The Company’s program is a clinically-studied commercial weight management program. WWI presents its program in a series of weekly meetings of approximately one hour in duration. The Company sells a range of products, including bars, snacks, cookbooks, food and restaurant guides with PointsPlus values, Weight Watchers magazines and PointsPlus calculators, which complement its weight management plans. WWI sells its products primarily through its meeting operations and to its franchisees. In fiscal year ended December 29, 2012, sales of its products in its meeting operations represented approximately 14% of its revenues.
Weight Management Plans In each of the Company markets, it offers services and products that are built upon its weight management plans, which consists of a range of nutritional, exercise and behavioral tools and approaches. As of December 29, 2012, PointsPlus and ProPoints, WWI’s weight management plans, are systems with similar methodologies, developed from a combination of the latest nutritional scientific research and insights of customers who experienced prior Weight Watchers plans.
WeightWatchers.com Offerings WWI offers two Internet subscription products - Weight Watchers Online and Weight Watchers eTools. The Company has offered these products in the United States, the United Kingdom, France, Germany and Australia. Through WeightWatchers.com, the Company is well positioned to benefit from the self-help weight management market as well as several trends taking place in the global Internet marketplace, including an increased willingness of consumers to access and pay for Web content, the proliferation of broadband and mobile access and the growth of e-Commerce and Internet advertising. During the year ended December 29, 2012, WeightWatchers.com reporting segment contributed 27.8% of its total revenues.
Weight Watchers Online is a product based on the Weight Watchers approach to weight management and is designed to attract self-help-inclined consumers. Weight Watchers Online helps consumers adopt a healthier lifestyle, with a view toward long-term behavior modification a key aspect of the Weight Watchers approach toward sustainable weight loss. Weight Watchers Online allows consumers to learn how to make healthier food choices and lead a more active lifestyle by providing them with online and mobile content, functionality, resources and interactive Web-based weight management plans. The Company’s interactive resources include PointsPlus Tracker, PointsPlus Calculators, Power Foods lists, Weight Tracker and Progress Charts, Nutritional Guidelines, Hunger Tracker, Fitness Workouts and Videos, Recipe and Food Databases, Recipe Builder, Meal Ideas and Restaurant Guides. During fiscal 2012, WeightWatchers.com had over 1.8 million active Weight Watchers Online subscribers.
2. History of business:
Weight Watchers was found by Jean Nidetch in the early 1960's when she began inviting her friends into her home in Queens once a week, to discuss how best to lose weight.
In May 1963, Weight Watchers was incorporated and the first public meeting was held in a loft in Queens. The meeting was a huge success.
The company rapidly began to expand, as former members who had successfully completed the program and extensive training opened franchises throughout the U.S. and abroad.
In1978, Weight Watchers International was sold to the H.J. Heinz Company.
In 1999, Weight Watchers was acquired in a leveraged buyout by Artal Luxembourg and
In 2001- Weight Watchers International went public.
In July 2005, Weight Wacthers acquired control of its licensee and affiliate, WeightWatchers.com. Subsequently in December 2005, WeightWatchers.com redeemed all shares owned by Artal in it.
In Feb 2008, Weight Watchers entered into a joint venture with Danone Dairy Asia to establish a weight management business in China.
3. Business Model:
Weight Watchers International’s business model has been enviable. At the core of Weight Watchers' business model are weekly meetings, which are held throughout the world and provide group support and promote weight loss through education and interaction among meeting attendees. The economics of the meetings are extremely favorable as both the cost of running a meeting, which includes commissions paid to part-time meeting leaders and rent expense for meeting locations (most of the locations are rented on an hourly basis), and the capital expenditure requirements are low. Furthermore, meeting fess are usually paid up front or at the time of the meetings while most expenses are deferred, which result in negative working capital and strong cash-flow generating ability.
To sum up, Weight Watchers’ business model inherently enables the business to achieve the following:
· High profit margin and operating margin
· Strong operating cash flows
· High return on invested capital
· Negative working capital
· Low capital expenditure requirement
Although Weight Watchers’ business has been shifting from the physical meeting model to the online model, the above attractive features will likely remain intact.
