WTW - Weight Watchers International

[SwedishValue]

deepValue how are you thinking about the online segment? They are charging like $20 per month online.

 

This is a huge chunk of their profitability. How can this online segment compete against the thousands of apps (some of which are highly reviewed) which charge nothing. I'd also be concerned about a potential capital raise. This is a highly leveraged business.

 

I don't own any stock but I've been interested in the company now for quite some time and I'll take my chances and add a couple of thoughts. My take on competing vs free apps is that if I asked ten of my fat friends to name a company helping out with weight loss, most of them would consider Weight Watchers. This is worth something, how much I do not know. Second thing is that a very large fraction of new WTW customers have been customers previously, and come back to get a good habit going again. This is also worth something (think of all the people who have lost weight with Weight Watchers... if/when they do get fat again, they will have a positive experience with WTW which makes them more willing to pay for their service). Last thing is that with increased numbers of fat people all around the world, there will likely be more people seeking assistance with weight loss - some of these people will need more than a free app, and will find it worthwhile to spend money in order to get better (slimmer). I do not think there will be a complete migration to free apps, as some people will need the extra help.

 

Another thing is that the WTW weight loss system all in all is pretty decent. For someone not willing to take the time to read a lot on nutrition and doing their own weight loss program, I think the WTW system is one of the very best from a scientific viewpoint. Myself I am very interested in sports and nutrition and have put a lot of hours to work to perfecting both nutrition and gym routines, but I think most people would rather pay somebody else to come up with a system for them. One problem with the WTW system is that it is extremely easy to copy a weight loss system that in essence is a calorie counter.

 

I don't have a bloomberg terminal, but I would very much like to know where the WTW bonds are trading relative to par.

 

I am also very impressed with the way Artal has run the business financially throughout the years. Sure, we now have a company with very high leverage, but to take out so much capital from such a small investment done only 15 years ago is pretty amazing.

[thelads]

swedish - there are two trading bank loans outstanding that I see. There is substantial bank debt outstanding. Its a first lien, time tranched into two. The first lien, B1 due in 2016 ($298mm) is trading close at 89.5 cents on the dollar (about 8.5% yield) and the 1st Lien, B2, due 2020 ($2.09BN) is trading @ around 82 cents on the dollar (about 7.641% yield. 

Coupons are L+300 with a 75bps floor for B2 and L+275 with no floor that I can see on the B1.

 

Hope that helps somewhat.

 

Incidentally both are very light on covenant protection but should not make a huge difference here.

[Guest deepValue]

How can this online segment compete against the thousands of apps (some of which are highly reviewed) which charge nothing.

 

Because they are different products. All the capabilities you have in free apps, you have with a notebook...is a notebook a substitute for a full weight loss program? Or to make the distinction more apparent, are free apps a substitute for meetings? Clearly not, they are something quite different. The real question then is whether  the online program is a substitute for meetings. Either way, WTW have a problem.

 

I'll add that online is just as profitable as meetings. Online subs stick with it an average of 9 months and pay $18.95 per month (assuming 3-month savings plan, which waves sign-up fee), so that's $170.55 revenue per online sub. At 50% online ebit margin (10k pg F-27), WTW makes $85 per online sub. Meetings subs pay $43 and stick with it for 8 months on average, so that's $344 rev per mtg sub. At 25% ebit margin, that's $86 ebit per sub. So a growing/cannibalizing online business is not too bad. Online ebit probably increases as it scales.

 

Free apps are more a symptom of a "third factor" (changing consumer behaviour) rather than competition i.e. the factor that is causing WTW attendance to drop is also causing free apps to become more popular.

 

What is causing the behavior change? People are just lazier now than they were five years ago? They want everything on an app now? I can't think of anything that would permanently draw away customers from WTW. WTW doesn't go after all dieters, just the ones who can't go it alone and are willing to pay for accountability. I don't see how free apps, or even WTW's online tool, can really replace the meetings business.

