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WTW - Weight Watchers International


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too much Panic in the stock Price. IMO

Agreed...probably attractive at these prices, we'll see if it goes lower. Stock price aside, they still need time to formulate (or really, implement) a new marketing and business strategy to leverage their brand.

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Seems like the move below $30 has really attracted some interest. I was on the other side of this and sold the move. I did this for a number of reasons but the basic idea is that it shouldn't trade here if January is going well. January is probably the most important month and if it doesn't happen this month it won't happen this year.

 

More generally, I am not totally sure what the upside here...if this goes right where does it trade? (that is a genuine, non-rhetorical question). I obviously liked it above this price so it feels lower risk but I don't feel like a recovery is either probable or rewarding enough to be worth the effort.  For example, if the company does meet the projections set out at the investor day, this won't be rewarding.

 

Finally, I am not sure the company has actually done much new. The big change so far appears to be the introduction of Simple Start. I think this is aimed at improving retention but it doesn't really change anything or deal with the issues raised at the investor day (changing consumer tastes, poor reputation). It looks a lot the big changes in the program, especially online, have been pushed out to next year. Costs and the "first four weeks" appears to the focus right now, this is admirable but unlikely to change anything. Moreover, I don't get the impression that much has actually changed. Big, flashy marketing still seems to be the goto strategy (I believe the first episode of their cooking competition thing aired recently), I suspect this conceals deeper problems.

 

I haven't completely given up on this situation but I think the current valuation is probably more than justified as any upside will be on costs not revenue.

 

(Another thing to bear in mind I suppose is that there are a ton of shares short).

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Guest deepValue

Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

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Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

Yep, that's the thesis. Couldn't have said it better. I didn't average down yet because I believe as you say this year will be stressed and the short term market will leave the stock left for dead. I could be wrong but given other, attractive opportunities, I am not reaching for reasons to average down just yet.

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Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

 

Ok so your target is presumably somewhere in the $40s? That would be impressive. I ended up viewing 2011 as something of an anomaly so my numbers didn't go quite that far.

 

I am also not too sure what you mean about the moat...presumably it had a moat in 2011 and it has one now...but the performance of the business has clearly changed significantly since then. Has the size of the moat changed? I think the company has correctly identified that consumer tastes are moving in another direction and that there was a negative (partly accurate) perception about the company, what does this mean for the moat? I agree that it is the most effective weight loss program but there are numerous competitors who do exactly the same thing. Slimming World took them apart in the UK. So that just leaves marketing? I still don't know if I fully disagree with your conclusion, I just want to see some tangible evidence about how we get there.

 

I should add that Weight Watchers advertising has been very noticeable in the UK this season (they also benefit from indirect advertising of their licensed products here). I don't watch TV that much but it is very noticeable.

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Guest deepValue

Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

 

Ok so your target is presumably somewhere in the $40s? That would be impressive. I ended up viewing 2011 as something of an anomaly so my numbers didn't go quite that far.

 

I am also not too sure what you mean about the moat...presumably it had a moat in 2011 and it has one now...but the performance of the business has clearly changed significantly since then. Has the size of the moat changed? I think the company has correctly identified that consumer tastes are moving in another direction and that there was a negative (partly accurate) perception about the company, what does this mean for the moat? I agree that it is the most effective weight loss program but there are numerous competitors who do exactly the same thing. Slimming World took them apart in the UK. So that just leaves marketing? I still don't know if I fully disagree with your conclusion, I just want to see some tangible evidence about how we get there.

 

I should add that Weight Watchers advertising has been very noticeable in the UK this season (they also benefit from indirect advertising of their licensed products here). I don't watch TV that much but it is very noticeable.

 

I think WTW could trade north of $90 by then end of 2017.

 

The decline in recent years is due to the free app fad and awful marketing and advertising. Free apps don't work because they're hard to stick with; people who are serious about weight loss will figure this out soon enough. The Nov 6 presentation outlines the company's plans for turning around its marketing.

