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WTW - PEEL OFF POUNDS & PILE ON PROFITS WITH WEIGHT WATCHERS INTERNATIONAL

|Includes: Weight Watchers International, Inc. (WW)
Summary

Weight Watchers International's late 2014 "Transformation Plan"is kicking in, igniting what appears to be a strong turnaround.

In October of 2015 Oprah Winfrey acquired a 10% interest in the company and took a seat on the board. Her holdings now stand at 15%.

As of Q1.17, the company has logged six consecutive quarters of YOY (year over year) membership growth, adding 800,000 members for a present Q1 17 total of 3.6 MM subscribers.

The new CEO, Mindy Grossman is a growth and turnaround "super star" set to take WTW's helm in July.

Management forecasts $1.30-$1.40/share earnings for FY 2017.

Source: YCharts

SOME HISTORY: 

In November of 2014, the company launched a comprehensive multi-year Transformation Plan.  As a result, Q1.17 YOY revenue gains were up 9% on a constant currency basis and 3.6 MM members were added for a YOY 16% growth rate. 

As of September 2016, CEO James Chambers resigned, the stock plummeted to $9.81 and Oprah Winfrey embarked on a search for a new CEO.

An Interim Office of the CEO was formed led by Nicholas P. Hotchkin, CFO along with Directors Thino Semmelbauer and Christopher Sobecki.

WEIGHT WATCHERS INTERNATIONAL POISED FOR STRONG TURNAROUND

As a result of CFO Nicholas P. Hotckhin's fiscal controls (loping off $250MM of expenses) and membership gains attributed to Oprah Winfrey, Weight Watchers International (WTW) appears to be poised for a strong turn around. Here's why:

Following is a review of the recent Q1 conference call.

Q1.17 was the sixth consecutive quarter of YOY (year over year) membership recruitment gains. 

 Q1.17 meeting subscribers were up 11% to 1.6 million and online subscribers were up 20 % to 1.2 million. Total Paid Weeks were up 13% in Q1 with meetings up 8% and Online up 17%.

It is important to note, because WTW is a seasonal business, and January kicks off the post holiday "diet season", Q1 bears the lion's share of costs of attracting new members but captures only a portion of the follow on revenues. And so Q1 increases in operating income (up $17 million) to $30MM and GAAP EPS of $.16 share is particularly impressive. The EPS reflected a tax benefit of $.17 related to the previously announced cessation of operations in Spain offset by $.01 per share of related expense.

For the sake of comparison, prior year Q1.16 showed a GAAP EPS loss of $.17/share.

While the company grew the membership base from approximately 3 million to 3.6 million (a 16% gain) in just one quarter, the growth of the more profitable "on line" membership base grew 20% compared to "meeting" membership growth of 11%. In a world that is becoming increasingly mobile and digitized, this is a good sign, especially with regard to attracting the very large millennial demographic.

INTERNATIONAL OBESITY EPIDEMIC

Additionally, when considering that 2/3 of all Americans (Aprox. 220 million people) are overweight or clinically obese in the U.S. alone, it is clear that the American market is in the midst of an obesity epidemic. 

Additionally, according to the World Health Organization, WTW's Continental European markets (mainly France, Germany and the UK) are experiencing accelerated population weight gains with 50% of the EU population overweight and approximately 22% of EU populations clinically obese. So well over 100 million people in France, Germany and the UK are potential members who are either overweight or clinically obese.

WTW's total addressable market both North American and European amounts to about 312 million people. However, according to a JAMA study (Journal of the American Medical Association) approximately 49% of overweight Americans are trying to lose weight. So applying the JAMA/US study percentages, the addressable US/EU potential market appears to be about 152 million people. Consequently, WTW's present 3.6 million subscriber base represents just 2.3% of the addressable market and so Weight Watchers International appears to have considerable upside potential.

NEW CEO MINDY GROSSMAN

The next chapter in Weight Watchers International growth story will be written by it's just announced new CEO, Mindy Grossman (Former CEO of HSN - Home Shopping Network), who was personally hired by Oprah Winfrey after a six month exhaustive search. Ms. Grossman has been ranked by Forbes Magazine as one of the 100 most powerful women in the world for the years 2009, 2011, 2012 and 2013. In 2014, Fortune ranked Ms. Grossman as #22 top people in business. The Financial Times listed Ms. Grossman as one of "The Top 50 Women in Business" in 2010 and 2011.

Ms. Grossman was instrumental in the "green field" launch and growth of Ralph Lauren's Jeans business to $450MM/Yr (Y2000), she headed Nike's global apparel business, growing it from $2.7B Y2000 to $4.1B Y2005 representing 32% of Nike's revenue. In 2007, Ms. Grossman began the aggressive re-launch of HSN (Home Shopping Network), successfully navigating the company through the 2008 financial crisis, transforming the company into a multi-platform, interactive network with ecommerce accounting for nearly half of sales. She brought in celebrities such as Jennifer Lopez, Queen Latifah, Mariah Carey, Martha Stewart, Mary J Blige, P. Diddy, Serena Williams etc., and created corporate tie-in's with Disney and other Hollywood studio's.

