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NutriSystem Inc. (NTRI), Weight Watchers International, Inc. (WTW): A Smartphone-Induced Crash Diet Crushed This Company’s Bottom Line

When investors think of companies taken down by the rise of smartphones and tablets, they generally think about PC manufacturers like Hewlett-Packard and big box retailers like Best Buy.

Yet, last week, Weight Watchers International, Inc. (NYSE:WTW) became the latest casualty of the mobile revolution, blaming the rise of mobile tech as a major contributor to its crumbling bottom line. On Aug. 2, the company, best known for its weight loss programs, warned that its recruitment trends and earnings will deteriorate throughout the rest of the year, since the rising popularity of free fitness apps and other electronic monitors were rendering its core business obsolete.

To top of that bad news, CEO David Kirchhoff also tendered his resignation. Investors dumped the stock in a hurry, and shares plunged nearly 20% after the announcement, dropping close to the 52-week low.

A second-quarter slide

Prior to that big plunge, Weight Watchers International, Inc. (NYSE:WTW) reported earnings of $1.36 per share, a 2.21% increase from the prior year quarter, coming up $0.03 short of analysts’ expectations. Revenue declined 4% to $465.1 million.

The company’s newly appointed CEO, Jim Chambers, acknowledged that “current business conditions are challenging” and that the company will “start 2014 with fewer active members and therefore a lower earnings base.” In addition, CFO Nick Hodgkin blamed a “sudden explosion of interest” in free fitness apps and activity monitors for crushing Weight Watchers International, Inc. (NYSE:WTW)’ core business during the quarter.

Nothing ‘sudden’ about that explosion

Yet, shrewd investors, who have been watching the steadily intertwining relationship between the fitness and mobile tech industries, should realize that there’s nothing “sudden” about that explosion at all.

Apple Inc. (NASDAQ:AAPL) and NIKE, Inc. (NYSE:NKE) kicked off the revolution in activity tracking tech with the Nike+ FuelBand in January 2012. The FuelBand is a fitness bracelet that synchronizes to an iOS app on the iPhone that can be used to track daily physical activity, such as steps taken daily and the amount of calories burned. The app tracks performance over time, fueling a game-like experience in personal fitness, and positive progress is rewarded with NikeFuel points, which can be used to unlock achievements. The app also allows achievements to be shared across social networks like Facebook and Twitter, which encourages interaction and competition with friends across the Internet.

In fiscal 2012, NIKE, Inc. (NYSE:NKE)’s equipment division reported an 18% year-on-year increase in earnings as a direct result of FuelBand’s popularity. This paved the way for other competitors, such as FitBit, Motorola MOTOACTV, and Jawbone Up Rev B to enter the market.

In addition to these fitness bracelets and apps, an increasing number of free fitness tracking apps have also flooded the market. The Apple Inc. (NASDAQ:AAPL) App Store now has over 10,000 mobile fitness apps, such as heart rate monitors, calorie counters, and instructional exercise apps — many of which can be downloaded for free.

Weight Watchers International, Inc. (NYSE:WTW) also has apps for iOS and Android, but they can only be accessed by the company’s paid members, which severely limits their appeal.

Stuck in the past

Unfortunately, Weight Watchers International, Inc. (NYSE:WTW) is still stuck in its old business model of paid memberships. Customers purchase membership plans, which include frozen meal deliveries and fitness plans, and then choose to meet Weight Watcher consultants in person or through an online program.

In the past, this idea worked fairly well as an “all-in-one” solution to weight management. However, times have changed quickly, and increasingly connected individuals now favor the sense of self-accomplishment and competition that comes from Nike’s FuelBand and its similar products.

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