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WTW AT A GLANCE

P/E ► 9.74 AVG EV/EBITDA ► 2.81 AVG ROA ► 26.1% VERY HIGH Debt to Equity ► -2.37   Current Ratio ► 0.389 VERY LOW Interest Coverage Ratio ► 14.8 AVG

 

 

 

 

 

 

Weight Watchers International, Inc. is a global company that offers a range of products and services related to dieting, weight loss, and weight maintenance.^[1] Weight Watchers' presence in over 25 countries worldwide has made it the top global provider of weight loss services, which include meeting services, food products, recipes, and publications that brought the company over $4 billion in sales in 2007.^[1] The obesity trend in the United States and the world at large has greatly expanded the weight loss industry as a whole. With only Colorado reporting an obesity rate under 20% in 2007,^[2] it is little wonder that the weight loss industry in the United States alone generated over $58 billion in 2006.^[3] By the end of 2007, WeightWatchers.com had almost 584,000 subscribers for its two-year life span.^[1] Much of the company's success, however, is predicated on the willingness of consumers to spend on losing weight - a willingness which tends to decrease during recessions, like the one that started in late 2007. Furthermore, medical weight loss alternatives, fad diets, economic downturns, and competition from companies such as NutriSystem (NTRI) , Nestle (NSRGY) (who owns Jenny Craig and Lean Cuisine) and Kraft Foods (KFT) (who provide South Beach products) also pose a threat to WTW's success.

Company Overview

Weight Watchers Membership Growth by Region^[4]

Weight Watchers Sales by Segment (Percent)^[4]

Weight Watchers Business by Region(Percent)^[1]

Weight Watchers is the number one international provider of weight management services with sales in over 25 countries. In 2007, its revenue exceeded $4 billion from meeting fees, product sales, internet revenues, and franchising royalties.^[1] The growing trend of obesity , accompanied by greater health concerns and wealth consciousness, has enriched and expanded the weight management industry as a whole, which pulls in about $58 billion in the US alone.^[3]

• WTW has taken advantage of this trend and the internet to focus on drawing in long-term customers as subscribers, resulting in a revenue increase from $700 million to over $2 billion between 2001 and 2005, with almost 80% of U.S. Internet content revenue coming from subscriptions versus individual sales.^[1]
• By the end of 2007, after only 2 years online, the company's website boasted a subscriber base of 584,000.^[1]
• At the same time, the company's U.S. subscriber base only increased by 3.1% between 2003 and 2007, while its membership in the UK dropped 7% and its membership in continental Europe rose a mere 1%. Since 63% of the company's 2007 revenues came from membership fees, these trends have the potential to adversely effect on earnings as WTW moves forward.^[1]
• The weight loss industry as a whole is generally sensitive to economic recessions, since fewer people are willing to buy dieting supplies. WTW's high brand awareness, suscriber database, and incorporation with other food service companies like Applebee's, Russell Stover, and Schreiber Foods, however, have kept it safer than many of its counterparts from economy-wide changes, as reflected by its consistent revenue increases over the past 4 years.^[5]
• On the other hand, its prices are more likely to dip in response to fad diets. One such example was the popularity of the low carb diet, which began in late 2003. This fad actually caused greater revenue declines for WTW than the economic aftermath of Hurricane Katrina did in 2005.^[4]
• The company has also had some difficulties with its international marketing strategies, and its 2005 marketing bust in the UK left international meeting subscriptions growth flat in 2005.^[5] It has continued working on international marketing but, with the majority of its subscribers coming from the United States, has yet to make significant increases in international subscriptions.^[5]

Business Segments

Weight Watchers' revenues come from four major sources: meeting fees through its officially licensed support groups, product sales (recipe books, Points calculators, pre-packaged meals, etc.), internet revenues, and licensing and franchise royalties. They comprised 63%, 23%, 10.3%, and 6.7% of its 2007 revenue, respectively.

Meeting Fees (63%): WTW's largest revenue source is its meeting fees, which members pay in order to attend weekly support and goal-setting meetings with other members and a "Leader."^[6] This fees vary according to the meeting location and financing options available;^[6] however, overall membership figures are the most obvious trend to look to when considering whether or not these revenues will continue to increase. The number of WTW subscribers in the United States increased 3.1% between 2003 and 2007, mostly due to a 2.3% drop in 2004; the number of subscribers in the U.K. dropped 7%; and, the number of subscribers in continental Europe rose by only 1%.^[1] Weight Watchers attributed the slackening in membership in the United States in 2004 to the popularity of alternative low carbohydrate diets that gained major media exposure, beginning in 2003.^[1] Though meeting attendance has risen around 6% a year since 2004, the potential for other detractors from WTW's subscriber base to arise remains.^[1] The company has also had issues with its marketing schemes internationally, especially in the UK, where a failed diet innovation scheme in 2005 led to the drop-off in meetings attendance between 2004 and 2006.^[5] Only in 2007 did meeting attendance in the UK post a gain, albeit one of only 3%.^[4] Still, WTW's meeting fees increased by 45% between 2003 and 2007, rising from $607.2 million to $880.7 million, in spite of these setbacks.^[4]

