Weight Watchers (WTW) has attracted a lot of attention in the past 6 months. Here is why:
The stock price has declined from the $45 range to the $37 range, to $30, to $20. And, if you look further back, you will see the 2011 and early 2012 peak of $80. Terrible!
What is so great about WTW?
- Operates on virtually zero capital.
- Has mindshare, thanks to its 50-year history and generous marketing spend.
- A weight loss solution that works – proven in scientific trials and through the test of time.
- Repurchased nearly half its shares.
Why then the 75% price drop?
- Declining attendance
- Exhausted online growth
- Free apps
- 4.5x debt/EBITDA
- Ghastly 2014 guidance
What does the future of weight loss look like?
Apps have stemmed the growth of WTW’s online business – it’s growth engine. At the same time, meetings are not only not growing but steadily declining, partly a consequence of the cannibalization from the online business. So, people are not only moving from meetings to online alternatives, but also from WTW online to apps.
What is the problem of building in the group support element in an app?
The app is already tracking how you diet and exercise. Using the app, you are able to share these stats with other people. People can react to what you post. This way you are getting both the tracking and the social reinforcement. It is not like live communication, but try telling this to the billion+ Facebook users.
And what is the price of this?
Free or close to it. It is true that commercial weight loss programs have always competed against the free alternative of making your own diet and exercising at home. The big difference is that now we have an easy way to get most of the benefits of a commercial weight loss program at a fraction of the cost.
Mobile devices (phones, tablets, wearable trackers) can keep track of our progress. There are apps that give you the nutritional content of any product and they will get better. This will be the death of WTW’s Points, PointPlus, 360°, and whatever their next calorie counting program may be. Then, there is one more step for the same app, or another one, to recommend an optimal diet in view of the current status and goal of the user.
How is WTW better then?
Recently, I had a Twitter discussion with @oddballstocks and @HardcoreValue about the merit of the “calories in, calories out” method to weight loss. I don’t agree with the purely quantitative approach (one reason why).
However, with a minor modification (made easy by apps) regarding the quality of the food (protein-carb-fat-fiber content), the quantitative approach is great and easy to follow. And following is the major problem with all diets. People are on diets that start next Monday, perpetually, because usually the restrictions are too onerous and the temptation to big. And once you break your promise to yourself, even for a single slice of pizza, you stop believing that you can stick to your plan. It takes time to build this confidence – by sticking to your word time after time – but it’s real easy to break it.
WTW makes it easier because there are no forbidden foods. As long as you are within your allotted points, you can allow yourself that slice of pizza and not break your promise to stick to the diet. This is a unique advantage WTW was over both diets with “restricted” lists and diets relying on special supplements (meal replacements). But, it is not an advantage over apps.
The other problem with motivating yourself to stick to a diet is that benefits are slow to become apparent. There is a long period where nothing happens. Unless you keep at it for weeks and months on end, no visible effect is likely to be produced. This can be pretty disheartening.
This is the strongest point of the meetings business. In a meeting there are other people going through the same and there is an experienced leader that knows a lot about what you are going through. These leaders, especially if they are good salesmen, provide the motivational stories and other encouragement to keep the group going. Online leaders in app communities may challenge this advantage to some extent, but they cannot deliver a charismatic and convincing leader in the flesh.
Another important point in favor of WTW is scale. Thanks to this WTW has more resources to gain more mindshare than any of its competitors. And, it already has a serious head start – being the longest on the market and having some scientific backing. WTW is likely top-of-the-list for people looking to lose weight and if not for them then maybe for their friends and their doctors. No app has the resources of WTW to spend on marketing and funding scientific studies. But, great apps can go viral. This can generate a lot of positive momentum, especially if it works well for a good number of people, which will inevitably lead to comparisons with WTW. Long-term, there can be surprising shift in approaches to weight loss.
Last but not least, WTW may soon have the blessing of some governments. Nothing sure here, but if Obamacare in the US and the NHS in the UK decide to become more serious about obesity as a major cause of more serious and costly health issues and delegate this problem to commercial weight loss providers, WTW will be at the top of their lists thanks to its mindshare and scientific backing. Apps are too new to play in this game unless they are backed by a company like WTW.
To sum it up:
- No forbidden foods makes the program easier to follow than other programs. But, it is not an advantage over apps.
- Charismatic leaders are the best way to motivate people to stick to the program. Can be a big advantage over apps, but nothing sure – depends on a person.
- Mindshare and scientific backing make WTW’s program a first choice for many. Strong, but not unassailable, advantage over apps.
- Possible government (+ insurers and employers) backing. Another distinct advantage over apps, if it happens.
The brand and the meeting leaders are the moat of WTW. It takes a long time to build a brand. With its big budget and celebrity endorsements, nobody is likely to challenge the WW brand. Meeting leaders are harder to judge. It depends on the individual doing the job. An online community leader can, in many respects, do as good a job, and why not better, as a WW meeting leader. So, I will go with WTW’s brand as its moat and allow for the possibility to let crocodiles inside, if the leaders are well selected and prepared.
The rest can be challenged by apps. While some apps are fads, apps as a whole are not. They are changing the way we do things.
WW-ers, who were in for accountability, can now get it easily, anytime from apps. WW-ers, who were in for social reinforcement, can now get (some of) it through the social networks integrated in the app.
Apps are directly eating into part of WTW’s market. How large a part this will turn out to be we don’t know yet.
On the positive side, this slide from the investor presentation shows that commercial plans are used by only 5% of dieters. This suggests that there is a small portion of the people who want to lose weight who are willing to pay to have their hand held through the process.
The big question that this evokes in me is: What was this percentage 5 and 10 years ago?
Is there a steady 5% core of dieters who prefer a commercial plan? Or is this a shrinking segment? Whose share did apps eat – the DYI-ers’ or the WW-ers’?
Inverted Guidance
Here I have played with the numbers a little in an attempt to make sense of the guidance. This is a link to the sheet in case you want to copy it and play with it. I start out with a normalized structure of the income statement. Then, I use the 2014 EPS guidance work back to the top line. Finally, I use more realistic numbers for marketing and G&A to come up with a likely scenario for 2014.
The very low guidance is likely management playing it safe in case there are large write-offs of intangibles and less cost savings than expected.
In any case, everybody already knows 2014 will be bad. I am looking forward to see the first quarter 10-Q, especially the January meeting and online numbers. Is WTW’s business stabilizing or eroding further?
Related links:
- For more discussion, there is a huge thread at cornerofberkshireandfairfax.ca
- November 6, 2013 Investor Day Presentation
- December 28, 2013 10-K
- Gannon & Hoang’s extensive notes
- Gannon’s initial WTW post
- Punch Card’s bear thesis
- For German readers, Stefan Mohr’s WTW post
Disclosure: Long WTW