Weight Watchers' (NYSE:WTW) stock price has been on a wild ride over the last few years and January could set the stage for even more volatility. After peaking near $85 per share in 2011, the stock price fell below $20 earlier this year and has since recovered to about $28.
All of this trouble is caused by falling attendance at Weight Watchers' famous meetings. Investors are concerned that the company's 50-year-old weight-loss program is losing customers to free diet apps and other weight-loss alternatives. Although free apps likely have an effect on meetings attendance, Weight Watchers' moat may eventually win out. Investors will get a big hint about Weight Watchers' long-term viability based on the company's performance in January 2015, a month when many people commit to losing weight for the new year.
Will Weight Watchers go the way of the dodo?
Before getting to why this January is so important for the company, let's take a look at what has caused Weight Watchers' current problems and how they might be resolved. Meeting attendance sharply declined over the last few years. It fell by 35% from 2011 to 2014. This has caused turmoil in the stock price as investors try to figure out if Weight Watchers' offline business can compete in the Internet Age.
It may sound strange that people who paid to attend meetings would blow them off, but that's exactly what is happening: So far in 2014, Weight Watchers has sold 38.6 million paid weeks in its North America meetings business, but only 18.1 million weeks -- or 47% -- were attended. That's about even with the first three quarters of 2013, but down considerably from 2009 -- when attendance topped 60% of paid weeks.
This trend could be due to the introduction of Monthly Pass, which provides a 20% to 34% discount for members who pay monthly instead of weekly. Introduced in 2006, Monthly Pass has grown to become responsible for more than three-fourths of Weight Watchers' meetings dues. Intuition says members who pay weekly are more likely to attend each week than members who pay monthly (monthly payers commit to four weeks, while weekly members only commit to the one they just paid for). Thus, Monthly Pass may be responsible for the growing gap between paid weeks and actual attendance. Weight Watchers also offers online services that don't require meeting attendance.
Members not going to meetings is problematic for two reasons. First, in-meeting product sales, which account for 12% of Weight Watchers' overall revenue, are at a five-year low. You can't sell products if people don't show up to meetings. Second, members who don't go to meetings they pay for are less likely to continue paying. Members who pay weekly are motivated to go to the meeting they just paid for, and going to the meeting makes them more likely to go to another meeting. Members who pay monthly and skip meetings may view dues as an unnecessary expense and skip the renewal.
A common explanation for Weight Watchers' declining meeting attendance centers around the proliferation of free and freemium diet apps. Fast-growing apps like MyFitnessPal and My Diet Coach track your diet and exercise while providing social reinforcement through online forums.
Those who need face-to-face encouragement and accountability may try apps and other online tools while they're new and trendy, but Weight Watchers' meetings business may ultimately be the best solution for those customers.
But even though Weight Watchers may be the best solution for its target audience, the company has failed to communicate this through its advertising and may be offering unattractive program packages. The Monthly Pass plan may need to be overhauled in order to encourage meeting attendance, and Weight Watchers Online may be better off as a supplement to the meetings business rather than as a stand-alone program that has little to offer compared with its free competitors.
Why January 2015 is important
January -- aka diet season -- is a crucial month for Weight Watchers. Millions of Americans make New Year's resolutions to shed weight and get healthy. Weight Watchers' paid weeks and attendance are always highest in the first quarter and decline throughout the year. That's why it's crucial that the company effectively advertise its offering and attract members from the free diet apps during January. Management needs to show that it has a solution to its problems -- and investors' patience may not last if 2015 is another lousy year.
Weight Watchers' North American paid weeks came in at just 13.3 million in Q1 2014, compared with 16.2 million in 2013. North American attendance registered at 6.6 million during the period, compared to 8.2 million in 2013. If Weight Watchers suffers another year of declining paid weeks, then current management may not have what it takes to turn the company around.
Investors will likely know the outcome of the January diet season before the first quarter ends. In February 2014 -- before 2013's 10-K had even been published -- management warned that the January recruitment effort had been brutal and that 2014 would be a tough year. A similar message -- good or bad -- could come again in February 2015. Investors should be prepared for a large movement in Weight Watchers' stock price based on the company's performance in January.
Ted Cooper owns shares of Weight Watchers International. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.