 

Artal is a wildcard. Who knows what it'll do, but WTW has strong fcf and limited capital requirements, so I think they can make it through without a capital raise. Artal could surprise, though.

[Guest hellsten]

Geoff and Hoang posted their notes on WTW:

http://gannonandhoangoninvesting.com/blog/2014/2/20/weight-watchers-wtw-notes-pdf

 

Moody's Downgrades Weight Watchers (WTW) Debt to B1 With Negative Outlook:

http://gannonandhoangoninvesting.com/blog/2014/2/21/moodys-downgrades-weight-watchers-wtw-debt-to-b1-with-negative-outlook

 

Separately, Morningstar downgraded the "moat rating" for Weight Watchers from "wide" to "narrow". You can find our discussion of free apps (the reason for Morningstar's downgrade) near the end of the notes PDF.

 

Does Morningstar think WTW's wide moat narrowed overnight, or did they change the criteria for wide moat companies ;D

 

Examples of recent headlines:

- Weight Watchers International Lowered to “Underperform” at Zacks (WTW)

- Zacks Downgrades Weight Watchers International to Sell (WTW)

 

A contrarian's dream? I wouldn't bet against the piece of the obesity-pie that WTW will get for free from Coca-Cola, McDonald's, Arcos Dorados, capitalism, and so on.

[thelads]

Wow, Geoff and Huongs notes were very thorough and interesting. To the point they bring up on the Artal group taking the company private at a very low price, is there a reasonable way to judge this? Perhaps I am being overly paranoid, but the guidance was pretty bad. It almost felt like it was being talked down. Is it possible they want to hurt results into 1q this year to torpedo the stock.

 

Just to test a hypothetical, but say 1q comes in horribly. Stock trades to say $10. And perhaps the b2 note down to $60 (I'm not sure how thoughtful the debt investors are. The debt Is at $77 now on b2). Assuming they can buy back debt at $60 or so in that scenario plus say

A 20% premium on the stock they can buy it back at a much cheaper ev/multiple than was implied in the notes. My question is this, (apologies if it is super ignorant), given Artal owns 52%, is there anything to stop them doing a coercive takeover at that price? Or do they need a super majority? Will I find that in the original equity ipo document?

 

I do agree that WTW has a big future and don't think it's a dyin business at all.

As the notes state they had issues in 2004 with Atkins. I think I read in the ipo document they had similar issues with nutri-system in the mid 90's also. But my big fear and the one I am having trouble getting my very small brain around is the games that Artal can play to take the equity out super cheap.

Any thoughts, criticisms, observations would be very much appreciated.

 

 

[Laxputs]

My main concern for WTW is meetings attendance for under 50 year olds. Meetings are not sexy. I've talked with a number of girlfriends that won't go to meetings and see it as outdated. Meetings are the most effective method for weight loss control; the peer pressure seems to be the most effective element. But if people under 40 won't go, it's doomed. Their demographic is currently skewed to 50+ year olds. This is my main concern - not the apps which is the current reason it has been suffering.  I need to reconcile the demographic/meetings issue.

 

Alcohol Anonymous uses meetings. There is no way that model changes; it is so extremely effective; it's the only route if you are addicted and serious about changing habits. The sharing and the peer pressure is key. Apps will not replace them. Maybe meetings for weight loss will always be needed for the people with serious weight related health issues. They've monetized the AA model. The question then becomes is that the market they have been serving? And is that market big enough (no pun intended) going forward?

 

I really have a hard time with the meetings keeping a steady or growing membership number base. And their online business is not effective enough on its own.

 

Thoughts? Am I looking at this wrong?

[LC]

What is more likely to change: under 40s attitude towards meetings changing, or another format comin out which will be a more effective weightloss tool?

