WTW - Weight Watchers International

[BTShine]

I like WTW.  The reason is 'psychological factors.'  Those being the network affect and critical mass.

 

Someone can come out with an identical, or even superior weight loss program, but it will be difficult to compete with the meetings that Weight Watchers holds.  They have the critical mass needed for this type of service (similar to Dale Carnegie for anyone that's had the pleasure to take that fantastic course). 

 

The network affect, and I'm no expert on this topic, helps Weight Watchers because it means that anyone looking for a weight loss service, that comes with counseling, etc. has the logical option of using WW.  Other programs may be available, but WW has a solid program with group meetings that are robust with attendees (enough attendants to be effective).  Once someone feels like they're "part of the group" they're going to stick around WW for a while.  They also get the feeling that the other attendees are dependent upon her, so there's an altruistic element here.  Attendees don't want to quit because "the other members count on me".

 

My apologies for those thoughts being somewhat scattered.

[blainehodder]

WTW beats on earnings and revenues... yet way down on suspended div and forward guidance.  Interesting.

[LC]

Q3 Numbers: http://www.sec.gov/Archives/edgar/data/105319/000119312513418591/d620899dex991.htm

 

Customer acquisition and retention continues to fall. As does the share price (down ~15% after hours).

 

Could be a compelling bargain soon.

 

blaine...I think the issue is revenues (both meetings & internet), meeting attendance/paid weeks, online active subscribers are all down QoQ.

 

Heck, they even come out and say it: "we expect Q4 revenues to be down low double digits given our continuing negative recruitment trends...While we are working aggressively on both near-term commercial activities and longer-term strategic initiatives, 2014 will be a very challenging year"

 

Also interesting is that marketing expenses are down about 30% from the same period last year. I'm not sure how they plan on retaining and acquiring customers without marketing to them. They could be gearing up for the New year's recruitment cycle, however.

[Guest hellsten]

Management doesn't seem to know what they're doing:

We need to turn this company inside out. Frankly, I'm not sure if it's inside out or upside down, I just know that to win, we need to change. To fulfill our mission, we need to change.

…

We are working very hard on our 2014 winter season plan and are optimistic they can have a positive impact on our trajectory. That said, we are not currently expecting the wave of free app trials to abate in 2014. In fact, it's likely to be tougher than ever. As such, the revenue pressures affecting our business are not likely to lessen. Based on this, the decline in 2013 enrollment trends could persist into 2014. If our expected negative recruitment trends in the fourth quarter were to persist through 2014, this, combined with a lower starting actives base, would result in a low double-digit revenue decline next year. Clearly, we hope to do better, but we do not expect a return to revenue growth until our strategic initiatives bear fruit.

 

http://seekingalpha.com/article/1790202-weight-watchers-international-management-discusses-q3-2013-results-earnings-call-transcript

 

I hope this goes to $20-25, I might be a buyer then.

[collegeinvestor]

I dont think I would invest in this business--but I might be wrong.

 

They have negative equity, which is a huge risk to common stock shareholders.

This is a high profit margin business with gross profits of 60% and EBIT margins of 30%. Roughly 1/2 of their revenues (slightly over 900 million come from meetings and they also sell products in these meetings roughly 250 million) The online business was growing. Even if this is a high margin business with network effects they have horrible capital allocation skills which is shareholder destructive---and maybe even company destructive.

 

 

This is just my initial scuttlebutt I will continue studying this business. I think the stock has further to fall... but what do I know. If sales keep falling (which management believes will be the case) this is a classic falling knife investment.

 

Please let me know if you guys have any counter arguments would love to discuss.

[jouni1]

They have negative equity, which is a huge risk to common stock shareholders.

This is a high profit margin business with gross profits of 60% and EBIT margins of 30%.

 

why is negative equity such a huge risk? they're making real cash and returning it to shareholders. numbers-wise this reminds me of DTV, which also has negative equity and some risk-averse investors betting big on it.

 

isn't making loads of cash with no equity better than making the same amount of cash with lots of equity? i have always thought that businesses that can throw off cash without tying up a lot of capital were quality businesses.

[LC]

They have negative equity, which is a huge risk to common stock shareholders.

This is a high profit margin business with gross profits of 60% and EBIT margins of 30%.

 

why is negative equity such a huge risk? they're making real cash and returning it to shareholders. numbers-wise this reminds me of DTV, which also has negative equity and some risk-averse investors betting big on it.

 

isn't making loads of cash with no equity better than making the same amount of cash with lots of equity? i have always thought that businesses that can throw off cash without tying up a lot of capital were quality businesses.

