Sell Weight Watchers Now. It’s a Value Trap.


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Written by

Jae Jun

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I lost 40% on Weight Watchers.

That doesn’t tell you anything about the investment. But taking a 40% loss is tough in any situation and I know that a lot of value investors own it.

But here’s why I took the blow to the gut and why you should consider selling Weight Watchers too.

I Sucker Punched Myself Into the Value Story

I Got Sucker Punched

The value story is short, simple and compelling.

  • Well known brand
  • Credible studies and proven results
  • Not a quick scam or fad
  • Currently in a marketing down cycle
  • Free mobile apps are the true fad

If you dig deeper into the value side, it’s really good. Comes across as a once in a decade opportunity. But I’m against it now.

The Moat and Brand Value isn’t Durable

Brands Don’t Know Much About Themselves

Weight Watchers is supposed to have a strong and durable brand moat but I don’t buy it.

Name a soda.

Coke.

Name a weight loss program.

umm…

Coca Cola is a moat and brand. Unfortunately, Weight Watchers isn’t as wide or deep as you think.

Even if Weight Watchers has a strong within the industry, it doesn’t stop companies from going bankrupt.

Blockbuster was a brand.

Kodak was a brand.

Hotmail was a brand.

My point? The Weight Watchers brand is easily erodible.

The Younger Generation Doesn’t Care or Have any Loyalty to Weight Watchers

Can You Guess Weight Watchers Target Demographic?

If you look up weight loss forums or other weight loss programs online, it’s clear that younger folks are more comfortable with online forums. People post their underwear photo for the whole world to see but won’t attend a live group.

The very act of meeting a bunch of strangers and discussing weight loss and life style changes is not something a person in their 20’s or 30’s is interested in.

People are just less willing to open up and interact with other humans. When I attend events or social gatherings, I see people build a “I’m not interested in socializing” barrier. They stand in a corner or lean against a wall and stare at their phone.

Why?

Because it’s easy and “safe”.

I’ve done it. You’ve done it. Everyone has done it.

The Weight Watchers support group is a broken model the longer it goes.

The Dying Trend of Group Meetings

I admit that the meetings are extremely important in achieving weight loss.

It works.

But the program isn’t the problem. The program is good.

The mistake is to believe that the group meeting format will continue to be the heart and soul of Weight Watchers.

Unfortunately, that was 3 fiscal years ago when the Points Program was launched in Dec 2010. Problem is, the meeting fees declined immediately after one year. Not to mention that the Points Program was delayed by several years to get it perfect.

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Consecutive years of revenue declines immediately following a new program launch is a big red flag.

I don’t see how the group meetings can continue to be the cornerstone strategy for Weight Watchers.

Weight Watches Value Trap Revenues | Click to Enlarge

As meeting enrollments go down, in-meeting product sales also go down. Licensing has been flat and will likely remain flat. How many restaurants or ice creams will license the Weight Watchers brand?

That means the only revenue stream with growth potential is the online business.

But with management focusing on reducing costs and improving inefficiencies, the chance of being left behind on the technological front is very real.

*cough* Blockbuster Video *cough*

Weight Watchers is NOT a Lifestyle Change Company

A huge mistake is how value investors view Weight Watchers as a lifestyle changing company.

I also fail to see how this adds value to Weight Watchers as an investment opportunity, but I see it come up all the time.

The truth?

Weight Watchers is a weight loss program pure and simple.

Overweight people don’t want to hear lectures about changing habits and eating healthier.

Weight Watchers knows it. That’s why all of their ads focus on how much weight Jessica Simpson and Jennifer Hudson lost.

Here’s something to think about.

Two friends were talking and one was smoking.

Non Smoking Friend: If you put the money you spend on cigarettes into an index fund and let it compound at 8-10% you’d be a millionaire in 10 years.

Smoker: You don’t smoke, so why aren’t you a millionaire yet?

Changing people’s behavior is one of the hardest things to do and that’s why apps, diet plans, pills, fads and scams will continue to do so well and keep eating away at Weight Watchers.

There is so much noise and crap in the weight loss industry that it’s extremely difficult for Weight Watchers to penetrate the market.

From the looks of things, it’s only going to get noisier.

The BIGGEST Mistake is Believing that Free Apps are Competitors

Weight Loss Apps are Just the Beginning

Free apps are NOT the competitors.

It’s the start of a massive trend as new companies also see the market potential and start crossing boundaries into the fitness and weight loss category.

Nike, Apple, Samsung, mobile apps that sync with web apps and the huge shift towards wearables.

I’m not talking about free or 99c apps here.

There are huge players invading the weight loss territory. Look at what mint.com did to the personal finance space. It’s getting easier to track your goals and manage weight with the help of gadgets.

