Over the past five years, shares in Weight Watchers International (WTW) are down almost 75%. In the last 12 months alone, shares are down nearly 65% compared to a 40% rise for its closest competitor NutriSystem (NTRI).
On most valuation metrics, the company looks cheap compared to its previous trading history and its industry. Could this signal a buying opportunity, or are there legitimate concerns that should cause you to avoid this massive underperformer?
The Business
Weight Watchers International is a provider of weight management services, operating globally through a network of company-owned and franchise operations. Its services are primarily conducted through paid meetings, providing hands on help with food plans, exercise, behavior modification and group support. Each week, approximately a million members attend over 40,000 Weight Watchers meetings around the world, which are run by more than 10,000 leaders—each of whom has lost weight on the Weight Watchers program.
In 2013, consumers spent approximately $5 billion on Weight Watchers branded products and services, including meetings conducted by the Company and its franchisees, Internet subscription products sold by WeightWatchers.com, products sold at meetings, licensed products sold in retail channels and magazine subscriptions and other publications. Even with its current troubles, Weight Watchers has established one of the most recognized brand names within its industry.
Weight-Loss Market is Still Strong
According to Marketdata Enterprises, the weight management industry had revenues of $61 billion in 2013 in the United States alone. The number of overweight and obese adults around the world rose 28% between 1980 and 2013, to more than 2 billion individuals, and is estimated to reach over 3 billion by 2030. Between 2011 and 2012, 69% of Americans at or over the age of 20 were considered overweight and over a third of these were obese. Numerous diseases, including heart disease, high blood pressure and Type II diabetes, are associated with being overweight or obese.
Though the company faces competition from NutriSystem, Herbalife (HLF) and a raft of smaller upstarts, the market is big enough for everybody.
Issues Are Relegated to a Sub-Segment of the Industry
Many major brand-name weight loss services have struggled growing revenues in recent years. Competition from lower-cost or free services such as apps or online providers has dampened the growth of traditional weight-loss models.
Still, competitor NutriSystem has been able to stem the sales declines and return to stable EPS growth. This is in sharp contrast to WTW’s rapidly declining profitability.
Why Have NTRI and WTW Diverged?
Thus far, Weight Watchers has pushed a one-size-fits-all dieting program for its subscribers. The dieting market, however, does not work that way. The market is highly segmented with demographics such as overweight teens, overweight middle-aged women and men, post-menopausal women with hormonal imbalances, minority communities, etc. Major structural product changes are necessary to correct this, and these shifts take time to gain acceptance among consumers, sometimes years.
WTW also lacks enough retail partners to help it sell its programs. In comparison, NutriSystem can be purchased via the QVC TV channel, Wal-Mart (WMT), Target (TGT), and Costco (COST). WTW on the other hand only has 800 leased retail sites, with meetings mostly held in schools, churches, community centers and worksites.
Poor Corporate Governance
In 1999, H.J. Heinz sold Weight Watchers to Artal Group for $735 million in a leveraged buyout transaction. After its acquisition, Artal Group brought Weight Watchers public in a 2001 initial public offering, selling almost half of its stake. Today, it still has 52% ownership in the company.
According to its corporate governance statutes, Artal controls the board of directors, since Artal is able to nominate a number of directors equal to its percentage of ownership, giving the company the ability to compose the board in its favor.
Major shareholders can be attractive as they can strongly represent shareholders interests. However in the case of Artal, it can bear large agency costs for the minority shareholder. For example, WTW has conducted a number of private share repurchases that boosted Artal's and managements profit. The share repurchases destroyed a lot of value, as each Weight Watchers share is now worth significantly less it was than prior to the buyback.
Valuation
Growth estimates are predictably dire. Over the next five years, analysts expect EPS to decline by 33.5% annually.
This is in sharp contrast to NTRI’s anticipated 10% annual growth.
Still, despite the drastically reduced share price, investors still look to be pricing in small amounts of growth according to GuruFocus’ Reverse DCF tool.
Using analyst’s growth estimates, it looks like WTW shares are worth less than $1, implying a significant amount of downside at current prices.
Conclusion
It looks best at this point to avoid any investments in WTW. Not only do the shares look wildly expensive even after a 75% drop, but the corporate governance issues don’t look to be solving themselves any time soon.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
