WTW - Weight Watchers International

[Kraven]

I spent about 5 seconds looking at this.  If the future looks like the past, it's probably pretty cheap but I have no idea how to determine that so it's a pass for me.  There is something incredibly dated about Weight Watchers.  I remember growing up my mother, aunt and grandmother always ate those Weight Watchers turkey frozen dinners.  There was the turkey and stuffing, a little broccoli and a tiny dessert like thing.  Of course the reason people lost weight was that it was an amount of food for a toddler. 

 

I don't doubt that there are plenty of people willing to pay for their services.  My aunt has paid for decades.  I just wonder though whether younger people will continue to do so and that the longterm trend is down, perhaps dramatically.  With so many free options on the internet and that kind of thing, I struggle to see a bunch of 20 year olds with tattoos up and down their arms heading off to Weight Watchers or paying for it online when they can just jog around the lake or find some online service that's free.  To me it seems similar to something like bookstores.  I once thought that people would "always" want to go to a bookstore and that Amazon, etc would just be a nice side service.  It took me time to realize that it fundamentally changed the way people shop.  I suspect something like Weight Watchers will be the same, but since I have no real idea either way I will sit it out.

[scorpioncapital]

Tangentially related, many of the hot MLM stocks which have been on a tear lately include inside them weight management programs/systems. Their groups and organizations often provide the same kind of support network so I think the competition is fierce from that sector.

[Guest hellsten]

Earnings call transcript:

http://seekingalpha.com/article/1597092-weight-watchers-international-management-discusses-q2-2013-results-earnings-call-transcript

 

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

I promise this will be my last question. It's for Jim and it's kind of comprehensive but if you can try and answer it in a succinct way, Jim, the question is how do you think about the growth rate for Weight Watchers? You got this tremendous market opportunity yet the key metric of measurements i.e. attendance, hasn't really grown for the better part of a decade. You got high margins, strong cash flows, much of which goes to de-leverage the company, which is in part, reflective of your majority owners action. How do you think about the growth profile of Weight Watchers on a going forward basis with those inputs?

 

James R. Chambers

I think if you look at a measure of engagement, as we do, paid weeks, that has shown up to this year, consistent growth, I believe, for the last 5 years. So I can turn maybe a bit to the -- what's beneath your question, less on a quantified basis and more in general as to how I see the forces that might affect growth in the future for the company. And I did mention them a bit in the earlier remarks. I think there's an extraordinary opportunity here. I don't think I've ever worked in a business before where the potential market is as enormous as this is. I think it is a tricky category to market in but as Nick said, when we get those variables right, we can have tremendous impact. And I think historically, our product has been bifurcated between an online product and a meetings product. And as we look to the future and as we become much more consumer-driven in the way we construct our offerings, I think there's a real opportunity to innovate and to offer something that will be stronger in the market. And my belief in that is strong and that, as a consequence as you would imagine, translates into a belief that I think we can improve growth rates over the long term. There's a lot of work to do there. There's a lot of conceptual thought. I hope to share more with you guys about that in November at the Analyst Strategy Day, but we have a lot of work to do but I'm bullish, driven by the fundamentals that we can create a good long-term outlook.

 

Nice answer. The key question for me is – which I haven't figured out yet – how good is James R. Chambers and his team at turnarounds?

 

IMO, insurance companies, government and employers all seem to be interested in the potential cost savings WTW provide:

there are also reasons to believe in the B2B healthcare opportunity. This is a great story, which you have heard much about on prior calls. I won't repeat everything you've heard in the past, but feel that it is important for me to say that the efficacy of our program, coupled with strong interest we are seeing today in the marketplace, strengthen my belief that we can emerge as a leader in this space. But to enable this business to realize its full potential, we need to move from strategic evaluation mode to implementation. What is new is that we are now committing resources to this implementation with a focus on building out our capabilities in technology and people. We will share more of the blueprint and milestones for B2B health care with you in November.

 

WTW thinks free apps are a fad, and I agree:

But, you're absolutely right, Weight Watchers has faced this issue before. Our sector, there's a slight fad nature, if you will, to the space in which we operate. And history shows that folks come back to the holistic program that works.

 

Even if they are wrong, I think there's room for both free apps and WTW…

 

My opinion on WTW as it stands now is that it looks pretty cheap for a high-quality business. WTW might be a good place to park your cash if you can wait for a turnaround (1-5 years?). I will wait for a better entry point. As I have understood things, Q1 is when new marketing campaigns are launched and 2013 seems lost because of a failed marketing campaign.