Nike uses sensors and partnered up with Microsoft to offer a Kinect weight loss training game.

Game on Weight Watchers.

Results Using the Nike+ Kinect Weight Loss Game

Defense isn’t going to cut it for Weight Watchers when competitors are innovating like crazy.

Everybody knows how big of a market this is.

Weight Watchers needs a big shift in strategic direction instead of focusing on cost cutting.

Weight Watchers is a Dinosaur and a Value Trap

Ironically, Weight Watchers it the big, fat, stubborn incumbent in the weight loss industry.

I just wrote 1,000 words explaining two words. Value Trap.

Weight Watchers is working with a broken model. They need to start innovating, making itself known and getting consumers excited. Otherwise, expect margins, FCF and memberships to continue falling to the point where intrinsic value does become $20 per share.

Value investors are mistaking the width of the moat.

It isn’t as wide as it seems.

Free apps aren’t the problem. It’s just the start of its problems.

Have Your Say

Do you own WTW? Let me know what you think and why you are holding.

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14 responses to “Sell Weight Watchers Now. It’s a Value Trap.”

  1. Guest says:

    Not to mention it’s got a lot of debt, which was incurred in order to buy back shares at a very high price. However, the high short interest/small free float suggest that any good news could trigger a nice pop in the shares.

  2. sb says:

    WTW has a model of going to meetings which has actually been proven to work vs. apps/wearables which have not. Will people who are unsuccessful using apps continue to do so? Company has problems, but if they can just get back to where they were a year or 2 ago thay have huge upside.I know it is popular to say every company is going to be put out of business by internet innovations, but a lot of times they can have huge comebacks… GME, BBY, OUTR,etc.

  3. frankiethepunk says:

    Great column! I agonized over whether to buy WTW for weeks and finally decided against it because it just didn’t click with me. But believe me I was within a nano-metre of hitting the “buy” button. I just didn’t have that Aha! moment the way I have with some of my more successful picks. And your piece more or less articulates what my intuition told me. But I didn’t do nearly as much background research as you have to rationalize your decision that WTW was a value trap.

    But this is a excellent column because it demonstrates a number of things. Firstly, even a solid well founded methodology such as the Value based system is not going to guarantee you success every time. Secondly, I like the fact that even though you suffered a 40% loss you eventually had the intellectual honesty to pull the plug on a bad idea. George Soros once said, that what separates him from everybody else is that he is able to get out when he knows that he is wrong. That indeed is probably the most valuable trait that any investor (or speculator) can have, which is the lack of vanity to be “right” every-time. It is hubris that is the enemy, not intellect.

    I guess the most interesting issue is how do you tell when when you are right and when you are wrong? Seth Klarman and Warren Buffet, both tell you that its smart to load up on your good ideas and not make the mistake of diversifying into mediocre ideas.

    And Buffet, has always maintained, that unlike baseball there is no “three strikes and you’re out” rule. He exhorts you to wait until the “perfect pitch comes over the plate”. Well, how do you do that? Why wasn’t WTW that “perfect pitch”, especially since it was going lower and lower and becoming better and better value.

    I guess this argues well why you should use Warren Buffet’s other golden rule, only invest in what you understand (which is another difficult rule to follow. As Donald Rumpsfeld would say, I do I know what I don’t understand?) Anyway, I have my own filter for screening out bad picks. My rule is, only invest in stocks that even a moron can see is fabulous idea. Its a bit cynical, but it works for me.

  4. The Truth says:

    Couldn’t agree more. Well written!

  5. Ivan says:

    well written but i have to disagree with some parts of the argument – it definitely is a fluid situation and beckons additional work

    1. Artal (PE firm that bought WTW in 1998 from Heinz has managed to extract 3.8bn of cash flow and share sales/buy backs over the years) – cash flow generation is very strong year on year. Hence not clear at these low prices how Artal will act – might buy debt at lower prices and reduce the liquidity concerns, might take company private
    2. it is very frustrating that the management team has not communicated a clear competitive response (and I agree that the group meetings cannot be the heart and soul of the business going forward) – this is the biggest uncertainty
    3. 92% short interest in the stock (if you take away the PE firm and top 4 institutional holders who have been adding to their positions
    4. the company has such strong cash flow generation that it will take -25% and -15% drop in the topline for 2014 and 2015 for intrinsic value to drop below current price level so there is some protection

  6. JP says:

    So your entire thesis is “Revenues have gone down 6% in three years and brands don’t last forever people probably won’t go to meetings anymore and besides everyone else is innovating”?

