Weight Watchers International Inc. has helped millions of people shed pounds over the past four decades. Unfortunately for its investors, the biggest loser in 2014 has been the company's stock, which has slimmed by nearly 60 per cent from its 52-week high.
The primary problem is that Weight Watchers has joined the list of long-standing companies that find it increasingly hard to sell what others give away for free. A host of low-cost or no-cost smartphone apps offering the promise of weight loss are cutting into Weight Watchers' traditional model of in-person meetings and high monthly fees.
The results have been rather ghastly: Memberships and meeting attendance are dropping, and the company's latest earnings projection for 2014 is half what analysts had been forecasting. The shares, close to $50 (U.S.) last summer and above $30 earlier this year, are now struggling to stay above $20.
That kind of downward price action on a well-established franchise has rightly attracted the attention of value investors. After all, the company just made $3.65 a share in earnings in 2013, giving Weight Watchers a trailing price-to-earnings ratio of a little more than five. And, indeed, the company could richly reward today's buyers if it can figure out a way to maintain its franchise in the new world of apps.
If there is a turnaround, it has barely begun. Those who get on board now risk getting a significant bite taken out of their investment.
First, a review of the incredible shrinking income statement: Fourth-quarter revenue was down 11 per cent year-over-year, with earnings per share nearly halved. Guidance for 2014 is for an 18 per cent decline in revenue and a roughly 65 per cent decline in earnings.
The fourth-quarter numbers point to an across-the-board decline in member engagement: "meeting paid weeks," the number of weeks of meetings its members have paid to attend, fell nearly 11 per cent; "online paid weeks," for members doing an Internet-only program, fell 6.5 per cent; attendance fell 13.5 per cent, suggesting there are more members paying but not attending (leading to the question of whether they will, soon, stop paying as well).
Optimists note that Weight Watchers survived a rough patch when the meat-heavy Atkins Diet was all the rage, and that the company can overcome "fads" in dieting. (At least, that's what one contrarian investor, blogging on Seeking Alpha, calls the weight-loss apps, citing an academic study that says that the apps, in January, 2012, didn't have many of the 20 "behavioural strategies" that have been shown to work in weight-loss programs.)
Weight Watchers offers a comprehensive solution – in-person meetings with successful users of the program, specialized meals, and online and mobile tools – that it says is eight times more successful in promoting weight loss than simply offering up instructions to people and having them try to shed pounds on their own. For that, the company asks more than $40 per month in the United States or about $55 a month in Canada. It also has an online only plan that gets you the app, with a $30 sign-up charge and $20 monthly fee in the U.S. or a $40 sign-up fee and $22 monthly fee in Canada.
Consider a popular competing weight-loss app, "Lose It!" The basic version is free and claims to offer a number of, but not all, of the features of Weight Watchers' online plan. The "premium" subscription, at $39.99 per year, has a number of features that Lose It! says Weight Watchers does not, including compatibility with a number of other fitness and exercise apps.
Weight Watchers, to its credit, doesn't think these apps are fads, according to comments on its February earnings call. Barclays Capital analyst Meredith Adler notes the company has developed enhancements to its program for 2015, but won't say what they are for competitive reasons. It is also pursuing partnerships with health insurers to enhance corporate revenue.
In the meantime, it's forecasting no membership gains until 2015 and no revenue gains until 2016. The declining earnings, coupled with a debt load of more than $2-billion taken on to fund a massive share buyback, means credit downgrades are likely.
"Investing in Weight Watchers right now requires a great deal of patience and lots of fortitude," says Ms. Adler, who has a $15 target price but says shares could drop to $10 if earnings fall below the reduced expectations. "If you believe in management, then the company is going to steadily modernize and improve the business. But even at best, we think Weight Watchers has a very long road ahead and the benefits will come slowly."
It's almost like the attempt to lose weight, itself – a long-term challenge, with many setbacks, that might ultimately be unsuccessful.
David Milstead