[Martian]

My main concern for WTW is meetings attendance for under 50 year olds. Meetings are not sexy. I've talked with a number of girlfriends that won't go to meetings and see it as outdated. Meetings are the most effective method for weight loss control; the peer pressure seems to be the most effective element. But if people under 40 won't go, it's doomed. Their demographic is currently skewed to 50+ year olds. This is my main concern - not the apps which is the current reason it has been suffering.  I need to reconcile the demographic/meetings issue.

 

Alcohol Anonymous uses meetings. There is no way that model changes; it is so extremely effective; it's the only route if you are addicted and serious about changing habits. The sharing and the peer pressure is key. Apps will not replace them. Maybe meetings for weight loss will always be needed for the people with serious weight related health issues. They've monetized the AA model. The question then becomes is that the market they have been serving? And is that market big enough (no pun intended) going forward?

 

I really have a hard time with the meetings keeping a steady or growing membership number base. And their online business is not effective enough on its own.

 

Thoughts? Am I looking at this wrong?

 

As you said the meetings are the key. May be today's 30 and 40 somethings are fashion conscious/want to use free apps and don't want to go to the meetings. But when they turn 50, the reality will in. The question will be fashion or healthy longer life. I think they will choose life.

    In future, people will be living longer than now. i.e the average age will be going up. So even if it is only for the 50's, the number is not decreasing.

    Human interaction is a very powerful tool and is not going away anytime soon. In 90's people speculated that the bank branches will disappear soon as everyone will do everything online. But the number of branches has actually doubled in this time. So unless we find a magic pill or any other company come up with a solution to make the meetings better than WTW, I think weight watchers will have a place. 

[CorpRaider]

Well it seems like a lot of the apps attempt to replicate the experience via an online community; either a totally new community of app users or incorporating your facebook and or twitter community. 

[GregS]

My main concern for WTW is meetings attendance for under 50 year olds. Meetings are not sexy. I've talked with a number of girlfriends that won't go to meetings and see it as outdated. Meetings are the most effective method for weight loss control; the peer pressure seems to be the most effective element. But if people under 40 won't go, it's doomed. Their demographic is currently skewed to 50+ year olds. This is my main concern - not the apps which is the current reason it has been suffering.  I need to reconcile the demographic/meetings issue.

 

Alcohol Anonymous uses meetings. There is no way that model changes; it is so extremely effective; it's the only route if you are addicted and serious about changing habits. The sharing and the peer pressure is key. Apps will not replace them. Maybe meetings for weight loss will always be needed for the people with serious weight related health issues. They've monetized the AA model. The question then becomes is that the market they have been serving? And is that market big enough (no pun intended) going forward?

 

I really have a hard time with the meetings keeping a steady or growing membership number base. And their online business is not effective enough on its own.

 

Thoughts? Am I looking at this wrong?

 

These are the key questions.  I think you are looking at it correctly.  To find the answers look at WTW's own actions.  They have promoted the website the last couple of years and it has grown and covered up for weakness in the meetings business.  Now online is cracking, which isn't surprising because of fierce competition.  They have their brand, but it isn't enough to compete against free. 

 

Weight Watchers works because it combines two key elements: 1) a simple calorie counting program, and 2) social support/pressure.  There are some bells and whistles around it (such as education on nutrition, exercise) but that's the essence.  The problem is #1 is easily replicated.  #2 is where the moat is.  However, WTW's is itself abandoning its moat in favor of online, where they have little group support and are left with calorie counting.  They tout how effective their program is but then drop the element that is key for both effectiveness and differentiation.  While the calorie counting program is effective, it is not unique and too easy to copy.  Even if the brand name leaves WTW with a viable online business, it won't be at big margins.

 

The CEO has mentioned some things they can do to improve online.  For example, pay for private coaching, things like that.  It might work - we haven't seen anything yet.  But I don't think they are going to be able to charge almost $20 a month for the base product.

