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Will Weight Watchers International Continue to Provide Fat Returns?

By Jamal Carnette, CFA - Apr 4, 2016 at 2:03PM

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Weight Watchers stock has dropped after the spike fueled by its partnership with Oprah Winfrey. Can she reignite the product's popularity.

Weight Watchers' new Beyond the Scale program is an attempt to broaden its brand proposition. Image Source: Weight Watchers International.

It's been a good year to be a Weight Watchers International (WW -2.30%) shareholder. After years of continued struggles, Weight Watchers' stock has posted one-year gains in excess of 100%. The biggest driver of the weight-loss community's recent appreciation was an announced partnership with Oprah Winfrey in which the media mogul became a member of the board of directors and took a 10% equity stake with additional options worth 5% of shares outstanding. Shares of the company rallied nearly 300% after the October 2015 announcement.

After the euphoria died down, so did the majority of the company's gains. The company's recently released full-year results confirm the company is continuing to struggle. Last year the company's top line shrank 21.3% from fiscal 2014, dropping from $1.48 billion to $1.16 billion. Backing out negative currency effects from a strengthening dollar, sales dropped 16.3%. What can Weight Watchers investors look forward to in 2016?

Oprah's costs and potential benefits
Per the agreement, Winfrey paid $43.2 million for 6.36 million shares, for a price of $6.79 per share. Unfortunately for her, if she were in it for the money, the shares have a two-year lockup period, preventing her from selling at the $25 highs the stock quickly ran up to and pocketing $115 million in gains. For current investors, there's a cost for Winfrey's partnership. It's easy to forget because of the tremendous gains post-announcement, but the company increased its share count to accommodate Winfrey's partnership, meaning earnings are now split among more shares. 

Additionally, Winfrey was granted a fully vested stock option for an additional 3.5 million shares. The expenses of both the stock issuance and option grants amounted to $13.6 million, with the average weighted shares increasing 4% over last year's total. Next year, expect diluted average shares outstanding to increase as the shares from Winfrey's transaction will have a full-year weighting. 

The question is: Will the issued equity and stock-option grants be worth it for investors. For now, the answer is an emphatic yes, with shares up significantly after the announcement, but valuations will be driven by operational performance in the long run. However, the company is signaling Winfrey is worth her cost: The partnership is directly credited for increased North American recruitments versus the same period of last year. The company is betting Winfrey brings more value to shareholders than the amount of shares the company is issuing for her her. However, I'm skeptical Winfrey can fix Weight Watchers' biggest problem.

Weight Watchers' biggest problem
The biggest problem with Weight Watchers is that a plethora of free calorie-tracking and activity-tracking apps has disrupted its traditional business model. This is due to Weight Watchers' overall efficacy problems. In 2014, a study from Duke Medicine found the average Weight Watchers recruit paid $377 per year and only lost five pounds. Although losing weight long term is very difficult regardless of the method employed, recruits are still paying for performance. Simply put, it will be hard for Winfrey to significantly sell an ineffective product when lower-cost options for those trying to reach the same goal are available. 

Additionally, fitness-tracking device makers like Fitbit (FIT) have expanded their product lines to provide comprehensive solutions like calorie and sleep tracking. The company has struggled in the wake of its IPO, but Fitbit is continuing to grow its top line and device sales at a healthy clip where Weight Watchers has produced four straight years of year-on-year revenue decreases.

Fitbit packages itself as a fitness solution where Weight Watchers has historically positioned itself on weight loss only. More recently, it seems Weight Watchers has gotten the memo and is trying to rebrand. Late last year, Weight Watchers introduced its Beyond the Scale program and a new FitBreak app in an attempt to broaden its appeal.

Oprah Winfrey can effectively market a great product, but may have problems bringing new recruits to the fold when there are lower-cost options available with the same levels of efficacy.


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