4. Competitive Advantages:
Weight Watchers’ moat has been wide in the past as it has a reputable and a differentiated brand in the industry where false claim is abundant. In fact, according to the Company’s 2012 annual report, the U.S. Preventive Services Task Force endorses Weight Watchers’ multi-component intensive behavioral therapy (MCBT) as the only weight-loss treatment. They recommend that doctors refer patients to community-based program, which is Weight Watchers’ network of leaders and members it built since the 1960s. This network is extremely difficult to replicate.
The results of participating in Weight Watchers’ program may explain its wide moat. As of 12/31/2012, 37% of Weight Watchers participants lost at least 10% of their starting weight, which exceeded only 11% for standard weight-loss treatment and 15% for a combined approach.
However, the fact that Weight Watchers has enjoyed a wide moat in the past does not mean it will continue to do so in the future. Mobile apps and regional and community weight loss programs have been eroding Weight Watchers’ moat gradually, as evidenced by the decline in both paid meeting weeks and total paid weeks. The challenge is acknowledged by its management during the Q2 2013 earnings call:
“We think there's a lot of competition for trial and forces distracting the enrollment mechanism associated with free apps and with activity devices in general. But I think it's critical to make a distinction between competition for trial and alternatives to our proven and effective program. And as a stand-alone activity with consumers, we're reasonably confident that these things are not going to change the trajectory of the obesity challenge. Turning that around and looking at them as the potential additives to a strong program like ours, we think through time, there are real opportunities for us to strengthen our offering on the basis of what we're seeing have a real appeal for consumers.” - CEO James Chambers
Weight Watchers’claims that there are no significant group education-based competitors in any of its major markets, except in the United Kingdom and even in the UK, it believes that it possesses the largest share of the commercial weight management market.
In its biggest market, North America, Weight Watchers compete with self-help weight management products, services and programs, internet and mobile apps, nutritionists and dieticians, fitness centers and companies that sell pre-packaged meals and meat replacements.
In its second biggest market UK, aside from the competitors mentioned above, Weight Watchers also has a significant competitor. Although the name of the competitor is not disclosed in the 2012 form 10K, a little research would reveal that it is most likely Slimming World, a company that was founded in 1969 and has a weekly attendance of over half a million. What’s interesting about Slimming World is that although based in UK, it has expanded to Ireland, Cyprus and now U.S. The current impact of Slimming World on Weight Watchers in the U.S is not material enough for Weight Watchers to disclose but as the business model is very similar, Slimming World poses a potential threat to Weight Watchers’ dominant position in the U.S.
6. Important Operating Metrics:
· Net Revenues
· Paid Weeks (including meeting paid weeks, online paid weeks and total paid weeks)
· Lecture income per paid week
· In-meeting product sales per attendee
· Number of end of period Online subscribers
· Gross profit and operating profit.
· Operating expenses as a percentage of revenue.
Below are excerpts from the most recent form 10K that shows the 5 year data for paid weeks, attendance, gross profit and operating profit.
7.Profitability and Financial Strength (data from S&P Capital IQ):
|Return on Assets %||22.40||31.20||26.50||23.50|
|Return on Capital %||33.10||50.00||43.60||38.90|
|Gross Margin %||54.40||57.60||58.50||58.10|
|SG&A Margin %||27.60||27.30||31.30||30.20|
|Net Income Margin %||13.40||16.80||14.10||13.20|
|EBIT / Interest Exp.||5.1x||9.2x||5.5x||4.6x|
As discussed in the business model section, Weight Watchers’ business is very profitable (high operating margin and net income margin) with strong operating cash flows. The company has incurred a good amount of debt to finance its shares repurchases. Weight Watchers’ diluted shares outstanding has decreased from 109.7 million shares at the end of 2003 to a little over 56 million shares at the end of the latest reporting period – a whopping almost 50% reduction in share count. However, long term debt has increased from merely $454 million to almost $2.4 billion during the same period.
The increase in long term debt is mainly due to the fact that the Company commenced a “modified Dutch auction” tender offer and simultaneously entered into an agreement with Artal Holdings to purchase its common stocks at $82 per share for a total of approximately $1.5 billion financed by debt offering. The purchase price is almost 20 times earnings per share and more than18 times free cash flows per share, both multiples are at the high end of Weight Watchers’ historical PE and PFCF ratios.