Product Sales (23%): The company's second largest source of revenues is product sales. WTW sells products like pre-packaged meals, bars, snacks, cookbooks, and POINTS calculators and POINTS value guides (both related to the POINTS system that WTW members use to gauge food intake).^[4] The majority of these product sales are made to members of the company's weekly meeting system and its franchises.^[4] As a result, the success of WTW's product sales is largely based on the success of its efforts to increase its meeting and franchise membership. Revenues from product sales increased steadily along with membership fees between 2003 and 2007, rising 22% from $276.8 million to $337.7 million.^[4] Product sales did stay flat between 2003 and 2004, however, likely owing to the low-carb diet trend - a revelatory figure when considering the risks posed to WTW's product revenue by fad diets and competitors.^[4]

Internet Revenues (10.3%): WTW has taken advantage of the obesity trend in the United States to focus on drawing in long-term customers as subscribers, resulting in a revenue increase from $700 million to over $2 billion between 2001 and 2005, with almost 80% of U.S. Internet content revenue coming from subscriptions versus individual sales.^[1] By the end of 2007, after only 2 years online, the company's website boasted a subscriber base of 584,000.^[1] The company's website draws income from the sale of subscriptions and advertising space.^[1] Since it began making revenue from its website in 2004, Weight Watchers' internet revenues have increased 133% from $65 million to $151.6 million.^[4] The company's internet revenues are subject to the same trends and forces as its other revenue sources, including fad diets, competition from other weight loss services companies, and economic downturns. Still, WTW's international and internet presence have driven a significant revenue increase since 2001.

Licensing & Franchise Royalties (6.7%): WTW licenses its brand and other intellectual property for certain foods and products to franchises and cooperative companies. In addition, the company draws revenue from royalty fees paid by its franchises (typically 10% of their meeting fee revenues), while also earning income from magazines and third-party advertisements in its publications.^[4] Weight Watchers has established partnerships with a number of companies in related fields. Some examples of WTC partners in the United States alone include:

Licensing and royalty fees dropped between 2003 and 2004 as a result of the low-card diet trend; however, they recovered and rose a steady 73% between the end of 2004 and 2007.^[4]

Key Trends and Forces

U.S. economic fluctuations exert an influence on consumers' discretionary spending on weight management

Economic recessions, like that which struck the U.S. economy in 2008, tend to have an adverse affect on the weight loss industry. As consumers lose discretionary funds, luxuries like weight loss programs and dieting products lose their priority.^[7] As WTW CEO David Kirchoff noted in November of 2008, as the U.S. economic recession got underway: "when consumers are facing a sudden crisis over their savings, livelihood, and standard of living, the natural inclination is to comfort eat, not to lose weight. From an historical perspective, we saw similar behavior in the aftermath of 9/11 and Hurricane Katrina. The impact those two events had on our business lasted about six and three weeks respectively, but we think this current crisis will last longer."^[8] Stock prices have reflected this since September, 2008, when WTW prices dropped a 46.74%.^[9] Though this decrease may be attributable to other factors, such as competition from other diet programs, like Atkins and NutriSystem (NTRI), and difficulties with new marketing initiatives,^[8] the existence of these factors before the recession implies that the recession carries the brunt of the responsibility for WTW's recent losses in stock price.

Weight Watchers liabilities, including long-term debt from the buyout of Heinz, outstrip assets

A 2001 Business Week article by Robert Barker pointed out that, in spite of the $1.5 billion that WTW made in retail sales that year, the company's weak capital structure outstripped its assets.^[10] WTW was originally owned by H.J. Heinz Company (HNZ), who sold control of the company to a private Luxembourg firm called Artal Group in 1999 in a leveraged buyout. "Artal bought from Heinz 94% of Weight Watchers' equity," Barker notes. "In return, Heinz got preferred stock and cash, most of it borrowed by Weight Watchers itself."^[10] Other consequences of the buyout were the fact that Heinz retains a perpetual, royalty-free right to use the Weight Watchers' brand for its products, just like other franchisees, which means that WTW only brings in a fraction of the revenue that their brand generates overall.<busweekbarker/> For instance, in 2001, the company brought in $600 million of the $1.5 billion that its brand drew in revenue for the year.<busweekbarker/> This trend has since continued since, and the company has fallen into further debt throughout the next 8 years, with debt increasing by over $1.15 billion and liabilities by $1.441 billion^[8] The company has repurchased stock and faces repayments that will prove difficult to fulfill if earnings stay stagnant.^[8] How did this happen? Alan Brochstein noted in a 2009 article for Seeking Alpha that "The company repurchased stock, as you can see in the huge reduction in the number of shares outstanding. Guess who sold the bulk of it? Yes, Artal Group, though the public had a chance to participate as well a couple of years ago. For those who have held onto the stock, the company finds itself in a new world, where there is little money available to borrow to repurchase stock - game over. Going forward, the company will face some repayments in 2009 ($165mm) and 2010 ($215mm) that are possibly manageable, but the burden in 2011 is extreme at $490mm."<sadebtdiet/>