 

Re competitive advantages: I don't think it has competitive advantages that make it impossible for fads or poor execution to bite into profitability, clearly that is not the case. But I think it has structural advantages, namely scale, that make it inevitable that WTW will return to previous levels of profitability. As you acknowledged, WTW is the most effective program out there; people stick with it for 8-9 months on average, much longer than Nutrisystem (3 months), free apps (2 weeks), etc. I don't think there's anything out there like it; there may be similar programs, but nothing with the advertising budget that WTW has.

 

So the thesis is very simple: best program with the best ability to get the word out. The problem with waiting for confirmation of this is that everyone else is waiting for confirmation as well. To make the most money in this stock, you have to decide that the best program will eventually win out before it plays out in the subscription numbers. Fidelity announced a 10% stake earlier this month and I think others will follow once everyone wakes up to the opportunity; this isn't necessarily a dead stock this year just because the financials aren't going to improve.

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Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

 

Ok so your target is presumably somewhere in the $40s? That would be impressive. I ended up viewing 2011 as something of an anomaly so my numbers didn't go quite that far.

 

I am also not too sure what you mean about the moat...presumably it had a moat in 2011 and it has one now...but the performance of the business has clearly changed significantly since then. Has the size of the moat changed? I think the company has correctly identified that consumer tastes are moving in another direction and that there was a negative (partly accurate) perception about the company, what does this mean for the moat? I agree that it is the most effective weight loss program but there are numerous competitors who do exactly the same thing. Slimming World took them apart in the UK. So that just leaves marketing? I still don't know if I fully disagree with your conclusion, I just want to see some tangible evidence about how we get there.

 

I should add that Weight Watchers advertising has been very noticeable in the UK this season (they also benefit from indirect advertising of their licensed products here). I don't watch TV that much but it is very noticeable.

 

I think WTW could trade north of $90 by then end of 2017.

 

The decline in recent years is due to the free app fad and awful marketing and advertising. Free apps don't work because they're hard to stick with; people who are serious about weight loss will figure this out soon enough. The Nov 6 presentation outlines the company's plans for turning around its marketing.

 

Re competitive advantages: I don't think it has competitive advantages that make it impossible for fads or poor execution to bite into profitability, clearly that is not the case. But I think it has structural advantages, namely scale, that make it inevitable that WTW will return to previous levels of profitability. As you acknowledged, WTW is the most effective program out there; people stick with it for 8-9 months on average, much longer than Nutrisystem (3 months), free apps (2 weeks), etc. I don't think there's anything out there like it; there may be similar programs, but nothing with the advertising budget that WTW has.

 

So the thesis is very simple: best program with the best ability to get the word out. The problem with waiting for confirmation of this is that everyone else is waiting for confirmation as well. To make the most money in this stock, you have to decide that the best program will eventually win out before it plays out in the subscription numbers. Fidelity announced a 10% stake earlier this month and I think others will follow once everyone wakes up to the opportunity; this isn't necessarily a dead stock this year just because the financials aren't going to improve.

 

So over 20x 2011 earnings?

 

I think that, when the evidence comes out, free apps will be proven to be generally effective. Research suggests food/exercise diaries are effective and that is all free apps are. I don't really see them as related to what WTW do though. WTW provides a program, free apps provide a tool.

 

I am not sure what you mean by turning around marketing...the current plan is the "four pillar" plan. My interpretation is that the first pillar is going to be cost, improving online, improving first four weeks, and changing consumer perception. I am presuming that you are talking about the last one as the suggestion was that their advertising would challenge the misinterpretation. As far as I am aware, there isn't much evidence of this. Given the type of people the company hires, the way they perceive the WTW business, and the success of 2011 suggests to me that broad marketing strategy will never change i.e. heavy use of sponsorship and celebrities. My guess is that consumer perception will only change when they update their program (pillar 2).

 

More broadly though, my impression has been that the marketing strategy is created by people who wouldn't ever use the program, don't know anyone who does, and probably wouldn't want to know anyone who does. WTW seems like a kind of "middle America" product (I know the demo is above average income but broadly speaking) and the company is mostly run by professional managers hired out of business school/consulting living in NY. I think there is one executive who worked in the meetings business, for example, and she only came in at the highest level. The end result though is totally unsurprising, uncreative marketing based on volume rather than quality.

