By all accounts, Weight Watchers International (NASDAQ:WW) has had a disappointing year. Its stock is down nearly 40% year-to-date after ineffective advertising and increased competition from NutriSystem (NASDAQ:NTRI) and Medifast (NYSE:MED) caused a sharp drop-off in enrollment.

The stock is priced for continued declines, but Weight Watchers is primed for a turnaround. If management is successful in its turnaround efforts, Weight Watchers may become the next hot stock.

The sources of Weight Watchers' problems
The first six weeks of each year are crucial to companies in the weight-loss industry. People are more likely to commit to a new diet at the beginning of the year than any other time. Therefore, it is absolutely crucial for companies to get their messaging right in January and February.

Jessica Simpson, who lost 50 pounds on the program, was Weight Watchers' most effective promoter in 2012. However, in late 2012, the media buzz changed from Simpson's incredible weight loss to news that she was pregnant again. Weight Watchers' momentum came to an abrupt halt right before the most important six weeks of the year.

Of course, Simpson's ill-timed pregnancy is not entirely to blame for the company's weak 2012. Then-CEO David Kirchhoff acknowledged that the company had not effectively communicated the benefits of its program. Instead, consumers found the program confusing and thought it required too much of a commitment.

So, problem No. 1 is ineffective advertising.

Problem No. 2 is the proliferation of free apps and activity monitors. MyFitnessPal is one of many free apps that offers a free alternative to premium weight-loss programs. MyFitnessPal creates a personalized diet plan based on users' personal profile and provides online discussion forums where members can meet and encourage one another.

Although the free apps are attracting many dieters -- MyFitnessPal has more than 40 million users  -- Weight Watchers' unmatched in-person support network gives it a competitive advantage. The key to effective weight loss is an effective support group -- and support is Weight Watchers' greatest strength.

The remedies to Weight Watchers' problems
Many free apps offer a level of personalizing that users crave and Weight Watchers does not offer. Weight Watchers needs to personalize its program and communicate its effectiveness in order to reverse falling enrollment rates.

The company is changing its advertising by resegmenting its target customers along different lines:

  1. dieters seeking structured, proven plans
  2. dieters seeking clear direction and personal interaction
  3. dieters with serious medical conditions such as heart disease and diabetes
  4. dieters seeking a quick fix

By tailoring its advertising to each segment, Weight Watchers can drive higher enrollment.

The company is personalizing its offering by:

  • offering different levels of intensity
  • enabling flexible scheduling for in-person meetings
  • allowing users to build their own weight-loss program
  • providing flexible pricing based on individualized plans
  • partnering with third parties to provide rewards for dieters who complete milestones

In addition, it is combining its in-person meetings, mobile app, and online tools into one integrated offering that no other company can match.

If Weight Watchers can successfully implement these changes to its program, it should have a relatively easy time appealing to customers. Among premium weight-loss programs, Weight Watchers has no significant challenger in terms of effectiveness.

Competing plans from NutriSystem and Medifast
Two companies that try to compete with Weight Watchers are NutriSystem(NASDAQ:NTRI) and Medifast(NYSE:MED). Nutrisystem offers a monthly meal plan that is shipped to customers. There are separate plans for men, women, and diabetics. In addition to the meal plan, customers must purchase fresh produce and vegetables from the grocery store. The cheapest plan costs $230 per month.

Medifast offers a 5&1 plan: six meals per day, five of them 100-calorie meals made by Medifast and one meal that customers purchase from the grocery store and make themselves. The Medifast starter kit costs $363.90 per month.

Weight Watchers does not ship meals to customers, but its customized points system makes shopping easy. The points system and support network differentiates Weight Watchers from its premium competitors. Its standard package costs $42.95 per month.

Recently, U.S. News ranked Weight Watchers as the No. 1 diet program for weight loss, the leading commercial diet plan, and the easiest-to-follow plan. NutriSystem and Medifast did not fare nearly as well.

In addition to premium plans, free apps will continue to compete with Weight Watchers on price, but none can match Weight Watchers' effectiveness. In time, the disparity in results will become clear and a more effective advertising campaign will drive traffic back to Weight Watchers.

Medium-term outlook
Weight Watchers' 2014 outlook is bleak. Enrollment is highest in the first quarter and declines each quarter after that. First-quarter 2013 enrollment grew by just 1.4%. As dieters dropped out over the course of the year, the total number of enrollments fell below the level at which the company started the year. As a result, Weight Watchers will start 2014 with a smaller enrollment base than it had at the beginning of 2013.

This means that it must improve its recruitment efforts just to match 2013's earnings, which are expected to be $3.85 to $3.95 per share. Management says 2014 revenue may decline 10% to 14% year-over-year. 

Contrarian bet
The stock is priced at just eight times 2013 earnings guidance. If 2014 earnings decline 12%, the stock still trades at less than 10 times forward earnings.

If Weight Watchers can revamp its advertising and integrate its web, mobile, and brick-and-mortar concepts into a personalized experience, then enrollments should pick up again. If it can pull off a turnaround, Weight Watchers may become the next hot stock.