 

So why is Weight Watchers pushing so hard into areas where they don't have a moat?  To date, no app has been able to replicate the support system of the meetings business online.  It's too speculative to say whether that will happen - if I knew how to do it, I would drop everything and create it.  But I'm not sure apps will have to create this support structure.  I don't think the key question here is whether apps can successfully attack the moat of the meetings business.  I originally thought this was the key issue and is what I believe I got wrong (I've taken my lumps on this stock).  The key problem is that consumer tastes have changed.  They don't want to do meetings anymore, not in the same numbers.  They want to do online, where Weight Watchers has no moat.  This is what's hurting the business.

 

It's possible the pendulum will swing back, and the apps will be a fad and people serious about weight loss will return to meetings.  Or perhaps the B2B programs will be successful.  But to me the stock is too speculative in light of the fact that 1) consumer tastes may have changed permanently, 2) apps may be able to provide a reasonably successful support structure, even if we haven't seen it yet, 3) WTW's huge debt load limits their time and ability to maneuver, and 4) Artal may take the whole thing private before you get a chance to see any upside.  I will wait to see evidence of a turnaround before I think about getting back in.

[bookie71]

I have been using WW for about 1 1/2 years and find that their online stuff "sucks".  Their meetings are not men or young people friendly. BUT if you attend the meetings they help.

[Guest 50centdollars]

The people that I know who did WW never lost any weight. What they were doing was in fact stupid to me anyway. They would eat McDonalds which would max out their points for the day and then starve themselves the rest of the day lol. Now, I'm not weight expert or nutritionist for that matter but I would bet anything that you wont lose weight doing that. My friends didn't lose weight and left the WW program.  Maybe they were just doing it wrong but there is more to losing weight than just counting your calories. You have to be active and eat right. Also, my girlfriend says that she cracked the WW systems by reading through online boards where people actually post what the WW system is all about. Why would you pay WW for this? Eat well and be active.

[Laxputs]

If I could be convinced the membership base that is weighted to over 45 years of age will stay strong I would buy the stock today. It's not popular with young women but if it is age related and not generation related, I would buy the stock. My speculation is it's generational. No meetings, no moat.

[Guest deepValue]

Also, my girlfriend says that she cracked the WW systems by reading through online boards where people actually post what the WW system is all about. Why would you pay WW for this? Eat well and be active.

 

Weight Watchers works because members hold each other accountable. People who can hold themselves accountable don't need Weight Watchers. Most people don't need Weight Watchers and, historically, most dieters have not used Weight Watchers. It only targets those who are willing to pay for accountability.

[thelads]

Laxputs. I agree that is the question. Today's 45 year old lady was 25 in 1994. Would she have used WW back then @ that age? I would say maybe. Thats less likely for a 25 year old today perhaps. Though certainly they got some of that demographic in 2010-2012. More so than 1994 I would wager.

 

Would that same lady today @ 45 be likely to use it? I would argue yes. Just based on anecdotal evidence in my area. Its not just the weight loss and social pressure. Its also a social activity. Gets you out of the house and generally makes you feel like you are doing something positive. The argument around price is strange to me. Why does pampered chef exist? It sells you overpriced stuff you can buy in any store. But its a social activity. Its not about teaching you to cook. If anything free apps are really killing that business. Mario Batelli has a good App for instance. But people still use pampered chef because of the social aspect. at say 45 in many areas or getting older, that social interaction can be harder to find and also more valued. I think that is a large part of it. That and it works. But I could of course be completely wrong. My basis for this is anecdotal. And as deep value stated before, a lot will be dependent on how attendance looks for Q1.

 

My one last thing is a question. I again re-read Geoff and Quoun's notes. Cant get over how detailed and impressive they are. So impressed. But the one thing I cant get my head around is why ARTAL wouldnt let performance suffer badly here and try to buy back the 48% float outstanding on the cheap. I see the levered return argument - that it dilutes. But assuming they have more money- or another seperately controlled fund. If we see value @ 20 - surely they must too. Simply put - if they have incremental capital - why wouldnt they buy it here?

