and $40 in a more optimistic scenario in my view, with probability of debt burden-induced collapse being very low.

    I've just posted my own analysis on WTW on seekingalpha earlier today - - it might be of interest to you and others.
    Apr 16, 2014. 06:52 PM | Likes Like |Link to Comment
  • Weight Watchers: A Bargain Price In A Pricey Market [View article]
    I agree with your thesis, and believe the market is overly discounting recent negative news flow around the Company and industry trends. However, one point regarding your analysis which I believe is incorrect - FCF for FY13 is actually $364m, not $261m as you indicate. Your figure of $261m is OCF - capex (including capitalised software), however this includes partial debt service, as it is NET of $103m of interest expense. The true FCF to the Firm is $364m, after adding back the $103m in interest.

    Given the varying capital structures across the industry, I believe it is more appropriate to consider EV and FCF to the Firm and work back to equity value by subtracting debt (including adjusting for operating leases given the meetings format is so key to the business model) from the EV based on FCF to the firm. I recently posted my own analysis on seekingalpha, please feel free to offer any thoughts you might have on this.

    Good article, thanks for sharing your thoughts, and I agree with your thesis.

    Apr 16, 2014. 06:48 PM | Likes Like |Link to Comment
  • Sell Weight Watchers Now, It's A Value Trap [View article]
    Jae, a very interesting article, thanks for sharing your thoughts. I have to say that while you make some good points, I don't agree with your conclusions. First off, when you ask the question of name a weight loss programme, you can be sure that Weight Watchers is the response you will get in most instances, I've asked this question of my own peer group recently (and all in their in late 20s/early 30s I might add!). Even a quick Google search corroborates this. WTW really is synonymous with weight loss and I think you underestimate this.

    I would also contest your assertion that the younger generation don’t care about Weight Watchers. Yes, they are more comfortable with forums that the older generation, but that are you aware that many companies with young workforces hold weight watchers classes – anecdotally, here in Dublin, Ireland, there are Weight Watchers classes at Google’s European HQ which I live near, and these are not attended by 40 or 50 year olds, but young, online-savvy people. While this is anecdotal, this clearly refutes your argument that younger, more online-savvy people see Weight Watchers as redundant – clearly the traditional “social network” of group meetings is a valid format, and it is also core to why Weight Watchers works, as it has been clinically proven to do. Additionally, this local example also is evidence of the company already successfully combines two key ingredients of future growth – the corporate and preventative healthcare opportunity, and the leveraging of its brand with the younger, working professional generation.

    And in the weight loss industry, what really matters at the end of the day is whether a given weight loss solution actually works. Remember, the weight loss industry is one marked by fads and trends, where very few products or services have any longevity at all, and consumers will trial numerous fad products – diets, pills, apps, gadgets – anything that is trendy and promises success. However, the only proven product over the last 50 (!) years is Weight Watchers.

    Yes, it faces real challenges as a business at present, but these are not terminal – focused investment in fresh marketing and upgrading its online offering should see a revival in paid weeks and attendances and a return to previous strong performance. Fresh management are on board, and early success has been achieved on admin cost cutting under a very clear turnaround plan as outlined at the November 2013 investor event.

    While I disagree with your view, I welcome the debate. I believe WTW has 65% upside on a conservative basis, and perhaps 100% upside in an upside scenario. I recently posted my own analysis on SA if you are interested in reading some further thoughts –

    Thanks for reading,

    Apr 16, 2014. 06:38 PM | 1 Like Like |Link to Comment
  • Weight Watchers International - Is The Fat Lady Singing? [View article]
    Michael, I understand your point, but any such takeover would require some kind of premium to present share price, which provides additional support for a long thesis on the stock, although it should not be the primary reason for investing in WTW.
    Apr 16, 2014. 04:28 PM | Likes Like |Link to Comment
  • Weight Watchers International - Is The Fat Lady Singing? [View article]
    Author update - the published article is missing a table in the valuation analysis section. I have edited the article and the updated table will clearly show my valuation analysis and intrinsic value estimate.
    Apr 16, 2014. 03:35 PM | Likes Like |Link to Comment
  • Western Digital Corporation: An Undervalued Rock Star Of Electronic Storage [View article]
    Good analysis, but I'm not sure it is actionable - your price target implies c. 6% upside from today's price, therefore no margin of safety at all.

    WDC is fully valued - please see my analysis from last November:

    I put an intrinsic value range of $86 - $106, so it's a hold now, but not a buy - just not enough margin of safety in my view.
    Mar 21, 2014. 02:44 PM | Likes Like |Link to Comment