Back in May, we warned investors to stay away from Weight Watchers International (WTW). Since then, shares have fallen an additional 40%.
The latest dip brings the total return of WTW shares over the past three years to a whopping -93%. While shares were already down big before our last call, we still decided it looked best to avoid investing in the stock. With the stock down another 40%, is now finally time to buy?
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 –Â 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.
Previous issues remain a headwind
We noted in our last piece that 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.
For a long time, Weight Watchers 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 still 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 (NTRI, Financial) can be purchased via the QVC TV channel, Walmart (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.
Over the next few quarters, analysts are anticipating double-digit revenue drops. While the tide is expected to slow next year, the headwinds listed above (including both product pipeline and branding issues) are structural in nature. It looks doubtful that these issues will be solved in a timeline measured in months.
Financials are worse than ever
It’s hard to argue that WTW is not headed to zero eventually, at least if there are no major changes that allow for a dramatic turnaround. WTW should eventually reach a cash-burn rate that should force some major shareholder dilution.
Right now, the company has been hoarding operating cash flow, raising its cash levels to $300 million. Still, with $2.3 billion in debt, the company is paying over $100 million interest per year. This results in an interest expense of $2.15 per share. With EPS next year expected to be only $0.43, this should become a major problem quickly.
At best, WTW will last until 2020 when a massive amount of debt is due. With some massive impending share dilution to stem to pressure of interest payments, expect shares to continue selling off. With a spiking debt-to-equity ratio, it’s doubtful the credit markets will allow the company to refinance almost $2 billion in debt due after 2019.
Conclusion
It appears as if the only chance Weight Watchers has of surviving would be through a takeover. A New York Post article reported that the company may attract takeover interest after such a steep drop in share price. According to the report, three sources say a suitor, an activist hedge fund, is talking with potential partners about making WTW’s majority owner an offer, and has recently bought most of the company’s remaining $144 million in senior loans due April 2016. Including debt, which could be bought at a discount, the bid could total ~$2 billion.
While this remains a possibility, it is still speculation for now. If you’re investing in the company for the fundamentals, it’s clear that you should stay away. Aside from the off-chance a takeover occurs, the company is set to spiral into nonexistence.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