The obesity trend in the United States and abroad boosts demand for Weight Watchers' products

The obesity trend in the United States and the world at large has greatly expanded the weight loss industry as a whole. With only Colorado reporting an obesity rate under 20% in 2007,^[2] it is little wonder that the weight loss industry in the United States alone generated over $58 billion in 2008.^[1] Weight Watchers has taken advantage of this trend and the internet to focus on drawing in longterm customers as subscribers, resulting in a revenue increase from $700 million to over $2 billion between 2001 and 2005, with almost 80% of U.S. Internet content revenue coming from subscriptions versus individual sales.^[1] By the end of 2007, WeightWatchers.com had almost 584,000 subscribers.^[1]

Fad diets, competing weight loss services companies, and medical offerings provide alternatives to WTW's services and hurt its sales growth

WTW faces a number of competitors in the weight loss field, which include: self-help weight management regimens and other self-help weight management products and publications such as books, tapes and magazines; commercial weight management programs; Internet weight management approaches; dietary supplements and meal replacement products; weight management services administered by doctors, nutritionists and dieticians; surgical procedures; the pharmaceutical industry; government agencies and non-profit groups that offer weight management services; and fitness centers.^[7] Medical developments, such as the 2007 weight loss drug Alli, have caused major dips in the weight loss market.^[11]

WTW's success abroad is directly related to the success of its marketing and product innovations there

Between 2003 and 2007; the number of Weight Watchers subscribers in the U.K. dropped 7% and, the number of subscribers in continental Europe increased by only 1%.^[1] The company has had issues with its marketing schemes internationally, especially in the UK, where a failed diet innovation scheme in 2005 led to the current drop-off in meetings attendance.^[5] Though the majority of WTW's subscribers come from the United States, a sizable 40% of its revenue comes from other parts of the world.^[4] Thus, Weight Watchers' efforts to maintain and increase its international subscriber base will play a sizable role in determining its future growth.

Competition

Weight Watchers is the world's largest provider of weight loss and weight management products, and the diversity of its products and services has brought it competition, both direct and indirect, from a variety of sources.^[1] Though WTW faces indirect competition from trend diets and prescription/non-prescription weight loss supplements, its main competitors are Nestle (NSRGY), the company that owns the Jenny Craig and Lean Cuisine brands, NutriSystem (NTRI), and LA Weight Loss.

Jenny Craig: Nestle (NSRGY)

Jenny Craig is a weight loss and nutrition services provider, currently owned by Nestle (NSRGY). It has posted consistently increasing profits since 2001 and had a 2006 market share of 0.8%.^[12]

NutriSystem (NTRI)

NutriSystem (NTRI) brought in 1.1% of the United States weight loss services market in 2006 due to a massive earnings increase between 2004 and 2006.^[13] It is WTW's leading competitor, though its earnings since 2001 have been less consistent than Weight Watchers' and its elevation to the second largest weight loss services provider in the United States market only occurred in 2006.^[14]

LA Weight Loss

LA Weight Loss offers a website similar to WTW's that seeks to draw in subscribers to the LA Weight Loss and dieting program, which operates out of centers around the country. The company's earnings have increased since 2001; however, its market share lags behind Weight Watchers' at only 0.3%.^[15]

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18} | WTW 2008 10k - Item 1: Business
2. ↑ ^{2.0 2.1} | Centers for Disease Control and Prevention Obesity Report 2007
3. ↑ ^{3.0 3.1} [1]
4. ↑ ^{4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 4.12 4.13}
5. ↑ ^{5.0 5.1 5.2 5.3 5.4}
6. ↑ ^{6.0 6.1} | Weight Watchers.com, "How Weight Watchers Works - Meetings - What happens at a meeting?"
7. ↑ ^{7.0 7.1} | WTW 2008 10k, Item 1A: Risk Factors
8. ↑ ^{8.0 8.1 8.2 8.3} | Seeking Alpha, "Weight Watchers International: Time for the Company to Go on a Debt Diet?" January 11, 2009
9. ↑ | Google Finance Chart: WTW
10. ↑ ^{10.0 10.1} | Business Week, "Weight Watchers: A Little Debt-Heavy?" December 10, 2001
11. ↑ | Nutraingredients-usa.com, "Alli and the Weight Loss Drug Market"
12. ↑ Source: CIBC World Markets, WTW, March 21, 2007, p.9
13. ↑ CIBC World Markets, NTRI, March 21, 2007, p.29
14. ↑ CIBC World Markets, NTRI, March 21, 2007, p.29
15. ↑ Source: CIBC World Markets, WTW, March 21, 2007, p.9
16. ↑ Source: CIBC World Markets, WTW, March 21, 2007, p.9