In 2008, Ms. Grossman took HSN public. By 2009, HSN had become a Fortune 1000 company. It's returns since going public are said to be amongst the top two IPO's. She is one of only 51 women to lead a Fortune 1000 company. Clearly, Oprah Winfrey's 6 month search appears to have attracted a very strong CEO who has a long and varied history of launching, revamping and growing businesses.

MINDY GROSSMAN'S COMPENSATION PACKAGE: A ROADMAP

I am assuming that Mindy Grossman's compensation package (reviewed below), as described in the recently filed 8K, provides a realistic roadmap for Mindy Grossman's performance targets. Consequently, Ms. Grossman's targets may provide a valuable long term (12-24 month) road map for investors.

Besides generous salary and bonus compensation, Ms. Grossman was awarded 1.5 MM shares of WTW, 500,000 shares of which are exercisable at $40 and 500,000 shares of which are exercisable at $60. The entire stock option package, with the stock achieving $60, appears to be worth $900 MM. Considering Ms. Grossman is 59 years old, it's seems possible that her leadership of WTW could be the "crowning glory" of her business career.

With CFO Nicholas P. Hotchkins "tightening" of financial controls in the preceding six months, combined with Oprah Winfrey's marketing "halo effect", it appears as if Ms. Grossman could be lobbed the proverbial "grand slam" winning pitch.

The compensation package set forth in the recent 10K reveals Ms. Grossman's and WTW's mutually agreed upon bet; that she can drive earnings and the stock price first to $40 and then $60 per share.

Based on near term metrics and a consensus estimated earnings for FY17 of $1.40 - $1.50, WTW stock target of $31-$33/share by year end 2017, or a gain of 33% seems realistic.

The "wild card" for WTW shareholders is the new CEO Mindy Grossman (who comes on board in July). Wall Street will be sure to watch for Ms. Grossman's ability to accelerate memberships (which are already gathering steam thanks to Ms. Winfrey), and especially Ms. Grossman's ability to aggressively accelerate the higher margin digital memberships vs. meetings.

For example, WTW's growing ability to integrate with most leading exercise apps/devices, signals the company is poised to fully integrate it's program with the "holistic" exercise/diet/lifestyle trend, while offering more multi-platform and on line digital/video services. As a result, WTW seems likely to attract greater numbers of the considerable millennial demographic.

HIGHLY LEVERAGED EARNINGS

WTW's earnings are highly leveraged. By that I mean, the company has three major expense, investment lines: 1.) G&A, 2.) Technology and 3.) Marketing/Advertising.

The General and Administrative costs are largely "fixed" and should remain relatively stable. The Tech investments have considerable ROI potential. And as Marketing/Advertising algorhythms are fine tuned, the rate of tech/marketing expense as a percentage of sales is likely to decrease due to the "network effect". One might say WTW essentially has a very low "cost of goods" because the company is selling a "lifestyle/coaching" service. The food and various other products are licensed to third parties. With 50%+ gross profit margins, the more members join, the more WTW profit margins seem poised for considerable expansion.

Over the next 12-24 months, it is not beyond reason to expect Weight Watchers International shares to  trade at between $40 and $60. Here's why:

* As mentioned, Weight Watchers International has reported 6 consecutive quarters of YOY (year over year) subscriber growth. The subscriber recruitment momentum appears to be picking up steam as algorhthmic marketing efforts are continually fine-tuned. 

* In particular, Q1 17 saw WTW dramatically increase its subscriber base by 600,000 subscribers or 16%, jumping from 3.0 million subscribers to 3.6 million members. The highest rate of recruiting in many years. 

* According to management, based on historical trends, Q1 has typically represented 40% of recruiting totals.

However, because of Q 1 17's strong subscription rates (+ 600K new members or +16%), I am projecting that Q1 17 recruitment of 600K new subscribers will represent 35% of Y17 recruiting totals. And that may be a modest adjustment. In that case, the balance of  2017 (Q2,Q3,Q4) recruiting could add approximately 1.1MM new members, for a total FY 17 subscriber growth of 1.7 MM new members and a year end total of approximately 4.7 MM. That would result in a FY 17 growth rate of 38% compared to 2016's 20% subscriber growth rate. 

YEAR OVER YEAR SUBSCRIBER GROWTH COMPARISON

* WTW's on line and meeting subscriber value calculates as approximately $275 per subscriber

* And so a little math:

2017's projected 1.7 MM new subscribers are worth an average of approximately $275 each or $468 MM +  FY 17 revenue growth, resulting in projected total FY17 revenues of $1.66B (+ 28% YOY). 

Present WTW Operating Income rate FY 16 = aprox. 21.1% X FY 17 projected $1.66B revenues or $350MM Operating Income

Average EBITDA PE for peers = 7.3X PE 

However, the most recent 2017 average EV/EBITDA multiple for the healthcare sector is 12.92X. 

Therefore, during the FY 2017/2018 time frame, based on the above subscriber targets, WTW should trade between a low of $40 and high of $70.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. Investors should not rely upon any information contained herein nor forward looking statements. I am long WTW.

Disclosure: I am/we are long WTW.