Weight Watchers International, Inc. (NYSE:WTW) has consistently disappointed investors over the past year. From poorly timed buybacks to disastrous investments in marketing Weight Watchers has managed to stumble at every hurdle. Critics have begun to question Weight Watchers’ business model in its entirety. However, the bear case ignores both the long-term strength of the brand, and the huge short-term potential to turnaround the business.
Weight Watchers’ Impenetrable Competitive Advantage
The majority of Weight Watchers International, Inc. (NYSE:WTW)’s revenue is achieved through fees paid to attend its meetings. Investors currently view the company’s reliance on this business as a weakness. Attendance at meetings has contracted consistently for a few years. In early 2012, declines intensified igniting a rapid fall in the stock from $80 to $44, where it still stands, a few months later. The company blames consumer confidence but analysts suggest a secular shift away from weight-loss meetings.
To anyone familiar with the effectiveness of the Weight Watchers’ program and its alternatives, this argument is incomprehensible. Regardless of what the stock is doing or how many people attend meetings, the fact remains that Weight Watchers International, Inc. (NYSE:WTW) has one of the most effective weight-loss programs out there.
In the UK, where I live, the program is often the first recommendation by doctors for patients seeking to lose weight. This kind of institutional support for a product, although it does not exist within all markets, is a testament to the effectiveness of the program. Attendance is unquestionably linked to consumer confidence, and perhaps certain sections of consumers within that, but medical research clearly suggests that Weight Watchers works.
In addition, though, Weight Watchers International, Inc. (NYSE:WTW) is more effective than other companies running weight-loss meetings. Meetings are clearly an effective way to lose weight but research has suggested that Weight Watchers’ customers lose even more weight. The reason is experience. On the ground, the point of interaction between the company and consumers are the meeting ambassadors.
The key to the success of meetings is the charisma of these ambassadors. As the incumbent operator of weight-loss meetings in many markets it seems likely that Weight Watchers has built up an unassailable stock of meeting ambassadors who have proved their ability through years of experience.
Why Free Apps Aren’t A Problem
In contrast, free rival apps such as MyFitnessPal lack the social credibility of Weight Watchers International, Inc. (NYSE:WTW), the research backing up their effectiveness, and the ability to really reach out to consumers in the way that meeting ambassadors surely do.
As Weight Watchers recently noted, most people don’t feel much investment in a free app. Consumers download it once, play with it, and then forget about it. Losing weight can be difficult and free apps don’t provide the same emotional and financial investment. Meetings are far more effective; consumers know they work.
Indeed, Weight Watchers is in far better position to exploit technology given the base it has in meetings. The company’s online strategy has been fairly ineffective but it still has an online presence that is multiples of anything achieved by any free apps. Online is the key source of growth for the company, recent signals that it will redirect attention here are very encouraging.
Marketing and Corporate Governance Problems
Most of the company’s criticism has, therefore, been largely an extrapolation of current trends. Unfortunately, Weight Watchers International, Inc. (NYSE:WTW) has proven to be quite adept in creating its own problems, too. The company’s marketing strategy, given the economic climate of the past year, was extremely aggressive. A willingness to take the long-term approach is to be encouraged but the attempt to win new demographics around were misguided. Pullbacks in this strategy show the company is willing to listen to investors.
Unfortunately, this same willingness wasn’t displayed in a buyback in early 2012. In short, the majority owners, Artal Group SA (which is advised by Invus), cashed out a huge amount of money and maintained their majority stake whilst loading the company with debt in exchange for shares that lost 50% of their value in a few months. Professional investors understandably felt betrayed by Artal’s actions.
However, Artal is in this for the long-term with an excellent record – as can be seen on Invus’ website – of turning companies around and solving problems. It supported the huge marketing program and provides stability in a volatile business. Moreover, it has maintained its stake, and while it’s been rather publicity-shy, it has made it clear that this is due to future growth opportunities. The buyback was certainly poorly executed but a recapitalization was the right decision given the lack of capex capacity at Weight Watchers. Though it has made serious mistakes, Artal’s ownership is undoubtedly a source of stability going forward.
Conclusion
Despite these challenges, it is difficult to understand the bear case for this company. At 10-11 times earnings, Weight Watchers International, Inc. (NYSE:WTW) represents great value. Its competitive advantage is founded in the long experience of meeting ambassadors; the company has reversed strategies that weren’t working; and it enjoys huge opportunities online that aren’t available to anyone else. Corporate governance is a worry, but Weight Watchers’ upside outweighs this risk at its current valuation.
Michael Russell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Lose Weight and Make Money! originally appeared on Fool.com and is written by Michael Russell.
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