 

Well, the reason for the negative equity has been buybacks at high prices. So not a great capital allocation decision, but their majority stakeholder wanted liquidity. But I agree, I have no issues with negative equity per-se, as long as it is the result of good business earnings/cash flows.

 

The issue here is the leverage...they cut the dividend presumably to help cover the debt/interest payments.

[collegeinvestor]

I believe that negative equity is a huge risk because there is less safety in the investment. If the cash flows go away, and there is no earning power left, where is your margin of safety?

[Fowci]

I don't think this has anything to do with the fact that equity is negative, rather than the equity is made up of intangible assets. They could have positive equity and it would potentially be just as illusory.

[Guest deepValue]

 

Well, the reason for the negative equity has been buybacks at high prices. So not a great capital allocation decision

 

 

That's what I thought at first, but they borrowed the money basically for free so they lowered their WACC even though they repurchased shares above IV. In any case, who cares if they bought shares at a high price in the past? Capital allocation actually hasn't been terrible; Artal just levers up, returns capital to shareholders, de-leverages, then levers up again. This could turn out to be a good long-term holding if earnings get back on track.

 

Free apps aren't really a long-term threat. People who pay for Weight Watchers are pretty committed to losing weight -- committed enough to pay up for a program. Weight Watchers is proven to be the most effective weight loss program and I think quality wins out over time. The company just needs to get marketing back on message (it cut marketing spend b/c it wasn't working) and eventually people will drift back to WTW.

 

If WTW gets back to normal and continues repurchasing shares, this could be a $100 stock in 3-4 years. (10x $500mm EBIT, 50mm shares)

[phil_Buffett]

 

Well, the reason for the negative equity has been buybacks at high prices. So not a great capital allocation decision

 

 

That's what I thought at first, but they borrowed the money basically for free so they retired shares basically for free. Capital allocation actually hasn't been terrible; Artal just levers up, returns capital to shareholders, de-leverages, then levers up again. This could turn out to be a good long-term holding if earnings get back on track.

 

Free apps aren't really a long-term threat. People who pay for Weight Watchers are pretty committed to losing weight -- committed enough to pay up for a program. Weight Watchers is proven to be the most effective weight loss program and I think quality wins out over time. The company just needs to get marketing back on message (it cut marketing spend b/c it wasn't working) and eventually people will drift back to WTW.

 

If WTW gets back to normal and continues repurchasing shares, this could be a $100 stock in 3-4 years.

 

i agree with you about the value in weight watchers  :)

 

there is fear about the apps that they will grab all Revenue away from wtw, but this is nonsense. free apps Are good but not more. only via wtw you get a real live Support and have a proven product. they only have to make good Marketing, deleverage, bring back good earnings and then  buying  again a Little stock back

[bookie71]

It is the "meetings" and the weigh in that sets WW apart.  The aps don't do that.

[phil_Buffett]

It is the "meetings" and the weigh in that sets WW apart.  The aps don't do that.

 

yeah weight watchers means real live contact. mental Coaching. apps dont do that. you look for two weeks on your apps and then you Forget it.

[LC]

you're right about most apps: two-weeks or so of use and then people forget it.

 

my fear is that given the influx of all these free apps, customer preferences will permanently change away from in-person meetings, which is an important part of WTW's success.

 

probably an unfounded fear, as people who REALLY want to lose weight will follow the program and do what is proven is necessary to actually lose the weight.

[Guest deepValue]

you're right about most apps: two-weeks or so of use and then people forget it.

 

my fear is that given the influx of all these free apps, customer preferences will permanently change away from in-person meetings, which is an important part of WTW's success.

 

probably an unfounded fear, as people who REALLY want to lose weight will follow the program and do what is proven is necessary to actually lose the weight.

 

http://i262.photobucket.com/albums/ii84/dannyboobear/hands_twiddling_thumbs_lg_clr.gif

[phil_Buffett]

http://www.beyondproxy.com/compounding/

 

very interesting short Video from Jeff auxier. he talks about wtw. bought it few years ago at the twenties and then sold it in the 80$.

 

 

now i can see him loading up again Shares (see gurufcocus or 13f). i hope the same will happen maybe 60-80$  :D 8)

[GregS]

Has anyone seen any advertising lately for Weight Watchers?  I've basically seen none, but of course that's just my perspective.  I would think they would be ramping up for the New Year's push, but maybe they wait until after Christmas or Jan 1?  I'm a little concerned they are holding back costs due to further revenue weakness in Q4.

[LC]

I haven't either. Perhaps they want us to eat more than our fill during this holiday season :D

[Spekulatius]

you're right about most apps: two-weeks or so of use and then people forget it.

