Jean Nidetch started Weight Watchers (WTW, Financial) out of her home in Queens, New York, in May of 1963. Once a week, she invited friends over to talk about how best to lose weight. Over 50 years later, the company reaches millions of people with proven dietary plans that start at $3.07 a week.
Short interest in Weight Watchers is 75%. That is higher than Sears Holdings (SHLD, Financial), which is on many analysts, hedge funds and private equity fund’s bankruptcy lists. Like Sears, Weight Watchers carries a lot of debt - over $2 billion with just $99 million in cash, and is majority owned by a holding company, Artal SA, based in Luxembourg. Unlike Sears however, Weight Watchers is profitable with earnings of $43 million on $1.16 billion in sales.
U.S. News & World Report ranks the company first in 4 out of 9 categories for 2017 Best Diets. In addition, Oprah Winfrey holds a 10% stake (6.3 million shares) in the company. She disclosed late last year her weight was down more than 40 pounds since beginning Weight Watchers.Since then, the stock is up 25%.
Thanks to Oprah, the company has a resurgence of influence that it needs to take advantage of and build upon. It is entrenched in the women’s health segment of fitness. With a new partnership with Apple (AAPL, Financial) that puts it on the new Apple Watch and higher monthly subscription plans, the company could be getting back to massive profitability - if it can execute. This is a great step forward considering the move toward wearable technology and subscription plans. The company is also likely to see success among the demographic of aging women who have more money than their children and are outliving men. In other words, fitness and diet are going to be a big part of their budgets.
Does this mean Weight Watchers has a durable competitive advantage? Not yet. If the company can use Winfrey’s ownership stake to continue wooing spokespeople and striking partnerships, it could build one over time. In the meantime, Weight Watchers' management will need to make good decisions if it wants to survive and grow. That means finding a new CEO since the business is currently being run by an interim group consisting of Chief Financial Officer Nicholas Hotchkin, board member Christopher Sobecki and new director Thilo Semmelbauer (who was the chief operating officer until 2008).
In the meantime, what to look for is membership gains in the next earnings release, which will translate into earnings during the subsequent quarters. This is the time to buy if you think a turnaround is possible as the year’s new enrollments generally occur during the first fiscal quarter - especially the month after the new year - coinciding with “resolutions.”
From a numbers standpoint, the company gets a mixed review. Sales and income are both down, but so are its margins. Thankfully, management has pared down some of the outstanding shares in the event the company’s operating profit can get back over 20%. At that level, the EPS could be in the $2 per share range and I think the price would easily be above $25.
The key for 2017 is tied to both new subscribers and the massive amount of short sellers in the stock, totaling 26% of outstanding shares. If the company starts to gain traction, the sellers, who have been pushing the stock lower since it was in the 80s, will be covering, creating a quick, potentially substantial rise in price.
Few guru investors have bought in yet, but if the company can increase subscribers while returning margins to historical levels, then this stock is a great buy right now. So, is Oprah making a mistake? It is too early to tell. I believe she has made a firm committment, Tony Robbins-style, to work with the company and help navigate it into the future.
Disclosure: I do not hold a position in any of the stocks discussed in this article.
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