    That seems pretty weak, iffy, not super-rigorous. I’m curious what your original thesis was for buying it. I haven’t really followed your writing since you posted things where I thought your thought process was really flawed (about CCME and DCHAF, and I was right), but this got RT’d by someone on Twitter.

    I see it as a pretty good risk/reward situation at this beaten-down price. They’re making a lot of money and haven’t slowed down much, just a little. Geoff Gannon had a good writeup when he bought it at $36, I just bought a fair amount at $20, my first purchase of the stock: http://gannonandhoangoninvesting.com/blog/2013/8/3/what-led-to-the-weight-watchers-wtw-purchase

  7. No there is more to it than that. No need to rewrite all the other stuff that’s out there.

  8. If you boil it down, it comes down to just one thing.

    Is the business flawed or not?
    It’s a lot like the HLF investment thesis. Is it a pyramid scheme or not?

    I believe the moat has been breached and will continue to suffer.

    I’m not too concerned about the fundamentals because it’s a low capex business, good FCF company. Sure they have a lot of debt, but “if” things are ok, debt is manageable.

  9. Thanks for the comments and great thoughts. Although I’ve sold off WTW, time will tell whether I’m right or not. Value investing, growth investing, day trading etc all work. Just not 100% of the time 🙂

    The main thing that killed it for me is that if the moat and brand is so strong and durable, why are there signs of major breakdowns and weakness? Lowering margins, falling meetings, increase in online, trying to push meetings into corporate healthcare packages..

    And management says that they had a marketing miss due to Jessica Simpson suddenly bailing out. If the moat is so strong, I don’t know why the business depends so much on marketing.

    The true strength of a brand isn’t dependent on a marketing hit or the next fashion hit.

    But getting back to bring right or wrong again, it’s just hindsight. If you look at Warren Buffett, he isn’t really a value investor. He just has amazing business acumen to be able to foresee what the business can grow to and is willing to hold for a while.

    If the WTW thesis is to hold for 3 years minimum, then the future is not so rosy.

  10. That’s the problem. WTW success 2-3 years ago seems to be the one time thing. Not the other way around.
    The model works, but consumers and the meeting fees is what’s important. If this was a private company and you tried to get funding for this, the VC’s would hound and pound the company on why it’s trending down.
    They pumped up marketing so much 2 years ago, but to see it drop off immediately is horrible business.
    The main issue is that WTW also recognizes that they are being left behind on technological front. That’s why they are trying to grow the online division.

  11. checked out the link and obviously don’t agree 100%. 15x is too high for this biz. If business continues to be bad, the debt is going to hurt them and investors will be taken along with them.
    In terms of risk/reward? Looks about even at the moment.
    I’d prefer HLF since the situation is the same.
    I didn’t put down 30% like Gannon did so the fall didn’t hurt much. Either way, thanks for taking the time to comment. See you around again maybe.

  12. uri says:

    Hi
    Maybe its a mistake looking for Moat in a cheap 5 PE stock?. Moat is good excuse for investing in expensive stock like Welles Fargo. Maybe the best time to buy a cheap stock is when the last analyst gave up and bailed out after 40% decline? lots of Value stock dont have Moat at all – they are just cheap enaugh for something to happean. there was no big cjange in the world of technology or weight from 2 years ago when the stock was at 80

  13. You’ve got a good point, but the entire investment for WTW is whether the meeting will go up or down.
    From what I’m seeing now, 2 years ago was the anomaly. I don’t see it happening anytime soon.
    And the moat is the reason why WTW is supposed to be able to pay back its debt easily. If WTW starts losing to competitors fast, debt repayment obligations is going to be suffer. If they dilute then the investment is also gone. That’s why I and all the other value investors are focusing on moat at this stage.

  14. Agree with your write up, Jae Jun. Specifically, the two things that concern me most are:

    1. The underlying business model within the weight loss industry is changing – while in person meetings have been shown to be effective, it becomes very hard to compete with the new tools and apps available. Particularly as they are innovating using social media sharing and game theory to make the virtual approach a real alternative to in person, peer-based support. And for Weight Watchers online to grow it also has to scale beyond in-person meetings.

    2. The $2.3 billion debt load is all based on variable interest rates. While there is some hedging of the debt (how much is not disclosed in the 10-K), what happens when interest rates rise from their 200 year historic low? Growing interest payments on the ballooning debt load have caused net margins to fall from around 18% to 12% over the last 10 years, while operating margins have been fairly steady around 25-30%.

    So, combine a revenue model under threat, with almost certain increasing interest payments, then it becomes very difficult to model any kind of fair value. Full write up at: http://kaizeninvestor.com/2014/04/05/is-weight-watchers-wtw-a-value-trap/

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