 

my fear is that given the influx of all these free apps, customer preferences will permanently change away from in-person meetings, which is an important part of WTW's

 

Many HMO and companies offer their employees free health coaching,  because they figure it saves them money LT. I have access to health coaching (including weight reduction ) both directly from my company, as well as from my HMO.

 

This has become more common in the last few years. The company I work for also used to sponsor WWW meetings (i think they paid half, the employees paid the rest) but dropped it. I think it was in favor of other programs. I don't think it's just the free apps, there is a lot of other competition out there (employer or HMO sponsored)

[LC]

Do you know how that business is set up? Did the health insurance provider offer that service to the company for a price? It seems like as a company, it's easier to go through the insurance provider who hires WTW to provide these services than do it on their own. My old company did exactly that.

 

I'm trying to figure out the optimal structure for offering employees health coaching as a means to reduce long-term costs, and whether WTW is a beneficiary of this structure or not.

 

I see it as such: OK I'm a company. I have 100 employees. I provide them health insurance through, say, Aetna. Does Aetna come to me and say, for every X number of your employees that you enroll in a health coaching service we provide, you can knock off $100/month from their premiums. Then Aetna goes and pays WTW (or another provider) to provide this service for $50/person.

 

Or do I, as the company, go to Aetna and say, "hey, charge me $100/mo less per person because I've got them enrolled through WTW's program which should be reducing their lifetime cost to you".

 

That former seems to me the best way to intuitively manage the process. Aetna is liable, therefore they should directly control the services offered. In which case, who is WTW competing with for Aetna's (and other health insurance providers) business? And how are they competing?

 

Overall I think this is more of a free-option on the WTW thesis, not the main crux of the thesis (which IMHO is the brand value).

 

 

[twacowfca]

Do you know how that business is set up? Did the health insurance provider offer that service to the company for a price? It seems like as a company, it's easier to go through the insurance provider who hires WTW to provide these services than do it on their own. My old company did exactly that.

 

I'm trying to figure out the optimal structure for offering employees health coaching as a means to reduce long-term costs, and whether WTW is a beneficiary of this structure or not.

 

I see it as such: OK I'm a company. I have 100 employees. I provide them health insurance through, say, Aetna. Does Aetna come to me and say, for every X number of your employees that you enroll in a health coaching service we provide, you can knock off $100/month from their premiums. Then Aetna goes and pays WTW (or another provider) to provide this service for $50/person.

 

Or do I, as the company, go to Aetna and say, "hey, charge me $100/mo less per person because I've got them enrolled through WTW's program which should be reducing their lifetime cost to you".

 

That former seems to me the best way to intuitively manage the process. Aetna is liable, therefore they should directly control the services offered. In which case, who is WTW competing with for Aetna's (and other health insurance providers) business? And how are they competing?

 

Overall I think this is more of a free-option on the WTW thesis, not the main crux of the thesis (which IMHO is the brand value).

 

Most companies with at least a few hundred employees are self insured, meaning that the cost of claims and administration by a health insurer will vary with claims experience.  The self insured company may have a catastrophic policy as part if its self insurance plan for protection against a big spike in claims.

 

Therefore, a reduction in claims cost will directly benefit the self insured company.  :)

[LC]

Thank you...so in that case WTW is pitching the company on reducing their costs, not pitching the plan administrator.

 

In terms of numbers, this is a bit dated, but:

 

According to a 2000 report by the Employee Benefit Research Institute (EBRI), approximately 50 million workers and their dependents receive benefits through self-insured group health plans sponsored by their employers. This represents 33% of the 150 million total participants in private employment-based plans nationwide

 

So about 1/3 this market is self-funded plans and the other 2/3rs or so are fully-insured. I have to dig into the dynamics more but I wonder to which type of client WTW is more attractive.

[LC]

Thank you...so in that case WTW is pitching the company on reducing their costs, not pitching the plan administrator (or insurance co. in the case of a fully-insured plan)

 

In terms of numbers, this is a bit dated, but:

 

According to a 2000 report by the Employee Benefit Research Institute (EBRI), approximately 50 million workers and their dependents receive benefits through self-insured group health plans sponsored by their employers. This represents 33% of the 150 million total participants in private employment-based plans nationwide

 

So about 1/3 this market is self-funded plans and the other 2/3rs or so are fully-insured. I have to dig into the dynamics more but I wonder to which type of client WTW is more attractive.

[alwaysinvert]

$29.50 now. Anyone getting interested?

[andron]

I was in at 32, if it goes much lower i might look into buying more