The likelihood of Weight Watchers defaulting on its debt is very low given the high profitability of the business and its cash generating ability. However, management’s capital allocation ability is best described as mediocre.
8. Management and Board:
The Company was led by David Kirchoff before his resignation in August 2013. James Chambers, president and COO, replaced David Kirchoff at the time of his resignation. Chambers has a limited history with Weight Watchers as he joined the Company in January 2013. Previously Mr. Chambers held roles at a variety of companies including Kraft, Remy Cointreau, NetGrocer.com and Nabisco. Mr. Chambers is a graduate of Princeton University, where he obtained a Bachelor's degree in Civil Engineering, and holds an M.B.A. from the Wharton School of Business of the University of Pennsylvania.
From reading Chambers’ bio, I get the feeling that he tended to jump from job to job. This type of managers typically makes short-term decisions because they are not there for the long term. Since Chambers took the reign at Weight Watchers, the Company has been expanding into the corporate employee weight-loss program, which has shown some early success. However, this has not been enough to offset the revenue declines in meetings and weightwatchers.com. How to address the challenges of increasing free and low cost online and mobile application will be a key task for Mr. Chambers.
Weight Watchers’ Board has 9 directors and 6 of them are not independent. The Artal Group controls 44% of voting rights and has significant influence on the Company. Artal’s interest may not be aligned with the remaining shareholders. The $82 purchase agreement is a good example of conflicts of interest. Artal arguably sold the shares to the Company at a good price at the cost of all other shareholders.
9. Employee Satisfaction:
Weight Watchers has a 2.4 start rating on glassdoor.com, based on 174 reviews. This low rating indicates that employees are not happy overall, which is a big concern for a service-oriented company like Weight Watchers. If employees are treated well by management, they will in turn treat their customers well. On the other hand, disgruntled employees are less likely to put on happy faces with customers. Below is a compilation of the pros and cons listed by Weight Watchers’ employees:
"Helping people lose weight and keep it off is very rewarding"
"I was always uplifted by helping others to get healthy and reach their goals"
"Plus I got to really help people in a meaningful way"
"Wonderful helping members reach their weight loss goals"
"The experience of helping members through the weight loss journey is very rewarding"
"Many required training sessions that are mandatory but paid at minimum wage"
"Not enough meeting to make it a full time job in south florida market"
"There is a set base pay plus commission on product sales and number of members in the meeting"
"Upper management doesn't make changes when suggested by front line employees"
"There is NEVER a raise in salary, not even cost of living"
“It's a very bumpy ride right now. The transformation of this old-guard company is going to be slow and painful.”
10: Customer Satisfaction:
After the research I have done regarding Weight Watchers’ employees, I am not surprised by what the customers are saying about the business, especially the meeting business. Many customers are not happy because:
· Meetings have been canceled
· Customer service is ineffective
· the Company is spending more time during the meeting promoting its products
Here are two reviews from consumeraffairs.com
“Weight Watchers has a good product in spite of itself. However it does not have customer service. First, I purchased the Active Link and it took me six months for me to get the problem resolved. (It was defective.) After numerous calls and promises that they'd call me back - they never did - it was unbelievable. Second, the meeting sites do not have a phone number. Third, I tried to get a receipt today and it took three transfers and a 30 minute hold. At the end of the call, the survey asked about my customer rep. The customer rep was fine, but they didn't even ask the right questions. Their business needs better management, and processes. Too bad, because their product isn't bad.” - Customer from Madison, WI
“Two weeks ago in Spring, Texas, the Territory manager came to our meeting and informed us that there would no longer be a Wednesday meeting. When asked why, she stated to provide a "better customer experience". Well since when is cancelling all the meetings on a particular day better for customers? She denied that Weight Watchers was cancelling the meeting to improve their bottom line. Well I may be overweight but I don't lack intelligence. She then proceeded to hand out schedules with a coupon as if that made up for our inconvenience. Her manner was very condescending as if she was doing us a favor. All of the members at the meeting were totally disgusted. Wake up Weight Watchers! You in your fancy corporate jobs! Change your attitude! The weight watcher leaders who run the meetings are the important ones. You would not have your jobs if your leaders did not help members.We, the members, pay for the services. Yesterday I complained and was contacted by Corporate Affairs. I was asked to furnish my phone number and told that the District Manager would call me today. I received no such call. Apparently member complaints are not a priority at Weight Watchers. I am done dealing with this company!” -Customer from Spring, Texas
Here is a Yelp review:
“I love weight watchers and have joined several times. This time I am losing weight but am a bit disillusioned at the meetings. I am not sure if it is the leader or just a change in the culture of the meetings, but the meetings seem like non-stop commercials for weight watcher products. I would like to see more support; perhaps it is the leader in this instance.” - Customer from San Francisco, CA.