 

I really have no idea what other people think about the stock. One of the things that concerned me originally on this topic was how well supported it was after every slip up. The stock always bounced nicely, this did stop after the investor day presentation though. On the other hand, the company has a big lever to pull this year with cost (was it $100m in consulting fees they paid each year?) and there is huge short interest.

 

What will you be looking for in the Q, if anything? I will be really interested to see if they got any traction in the UK. Slimming World is a very very small company (~1.5m members) so that marketing advantage should really pay off.

 

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Variant Anecdotal View regarding MFP:

 

MyFitnessPal works (at least for some people). My sister in law, her friends, as well as other in laws use it. It has worked for them. MyfitnessPal offers them a simple solution to keep track of net calories (as well as other nutrition values) and gives them a similar level of accountability (since they are part of a group participating).  (They are not extremely overweight -- all seeking to lose 20 lbs or less).  And of course MyFitnessPal is free -- my sister in law's comment to me -- "Why would I ever switch back." All of these MyFitnessPal users I'm talking about were one time Weight Watcher members.

 

I don't believe the talk that XYZ Solution doesn't work and that WTW is superior and that everyone will return to WTW after trying MFP or another alternative "bad" solution.  That doesn't mean that WTW will prove to be a bad investment.  The market is large enough for both WTW and MFP to be successful.  They obviously have an enviable business model and a great brand.  A huge moat? -- I'm not so sure.  More pluses, their overall market opportunity is HUGE (and growing) and their entry into B-to-B via healthcare I think has a lot of potential (given the changes in healthcare rules).  I've been studying WTW for a while now, but never pulled the trigger. Still on the fence -- waiting for something to change my mind one way or another.

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But I think it has structural advantages, namely scale, that make it inevitable that WTW will return to previous levels of profitability.

 

What are the scale advantages? Can you be more specific?

 

WTW has the biggest advertising budget (capacity for SG&A due to high sales) and the greatest capacity to increase advertising (highest profit margin in the business). That's a tremendous advantage.

WTW_marketing_spend.png.277c6565e5dfed712db8364b40c87ed1.png

WTW_net_margin.png.2fed099b4121c30eb9243dff3deb839b.png

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Guest deepValue

Nothing is going to happen this year. 2014 attendance will be lower than 2013 attendance. The idea is that several years out, say, 2017, WTW will earn what it did in 2011 if it has a legitimate moat.

 

WTW is the most effective weight loss program and has the largest advertising budget. I made it a 25% position around $32, will probably bump it up to 50% this week. Multiple expansion plus earnings growth plus share count reduction = home run. But you have to believe in the moat. That's the only thing that matters here.

 

Ok so your target is presumably somewhere in the $40s? That would be impressive. I ended up viewing 2011 as something of an anomaly so my numbers didn't go quite that far.

 

I am also not too sure what you mean about the moat...presumably it had a moat in 2011 and it has one now...but the performance of the business has clearly changed significantly since then. Has the size of the moat changed? I think the company has correctly identified that consumer tastes are moving in another direction and that there was a negative (partly accurate) perception about the company, what does this mean for the moat? I agree that it is the most effective weight loss program but there are numerous competitors who do exactly the same thing. Slimming World took them apart in the UK. So that just leaves marketing? I still don't know if I fully disagree with your conclusion, I just want to see some tangible evidence about how we get there.

 

I should add that Weight Watchers advertising has been very noticeable in the UK this season (they also benefit from indirect advertising of their licensed products here). I don't watch TV that much but it is very noticeable.

 

I think WTW could trade north of $90 by then end of 2017.

 

The decline in recent years is due to the free app fad and awful marketing and advertising. Free apps don't work because they're hard to stick with; people who are serious about weight loss will figure this out soon enough. The Nov 6 presentation outlines the company's plans for turning around its marketing.