 

Some pros and cons:

+ WTW has a moat that is proven to work against fads

+ Potential for growth is huge (B2B, international expansion, men). As I see it, Geoff and Hong are betting on growth, not value.

+ Marketing issues might be easy to fix, but we will have to wait until 2014 to see any results

- Turnaround might take years

- Debt

- Management

- Artal Group S A, which seem to know what they're doing (30x return on WTW?), don't have a track record of sharing returns with minority shareholders.

[LC]

Artal group did allow minority shareholders to participate in their buybacks pari passu. The issue is the valuation levels at which the buybacks were done.

[Guest hellsten]

Artal group did allow minority shareholders to participate in their buybacks pari passu. The issue is the valuation levels at which the buybacks were done.

 

OK, to be honest I haven't looked in detail at Artal's past actions, so I shouldn't have an opinion about them yet. Their returns on WTW seem to be stellar though :D

 

I also wonder what Artal did with all the money they got from WTW's buybacks. I might have read something about it, but I don't remember…

[fareastwarriors]

With the fallout of WTW, do you guys think this is net positive for NTRI (Nutrisystem)?

 

 

 

some write-ups on NTRI by Hong Quan

 

http://www.gurufocus.com/news/151344/nutrisystem-ntri--a-good-buyandhold-investment

 

http://gannonandhoangoninvesting.com/blog/2012/11/20/nutrisystem-sell-or-hold

[fareastwarriors]

http://www.businessweek.com/articles/2013-08-12/in-the-battle-for-the-bulging-weight-watchers-and-jenny-craig-lose-to-the-internet#r=nav-fs

 

In the Battle for the Bulging, Weight Watchers and Jenny Craig Lose to the Internet

 

[Guest hellsten]

http://seekingalpha.com/article/1656362-weight-watchers-a-wonderful-business-for-a-great-deal

 

The way to think about Weight Watchers' long-term valuation prospects is, it is necessary to think like an owner. If Weight Watchers has been able to compound incremental capital the past 10 years at 17% and an average ROA of 20.3%, what should the company be valued at if they were able to continue to compound capital and earnings per share at 10, 15, or 20% the next 10 years?

 

Robert Cialdini's book Influence describes six principles of the human condition that incline people to say yes and Weight Watchers utilizes three effectively to help customers say yes to lifestyle changes that will help them lose weight for the long term.

 

Also, one thing that could potentially be a problem is the large debt that Weight Watchers has incurred. If the company starts to pay down large portions of debt, shareholders will not receive high returns because management can get higher returns than the 3% interest on the debt. What should be noted is that management has used swaps to lock in a very low interest rate of 3% and with Artal as the largest shareholders, I feel confident that Weight Watchers will manage this debt with the best intention for long-term shareholders.

[A Dhandho Investor]

There is also a nice post on the punchcard blog (a great blog btw):

 

http://punchcardblog.wordpress.com/2013/08/21/a-closer-look-at-weight-watchers-wtw

[Guest hellsten]

There is also a nice post on the punchcard blog (a great blog btw):

 

http://punchcardblog.wordpress.com/2013/08/21/a-closer-look-at-weight-watchers-wtw

 

Thanks. Great article, which provides very good arguments for the bear case. I'll just say this is a controversial stock.

 

Competing Against Free:

For the past five years, we have been studying how incumbents have dealt with competitors employing free business models in a variety of product markets. (See the sidebar “About the Research.”) We have found no examples of companies in the non-digital realm that have prevailed against rivals with free offerings. In fact, in two-thirds of the battles that have progressed far enough to be judged, incumbents (both digital and physical) made the wrong choice. In a handful of instances, companies that should not have taken action did so immediately by introducing their own free offering—hurting their revenues and profitability. They should have either waited and allowed the attacker to self-destruct or recognized that the two could peacefully coexist.

 

More commonly, companies that should have taken action didn’t do so quickly enough or at all. Surprisingly, these included incumbents that had identified a genuine threat from a new entrant and had all the weapons they needed to win a head-to-head battle: an established customer base, superior product features, a strong reputation, and abundant financial resources.

 

Why didn’t these companies use their formidable assets to fend off free-product competitors? The answer is so obvious that you’ve probably guessed it: Managers were reluctant to abandon an existing business model that was generating healthy revenues and profits.

 

When both rates mentioned above are high, the entrant represents a business model threat. Most established companies must not only respond with a free offering but also radically change their business model to survive. And they need to do so pretty quickly—within two or three years. Many newspapers competing against online rivals that offer free classified advertising or editorial content are in this quadrant. They will continue to deteriorate sharply without a fundamental rethinking of their business model.When both rates mentioned above are high, the entrant represents a business model threat. Most established companies must not only respond with a free offering but also radically change their business model to survive. And they need to do so pretty quickly—within two or three years. Many newspapers competing against online rivals that offer free classified advertising or editorial content are in this quadrant. They will continue to deteriorate sharply without a fundamental rethinking of their business model.