11. Bear and bull argument:
What the bears are saying:
1.“These days, Weight Watchers International looks like one more old-fashioned business getting killed by a smartphone app. Its sales are down, meetings attendance is down, and competitors are giving away for free the online dieting tools that Weight Watchers expected to sell” – Seeking Alpha Article
2. “WTW has a great deal to do to fix its business and the process is likely to take multiple years. We feel some optimism given the new management team and our view that the diagnosis of the problems is correct and effective plans will be developed over time. Execution remains a question mark, however.” – Barclay’s Research Report
3. “Attendance trends a concern: Despite a number of positives in 2013 (new program/marketing, upgraded real estate, and a small accounts B2B rebound), recruitment trends continue to be weak, which we think highlights long-term secular challenges, including the lack of convenience of attending meetings. Slowing .com Growth: Increased competition from free apps is pressuring the online business, which is a major issue given it has been the key growth driver at WTW over the last few years. Valuation Does Not Look Compelling: Valuation of 10.1 times 2014 EV/EBITDA does not look attractive given fundamental struggles, although potential aggressive cost-cutting and B2B optionality should protect stock downside.” - Morgan Stanley Research Report
What the bulls are saying:
1.“The company can fix its numerous problems more quickly than we currently expect, thereby increasing recruitment and revenues sooner.” - Motley Fools Article
2."The fundamental strengths of the company: Strong Brand, Capital Light Business Model, Growing Market and the Strong Infrastructure are all still intact." – Seeking Alpha Article
3.“Longer term, as the world fights against obesity, we believe Weight Watchers is well positioned to further grow its business and increase traction with consumers and corporations, especially as they develop the right marketing campaign for men (which has been suspended for now), make further inroads with women, and bear fruit from increased effort behind gaining more self-insured corporate clients.” -JP Morgan Research Report
As Weight Watchers’ revenues and expenses are relatively stable because most of them are recurring, discounted cash flow (I actually used earnings, which is a more conservative for Weight Watchers, as a proxy for cash flow) is an appropriate method to use in calculating intrinsic values. As the future of Weight Watchers is highly unlikely, I assign an equal weight to 3 different scenarios assuming declining sales, flat sales and improving sales. Using gurufocus’s DCF too, the results are as follows: Bear Case:
Fair value assuming equal probabilities:
Margin of Safety based on closing price at 11/8/2013 of $33.67:
The biggest risk is obviously a medical breakthrough that will almost eliminate the need of overweight people to go to meetings or to purchase products online, which will effectively put Weight Watchers out of business. This could be the “Super Catastrophe Risk” Warren Buffett refers to in his first step analyzing a business. Other main risks include:
· Continually increasing competition from apps.
· Competition from Slimming World in the U.S Market.
· Declining customer base due to free or low cost apps, unsatisfactory customer services, and declining meeting qualities.
· High employee turnovers, which will affect the occurrence and the quality of the meeting business.
Weight Wacthers International is a capital light, high return and cash cow business that has been facing challenges recently. Both the meeting business and the online business have been declining due to a variety of factors. While the stock has fallen considerably from its historic highs and valuation may seem appealing to many value investors, elevated employee dissatisfaction and customer dissatisfaction is likely to affect Weight Watchers’ business in a negative way until a change of management. Furthermore, investors should be aware of the “Super Cat Risk” that can potentially put Weight Watchers out of business.
Disclosure: No position in WTW.