 

Re competitive advantages: I don't think it has competitive advantages that make it impossible for fads or poor execution to bite into profitability, clearly that is not the case. But I think it has structural advantages, namely scale, that make it inevitable that WTW will return to previous levels of profitability. As you acknowledged, WTW is the most effective program out there; people stick with it for 8-9 months on average, much longer than Nutrisystem (3 months), free apps (2 weeks), etc. I don't think there's anything out there like it; there may be similar programs, but nothing with the advertising budget that WTW has.

 

So the thesis is very simple: best program with the best ability to get the word out. The problem with waiting for confirmation of this is that everyone else is waiting for confirmation as well. To make the most money in this stock, you have to decide that the best program will eventually win out before it plays out in the subscription numbers. Fidelity announced a 10% stake earlier this month and I think others will follow once everyone wakes up to the opportunity; this isn't necessarily a dead stock this year just because the financials aren't going to improve.

 

So over 20x 2011 earnings?

 

No, 15x $300 million in earnings divided by 48 million shares outstanding (a modest share count reduction assuming debt is low enough to re-lever in 2017) equals $93.75. This is a favorable scenario, but there's room to be wrong.

 

I think that, when the evidence comes out, free apps will be proven to be generally effective. Research suggests food/exercise diaries are effective and that is all free apps are. I don't really see them as related to what WTW do though. WTW provides a program, free apps provide a tool.

 

Free apps will stay around, but they won't have long-term appeal for WTW customers, who tend to want their hand held through the diet. My biggest worry is that free apps aren't actually responsible for much of the attendance declines.

 

 

I am not sure what you mean by turning around marketing...the current plan is the "four pillar" plan. My interpretation is that the first pillar is going to be cost, improving online, improving first four weeks, and changing consumer perception. I am presuming that you are talking about the last one as the suggestion was that their advertising would challenge the misinterpretation. As far as I am aware, there isn't much evidence of this. Given the type of people the company hires, the way they perceive the WTW business, and the success of 2011 suggests to me that broad marketing strategy will never change i.e. heavy use of sponsorship and celebrities. My guess is that consumer perception will only change when they update their program (pillar 2).

 

More broadly though, my impression has been that the marketing strategy is created by people who wouldn't ever use the program, don't know anyone who does, and probably wouldn't want to know anyone who does. WTW seems like a kind of "middle America" product (I know the demo is above average income but broadly speaking) and the company is mostly run by professional managers hired out of business school/consulting living in NY. I think there is one executive who worked in the meetings business, for example, and she only came in at the highest level. The end result though is totally unsurprising, uncreative marketing based on volume rather than quality.

 

Everything started going downhill when Jessica Simpson got knocked up right before diet season and the company had to re-vamp its advertising on short notice. Celebrity endorsements work (for women, at least); I think it's just a matter of re-working the messaging to better communicate the program's benefits. People stick with Weight Watchers a lot longer than they stick with any other program. Obviously, the longer you stick with a diet the better it works. It would worry me if the avg subscription rate dropped from 8-9 months to 6-7 months, but that hasn't happened yet. The program is still effective, it just needs a celebrity that resonates w/customers.

 

 

What will you be looking for in the Q, if anything?

 

If Q1 attendance comes in below 10-11mm, would reconsider thesis.

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Ah, I see. I hadn't considered another repurchase so that does make sense.

 

I very much agree with your views on free apps, although I don't think they are the source of the problem. Either way though, I think WTW should have been able to stay competitive...in theory.

 

I presume you are talking about the UK for attendance...I am not quite sure of the numbers but that sounds a lot, the YoY change is something over 20% so attendance is presumably near 7.5m atm (as the y/e was around 10m)? I am not sure though...I think any improvement would show that they are actually in control of the situation somewhat.

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Guest deepValue

 

 

I presume you are talking about the UK for attendance...