 

http://hbr.org/2011/06/competing-against-free/ar/1

 

I wonder how e-cigarettes will change the tobacco industry. Business as usual?

[LC]

Thanks hellsten.

[GrizzlyRock]

There is also a nice post on the punchcard blog (a great blog btw):

 

http://punchcardblog.wordpress.com/2013/08/21/a-closer-look-at-weight-watchers-wtw

 

While the blog's operating margin point appears sharply negative at first glance, one would expect margins to decline when moving from a franchise model to a company-owned store model.  I wonder what the meetings margin line would look like if normalized for this effect?

 

I haven't done the work on that but consider it an interesting question...

[west]

On the debt:

 

The Term Facilities [the Tranche B-1 Term Facility together with the Tranche B-2 Term Facility] do not require us to maintain any financial ratios.

 

So the maximum net debt to EBITDAS of 5.0x covenant (which was a concern earlier this year) no longer exists, if I'm reading things right.  Does anyone have a link to the full debt related filings?  I'd like to go over all the covenants, but I can't seem to find them anywhere.

 

Also, from the conference call:

 

One other factor to consider for 2014. As we look ahead to a potentially rising interest rate environment, we have entered into a $1.5 billion interest rate swap to manage our risk on our floating-rate debt. The swaps will kick in, in the first quarter of 2014 when our current swap matures. It will lock in interest rates and as a result, approximately 60% of our debt will be at a fixed rate.

 

And from the most recent 10-Q:

 

On July 26, 2013, in order to hedge an additional portion of its variable rate debt, the Company entered into a forward-starting interest rate swap with an effective date of March 31, 2014 and a termination date of April 2, 2020. The initial notional amount of this swap is $1,500,000. During the term of this swap, the notional amount will decrease and the highest notional amount will be $1,500,000. This swap will qualify for hedge accounting, therefore, changes in the fair value of this swap will be recorded in accumulated other comprehensive income (loss).

 

So that's pretty sweet.  With its moat and essentially half low fixed-rate debt, WTW might even just be a great inflation hedge, if heavy inflation really does end up happening.

[GregS]

There is also a nice post on the punchcard blog (a great blog btw):

 

http://punchcardblog.wordpress.com/2013/08/21/a-closer-look-at-weight-watchers-wtw

 

While the blog's operating margin point appears sharply negative at first glance, one would expect margins to decline when moving from a franchise model to a company-owned store model.  I wonder what the meetings margin line would look like if normalized for this effect?

 

I haven't done the work on that but consider it an interesting question...

 

I was thinking the same thing when I read that, and I expect it explains some of the decline.  But the declining attendance figures suggest there is a more fundamental problem.

 

The decline coincides with the Great Recession and sluggish recovery.  Weight Watchers is a discretionary subscription service, and it isn't surprising that consumers cut back when the recession hit and haven't been quick to get back in given the lack of robust recovery.  WTW isn't able to lock consumers into habit the way some other discretionary services are (think cable or wireless) probably because they have to constantly reacquire their customers.  This is a major weakness in their business model.  However, if this theory is correct, it suggests the downturn in the business may be cyclical.

 

That said, the attendance and margin numbers were particularly weak the last year or so when we would expect at least some recovery.  The company's admission that free apps are taking a toll, particularly in light of their increased reliance on Weightwatchers.com, is eyebrow raising.

[west]

From the Consumer Reports article (subscription required):

 

We did a deeper dive into the survey results for Weight Watchers because so many of our respondents used it. About two-thirds said they attended the in-person group meetings, which can be supplemented with Weight Watchers online tools. The others followed the diet online only.

 

Judging from what they told us, if you want to get the most out of your Weight Watchers membership, you’d be well advised to get yourself to the meetings. Readers who did had slightly higher overall satisfaction scores. And a much higher percentage who went to the meetings reported that Weight Watchers had taught them self-control strategies. Plus, the meeting-goers also lost more weight than readers who followed the diet online.

 

Sciamanna says those results make sense: “When you go to a group, you get accountability to another human being and the belief that change is possible, because when you look around, you see that somebody is doing well. I think face-to-face programs are never going to go away because they’re probably always going to do better. I’d be shocked if it were otherwise. We’re social beings.”