[bookie71]

Laxputs,

Have you checked the demographics of the country and world?  The population is aging. :-)

 

[Laxputs]

Laxputs,

Have you checked the demographics of the country and world?  The population is aging. :-)

 

You misunderstand me. I'll try to be more clear. My question is whether the older membership base is age related or generation related. As in if women get older is there something more appealing about the live meetings - age related? Or is the older membership base due to an older generation's preference for live meetings which is not appealing to more recent generations of women - generation related. If it is the latter, an aging demographic does not help WTW.

 

 

[Guest hellsten]

Glenn Surowiec at Small-Cap Investing Summit 2014:

http://vimeo.com/user11443065/review/86456031/d6e1ffbdf8

[cr6196]

Glenn Surowiec at Small-Cap Investing Summit 2014:

http://vimeo.com/user11443065/review/86456031/d6e1ffbdf8

 

Not a comment on the merits of the argument/situation but what is up with these extremely long analyses...two or maybe three factors are important here, that is it (for example, the core biz is in severe decline, talking about the company's latest new business line doesn't seem particularly relevant...esp. when the company has a lot of debt). Focus seems to be more on what information is available rather than what information is relevant (no-one was talking about Health Solutions before the agonizing presentation at the Investor Day. I remember saying that the company played investors for suckers doing this, it seems to have worked). Anyway, sorry for the diversion...

 

I would argue that it is very much generation related. I think the company's interpretation, which I agree with, is that the underlying problem is changing consumer habits. The WTW program isn't personal/flexible enough and is too intrusive/unfriendly. I don't think older people are any less susceptible than the young to changes in consumption habits (if they weren't the decline surely wouldn't have been so severe) but this is a trend led by technology, which is more readily adopted by the young. In addition, it is worth pointing about that there is nothing that makes the WTW program particularly well suited to the old either. In short, the program is outdated.

[Guest hellsten]

Whatever happened to Leptin?

 

http://www.telegraph.co.uk/health/dietandfitness/4142022/Failed-obesity-wonder-drug-Leptin-revived-by-new-research.html

 

Leptin, an appetite-suppressing hormone, was greeted with great excitement more than a decade ago with many academics believing that it could be a cure for obesity.

…

"Everyone in the field thought they would get the Nobel," said Dr Umut Ozcan, who led the study, about the period when Leptin was first discovered.

"Unfortunately, when obese humans took the hormone, they lost weight only temporarily – then rebounded back.

"Most humans who are obese have Leptin resistance. Leptin goes to the brain and knocks on the door, but inside, the person is deaf."

 

Maybe the brain thinks it's just a fad…

[dcollon]

From SeekingAlpha

 

http://seekingalpha.com/article/2113953-weight-watchers-excellent-business-at-a-fire-sale-price

 

[ukvalueinvestment]

In my view, this is a massive value trap.  The debt load is huge.  If interest rates rise or lenders demand higher rates, interest costs will eat into profits. 

[CorpRaider]

In my view, this is a massive value trap.  The debt load is huge.  If interest rates rise or lenders demand higher rates, interest costs will eat into profits.

 

Yeah, I've thrown this one in the too hard pile.  With wearable devices monitoring vitals and a layered social networking this business model just seems DOA to me.

[andron]

I think the moat is the face to face meetings. Might i be wrong? yes. This is an 8% position for me and i've been slaughtered (bought at $32) but i still think that the face to face meetings are the ultimate way to lose weight , which is their core business model. apps, social networking just aren't as effective.

[bookie71]

I think the moat is the face to face meetings. Might i be wrong? yes. This is an 8% position for me and i've been slaughtered (bought at $32) but i still think that the face to face meetings are the ultimate way to lose weight , which is their core business model. apps, social networking just aren't as effective.

I agree and have been buying a few shares but more to watch than building a position.  Without the meetings you might as well use an app.  Statistically if you attend meetings you loose more.