Weight Watchers (WTW, Financial) is a well-known U.S. company that helps people live healthier lives through weight-loss programs. It is best known for the Weight Watcher meetings (the program sets you back $44.95 a month), but it also offers a purely online plan ($19.95) and a blended program of online with a personal coach which comes in at $54.95. Weight Watchers’ program is based on psychological principles to help people with the difficult process of eating more healthily and to have them stick with the program, and it gamifies healthy eating to some extent. The program has been found to be effective by scientists, and that kind of makes sense as it incorporates tried and tested scientific findings into its points program. It can be easily combined with any type of fad diet or dietary needs as it is not a diet itself.
The stock has rocketed up over the past couple of days on the news that Oprah Winfrey acquired 6.4 million shares for $46 million. In addition, Winfrey received options to buy an extra 3.5 million shares and she will sit on the board of the company. In the press release Winfrey said (emphasis mine):
I believe in the program so much I decided to invest in the company and partner in its evolution.
I have been interested in Weight Watchers for a long time because of its attractive asset light business model and its strong but underutilized brand. Meanwhile, the stock has been fairly cheap. However, the stock kept going down as the company has so far been unable to fend off the competition from apps and digital offerings that are more convenient than attending its signature meetings. The psychological element of accountability is an important part of the Weight Watchers program. So while competing apps may not necessarily be equally effective, it is the perception of effectiveness that sells in weight loss. People are attracted to shortcuts, and that is why there are so many scammy products on the market in this industry. One thing Weight Watchers has going for it is that it is distinct from fads and scammy tactics, and I think that is what ultimately won Winfrey over.
The reason the stock moved over 100% in one day on the news is because its price is much like a compressed spring. It has a major debt load: $2 billion against an EBITDA of $283 million and an asset light business model with lots of operating leverage. That means if the sales come (currently down a lot from previous highs; see chart below) its profitability explodes. Currently its debt trades below par, but if gross profits go up its debt load is no longer an issue either. I believe positive sales momentum will drive the share price in parabolic fashion for these reasons.
I have read much commentary from fellow bloggers and analysts, and I think the market is severely underestimating Winfrey’s ability to make a difference on this front. Note, the company acquired the right to use her image in marketing materials for the next five years. The WSJ reported
Ms. Winfrey is among the most powerful celebrities for influencing consumers’ purchase behavior, according to data from the Marketing Arm, an Omnicom Group-owned firm that ranks celebrity perception based on online polls. Ms. Winfrey ranks No. 4 out of 3,786 celebrities for influence, behind only Kate Middleton, Bill Gates and Taylor Swift.“She’s one of the very few that drives the needle for brands,” said Matt Delzell, managing director of the Marketing Arm’s celebrity-talent acquisition group.
Her appeal is strongest among women over the age of 40 in nonurban markets, said Allen Adamson, a branding expert and former chairman for North America at WPP PLC’s Landor Associates. “To some extent, what’s most important is to get the brand back on the radar,” he said. “If they can win Oprah’s core following that would be a good situation, and then tomorrow they can figure out how to go for younger consumers.”
Five years of Winfrey representing your brand is already an unbelievable win. Having her put $40 million-plus of her own money into the company in addition to having options gives her a huge incentive to make this a success. I will not go so far as to call the amount of leverage an advantage (this remains a crucial risk to an investment in Weight Watchers), but because the stock has characteristics of a coiled spring, moving sales can actually make a material difference, even to a billionaire like Winfrey. I think she genuinely believes in the company’s mission and its effectiveness but also think it helps this company can become a big success. She is sitting on the board, and I think it is likely she will be going the extra mile for Weight Watchers as she is effectively an owner instead of merely a paid endorser.
Winfrey is the largest private shareholder but there is another major shareholder called Artal Group which own 46% of the shares. This investment company has been a major factor in Weight Watchers management for many years. What is great about this relationship is that it adds somes stability. It is hard for activists or competitors to come in and cut up or buy up the company at a depressed valuation and I believe it is one of the reasons this has not happened. Although I believe the board represents shareholders well, the new CEO has only been at the helm since 2013, and it remains to be seen how he will navigate Weight Watchers through this difficult period. So far the market has not rewarded him for his efforts, although it was immediately recognized that bringing in Winfrey is a big win. The stock is not very popular with Gurus with most of them having reduced their holdings or even sold out. We will have to wait for another quarter of 13-Fs to see if any changed their minds.
This gets me to valuation and outlook which are difficult topics with Weight Watchers. First of all this stock can go to zero. Just one look at the debt load (the capital infusion by Winfrey helps reset the clock a few quarters back) will tell you that. In addition there are virtually no hard assets that could be sold to pay off the debt in a bankruptcy.
You may be inclined to believe there is little upside left as the shares made such a large move on the news, but if you look at Enterprise Value you will notice it did not move nearly as much. Effects on the share price are currently magnified because of the distorted debt/equity relationship but become more muted as the equity increases.
The big unknown is what sales are going to do after the third-most powerful celebrity for influencing consumers’ purchase behavior gets going. I read commentary of bloggers inquiring with friends and family about the brand Weight Watchers, which was not all that positive but we should not forget that is before Winfrey refreshed the brand. The currency of the brand will have improved significantly 12 months from now and probably by January already, which is the most important period for the company. If sales can go back to 2012 levels, we are looking at $540 million in EBITDA. In that scenario the company also has much better and credible prospects (if only because of its increased ability to deal with its debt) and is likely to be awarded a higher multiple. If it is awarded a 15x multiple (up from 10x currently) at a doubled EBITDA (requires roughly a 50% increase in sales) you are looking at an equity value of $5.6 billion. That would translate to an increase of the share price of 500%-plus. That is the coiled spring effect I am talking about. Of course this is not the only scenario possible. Perhaps Winfrey fails spectacularly in refreshing the brand. However, I am betting she will have some semblance of success and think the odds are with me.