 

No, I'm talking about 1Q14 global attendance. It depends on how big the drop-off is between Q3 and Q4. Assuming Q4 global attendance is no less than 8mm, I'd hope that Q1 adds at least 3mm so it comes out to 11mm (down from 13mm in 2013 and 15.8mm in 2012). Obviously, Q1 attendance is highest of year so we'd come in at mid-to-high 30s attendance for all of 2014. Historically, WTW has been able to increase attendance by more than 3mm from Q4 to Q1 and I think it'll do better this year. If it does worse, then we have a serious problem.

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  • 4 weeks later...
Guest deepValue

I think everyone knew 2014 would be a rough year. I'm waiting for Q1 attendance numbers to see how bad it is, but mgmt is clearly not optimistic. I'm glad I left this at a 25% position, but may bump it to 50% if Q1 numbers are not as bad as the market seems to think.

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I somehow do not find the guidance credible. I am not one to suggest or encourage conspiracy theories, but given that Artal owns 51%, I somehow have this feeling that they deliberately gave an extremely low guidance so that they could take this private at the lowest possible price.

 

I may be totally wrong here but I am having trouble understanding how the EPS could drop from $3.87 to $1.3-$1.6 in one year without a concurrent significant drop in revenues (which does not seem likely..maybe this is that 'kitchen sink' year).I guess we will know in a few years.

 

 

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I somehow do not find the guidance credible. I am not one to suggest or encourage conspiracy theories, but given that Artal owns 51%, I somehow have this feeling that they deliberately gave an extremely low guidance so that they could take this private at the lowest possible price.

 

I may be totally wrong here but I am having trouble understanding how the EPS could drop from $3.87 to $1.3-$1.6 in one year without a concurrent significant drop in revenues (which does not seem likely..maybe this is that 'kitchen sink' year).I guess we will know in a few years.

 

Yes, I am not sure I understand the guidance either. There are no plans to grow costs, the extraordinary stuff from shrinking SGA isn't included, there is minimal operating leverage, and the company is saying the lower estimate ($1.30) is consistent with current revenue trends...at the top estimate of $1.60 they are guiding revenue down 25%...the only plausible explanation is that they don't want to disappoint and that changes are going to make things worse before they get better. Interestingly, the annual cost savings they say are possible are roughly equal to this earnings estimate...it is hard to see how this makes sense, the only change I see is that they seem to be saying that they are just going to shrink the business.

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I think everyone knew 2014 would be a rough year. I'm waiting for Q1 attendance numbers to see how bad it is, but mgmt is clearly not optimistic. I'm glad I left this at a 25% position, but may bump it to 50% if Q1 numbers are not as bad as the market seems to think.

 

I dont think it would be smart to make a business that is completely imploding on every statistic a 50% position. 

 

WTW is in free fall right now and hoping for a turnaround isnt a smart strategy. It pays to wait.

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Guest deepValue

I think everyone knew 2014 would be a rough year. I'm waiting for Q1 attendance numbers to see how bad it is, but mgmt is clearly not optimistic. I'm glad I left this at a 25% position, but may bump it to 50% if Q1 numbers are not as bad as the market seems to think.

 

I dont think it would be smart to make a business that is completely imploding on every statistic a 50% position. 

 

WTW is in free fall right now and hoping for a turnaround isnt a smart strategy. It pays to wait.

 

I'm betting on a moat. WTW is the most effective weight loss company and has the biggest advertising budget. I'm not particularly concerned what this year's numbers are or what last year's numbers were; all I care about is that WTW remains the most effective weight-loss program and that customers continue to value the most effective weight loss program above less-effective weight loss programs.

 

WTW has suffered similar declines before, the last one being the Atkins diet fad at the turn of the millennium. It took a sharp dip in attendance and then recovered. Also, WTW only caters to a small portion of the diet market -- the portion that wants their hands held all the way through the diet. So I'm not hoping for a turnaround strategy; I'm just betting that the moat is intact and customers will eventually return like they did after Atkins/South Beach/etc.

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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.

 

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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.

 

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.

 

I really wouldn't be surprised if they did a rights issue though...would be so typical after the buyback at $80, Artal seem quite sleazy.

 

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