[west]

The two main competitors, in the online space, are MyFitnessPal and SparkPeople.  And not that site traffic = revenues, but:

 

http://www.alexa.com/siteinfo/weightwatchers.com#trafficstats

http://www.alexa.com/siteinfo/myfitnesspal.com#trafficstats

http://www.alexa.com/siteinfo/sparkpeople.com#trafficstats

 

And historical data for the search term "weight watchers":

 

http://www.google.com/trends/explore?q=weight+watchers#q=weight%20watchers&cmpt=q

 

I love the sudden spikes right after the holidays.

[LC]

I agree that meetings won't go anywhere...they are simply more effective than an app due to the accountability and social pressure. 

 

I think with all the apps floating around, it will take time for people to try apps, eventually give up on them, then come back to the "tried and true" solution which in this case would be WTW.

 

Heck, for those who like an anecdotal story, when I asked my girlfriend she was very adamant about WTW's staying power. "I've downloaded like 5 of those ipad weightloss apps, use them maybe 2-3 times, then forget about them."

[Guest hellsten]

The trends and fads are clear:

https://www.google.com/trends/explore#q=weight%20watchers%2C%20%20myfitnesspal%2C%20%20atkins%2C%20%20south%20beach&cmpt=q

 

The Atkins diet and South beach diets were fads, but are still popular.

 

I hope WTW has the money for marketing, global and online expansion, and that they don't do anything stupid; so far, so good.

 

The biggest risk I see is that the stock is not a screaming buy with all the risks, so I'm not a buyer.

 

The best thing about WTW is that it seems like the rest of the world has decided to go fat as fast or even faster than the US:

http://cdn.theatlantic.com/static/mt/assets/food/obesity-map-GIF-jh.gif

 

Obesity is spreading as fast as capitalism, Starbucks, McDonalds, KFC, etc.

 

According to a report, while China’s GDP doubled between 2005 and 2009, the nation’s number of obese people grew from 18 million to 100 million. And to make the situation worse, China, along with India and Vietnam, is a nation that has the “double burden” of dealing with a population that eats too much and is malnourished at the same time. As a result, Type 2 diabetes, high blood pressure and heart disease have become more prominent in China. A study by the New England Journal of Medicine estimated 9.7 percent of the country’s population has diabetes, most late onset Type 2, close to the U.S. rate of 11 percent.

http://www.ibtimes.com/effects-rapid-growth-economy-chinas-booming-fast-food-culture-takes-its-toll-health-photos-1155083

 

Berkshire is also betting on the obesity epidemic through DVA. There are probably lots of smaller companies that are more attractive, but I have no clue which ones.

 

Some interesting discussions can also be found on Quora:

https://www.quora.com/Weight-Loss/Why-do-people-who-want-to-lose-weight-not-use-calorie-counting-apps-like-Lose-It-and-My-Fitness-Pal

[west]

I agree that meetings won't go anywhere...they are simply more effective than an app due to the accountability and social pressure. 

 

I think with all the apps floating around, it will take time for people to try apps, eventually give up on them, then come back to the "tried and true" solution which in this case would be WTW.

 

Heck, for those who like an anecdotal story, when I asked my girlfriend she was very adamant about WTW's staying power. "I've downloaded like 5 of those ipad weightloss apps, use them maybe 2-3 times, then forget about them."

 

This is my thought too.  However, that Consumer Reports survey surveyed about 1000 people (iirc) and found that many people lost weight through free apps.  As much, if not more, than through Weight Watchers on average.  And faster, in general.

 

My only contentions are: A) as Consumer Reports self-confesses, the people who answer their surveys are generally of higher income and education versus the typical American (and Weight Watcher's classic target market has been typically low income/low education).  And B) They don't really describe their research methodology in the slightest, so I don't understand it.  Is it just general survey-based market research, or what?  There's nothing to go off of.  At least as far as I know.

 

The other thing that makes me nervous at this point is the fact that, despite growing Meetings-based revenues, the actual number of attendees for all their meetings has remained flat over 10 years.  It makes me wonder if they've just got a bunch of "addicts" and are milking them for all they're worth.

 

This all being said, I'm still thinking it's a decent bet.  However, as Liberty's Feynman quote goes...

[west]

The trends and fads are clear:

https://www.google.com/trends/explore#q=weight%20watchers%2C%20%20myfitnesspal%2C%20%20atkins%2C%20%20south%20beach&cmpt=q

 

The Atkins diet and South beach diets were fads, but are still popular.

 

I hope WTW has the money for marketing, global and online expansion, and that they don't do anything stupid; so far, so good.

 

hellsten, it is my understanding that they decided to cancel their big marketing push toward North American males due to lack of cash (due to their big debt load).  I don't have a primary source off the top of my head though.  Just fwiw.

