Weight Watchers International, Inc. (WTW) Goes on a Crash Diet

Let’s see how these two companies, with their different business models targeting the same demographic, compare to Weight Watchers on a fundamental scale.

Source: Yahoo Finance

Weight Watchers is a fundamentally strong stock, cheaper than its industry peers with much higher profit margins. However, fundamentals should also be scaled against financial growth over the past five years to accurately gauge the company’s health. Let’s measure the top and bottom line growth of these companies.

WTW Revenue TTM data by YCharts

Although Weight Watchers has grown revenue 20.96% over the past five years, its diluted earnings per share has soared 61.48%. This was attributed to its strong operating margins, which have consistently stayed above 25% during that period.

Yet it’s painfully clear that Medifast is the major growth stock in this industry. Medifast’s smaller size also makes it a more exciting growth stock than Weight Watchers. Although Weight Watchers is still faring better than Nutrisystem, it’s clear that the company needs to spur growth soon.

Lastly, we need to check the company’s cash and debt levels. Medifast’s growth in this department simply leaves Weight Watchers and Nutrisystem in the dust, as seen in this next chart.

WTW Cash and Equivalents data by YCharts

To top off this mediocre cash growth, here are two other figures that might be hard to digest.

Weight Watchers only has $80.59 million in cash reserves, but is shouldering $2.415 billion in debt — not exactly much breathing room for new marketing initiatives to attract new subscribers.

The Bottom Line

Weight Watchers’ rising overhead costs, declining subscriptions and increased advertising budgets all point to declining free cash flow around the corner. Those nasty problems make its robust fourth quarter earnings and revenue irrelevant, and caused the company to lose too much market weight. If Weight Watchers can scale back on its face-to-face services and capitalize on the growth in its fully online services, then it may be able to pack on the pounds again.

The article Weight Watchers Goes on a Crash Diet originally appeared on Fool.com and is written by Leo Sun.

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