[west]

The trends and fads are clear:

https://www.google.com/trends/explore#q=weight%20watchers%2C%20%20myfitnesspal%2C%20%20atkins%2C%20%20south%20beach&cmpt=q

 

The Atkins diet and South beach diets were fads, but are still popular.

 

hellsten,

 

Google analytics, unfortunately, doesn't use absolute traffic data like you'd expect it to.  Instead it normalizes things to be between 0 and 100 using a proprietary formula that no one has insight to.  (Although there have been academic articles on how different people think it works).

 

Anyways, the short and long of it is it's very tricky to use the tool to compare the traffic results of different keywords (versus looking at specific keywords all by themselves).  And if you do compare keywords, you should look at multiple date ranges.  For example, check out what analytics shows if you change the date range from 2004 to Jan 2010 to the present day.

 

https://www.google.com/trends/explore#q=weight%20watchers%2C%20myfitnesspal%2C%20atkins%2C%20south%20beach&data-ipsquote-timestamp=1%2F2010%2037m&cmpt=q

 

The results for Atkins, etc. don't look as fad-ish.

[Guest hellsten]

You're right about the Google data; it's difficult to say what it really means. Above the graph it says "The number 100 represents the peak search interest". I interpret it like this: the Atkins diet was the most popular in 2004, followed by Atkins at ~75, and WTW at ~50. Between Jan, 2004 and Jan, 2013 Atkins has declined from 100 to 12. South Beach from 73 to 14. WTW went from 47 to 74. That was the reason I called it a fad. Google seems to agree. There's also a "Forecast" button. Anyway, this is just Google's data and we don't know what is behind those numbers.

 

I didn't know Atkins is a real company. They have an interesting history:

In October 2003 Parthenon Capital LLC and Goldman Sachs both acquired stakes in the company.[1] Following the death of its founder in 2003, the popularity of the diet and demand for Atkins products waned, causing Atkins Nutritionals Inc. to file for bankruptcy in July 2005, citing losses of $340 million.

 

The company emerged from bankruptcy in 2007 owned by North Castle Partners, with a softened marketing emphasis on the low-carbohydrate aspect of its products and an attempt to emphasize the overall nutritional value of its line of foods. It now has in place a business strategy concentrating on sales of nutrition bars and shakes.

 

Roark Capital Group bought the company in 2010.[2]

http://en.wikipedia.org/wiki/Atkins_Nutritionals

 

The South Beach diet's history is also interesting:

South Beach Living was a low-carbohydrate line of foods from Kraft Foods that was based on the South Beach Diet.

 

In 2004, Kraft Foods licensed the South Beach Diet trademark for use on a low-carb line of packaged foods called South Beach Diet. The line was renamed South Beach Living. These products were designed to meet the requirements of the diet. The foods included such items as frozen TV dinners, frozen pizza, refrigerated wraps, salad dressings, candy, South Beach diet bars and more.[1] Most of the South Beach diet meals contained between 200 and 400 calories. They were discontinued in 2009.

http://en.wikipedia.org/wiki/South_Beach_Living

 

So I would still call them fads if we look at the numbers from 2004 or earlier, although they still have a following as the numbers between 2010 and 2013 show.

 

What's worse is that it looks like both Kraft and Goldman Sachs bought at the top. Maybe that's also a confirmation that they were a fad? I'm now waiting for Goldman Sachs, Nestle or Kraft to buy WTW ;)

[tooskinneejs]

The amount of cash flow this company produces is pretty amazing compared to its current equity price.  In the last three and one half years, the company has produced $1,026,349,000 in free cash flow (I calculated this as operating cash flow less cap ex and software cap ex).  The current market price of the company's equity is $2,100,000,000.

 

The big slug of debt issued to overpay for their treasury purchases ($2,400,000,000) is a drawback, of course, but is easily serviceable by their cash flows.

[west]

The amount of cash flow this company produces is pretty amazing compared to its current equity price.  In the last three and one half years, the company has produced $1,026,349,000 in free cash flow (I calculated this as operating cash flow less cap ex and software cap ex).  The current market price of the company's equity is $2,100,000,000.

 

The big slug of debt issued to overpay for their treasury purchases ($2,400,000,000) is a drawback, of course, but is easily serviceable by their cash flows.

 

Break up the cash flows by segment, and then by number of users.  And then look at historic numbers and changes in numbers.  And the online/app weight tools market.

 

I'm not saying it's a bad bet (I'm still considering it), but it's hardly a no-thought slam dunk.

 

[gary17]

http://www.cbc.ca/news/health/weight-loss-apps-missing-key-strategies-1.1928899