WTW - Weight Watchers International

[hellsten]

Might be a good time to start looking at WTW, even if you're not overweight:
http://www.businessweek.com/news/2013-08-02/weight-watchers-falls-most-since-2011-after-reducing-forecast

Weight Watchers fell 19 percent to $37.99 at the close in New York, the biggest drop since the company went public in November 2001. The shares have retreated 27 percent this year, compared with a 20 percent gain for the Standard & Poor’s 500 Index.

Per-share profit this year will be $3.55 to $3.70, less than an earlier projection of $3.60 to $3.90, the New York-based company said yesterday in a statement. The average estimate of seven analysts surveyed by Bloomberg was $3.70.

WTW was mentioned in the thread on cannibals:
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/cannibals/msg124378/?topicseen#msg124378

Weight Watchers International, Inc. WTW:
http://financials.morningstar.com/ratios/r.html?t=WTW&region=USA&culture=en-us

Share count has gone from 110 to 56 million in 10 years.

WTW seems like a very high-quality business based on historic net margin and ROA figures.

WTW was featured in today's newsletter from Tilson & Co:
http://valueinvestingletter.com/pdfs/Boyars-Intrinsic-Research-Report-Weight-Watchers.pdf

WTW's buybacks where very ill-timed and financed with debt

WTW's p-factor in 2012 looks good (http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/the-mysterious-factor-'p'/):
1083/1219=0.89

WTW is now Geoff Gannon's third stock:
http://gannonandhoangoninvesting.com/blog/2013/8/2/bought-weight-watchers-wtw

I guess it's clear that WTW is a high-quality business.

[LC]

I've looked into it in the past few months. Yesterday I read Geoff's article and sent him an email, here are the major questions I posed to him:

-How do you feel about Artal Group's controlling stake? They cashed out at
a high price and loaded the company with debt (although they did allow
minority shareholders to take part pari passu).

-How do you feel about the CEO's departure? There is a Forbes article (
http://www.forbes.com/sites/nathanvardi/2012/09/04/the-mystery-man-behind-weight-watchers-and-the-private-equity-deal-of-the-century/)
which adds some color to the picture but not enough details to truly grasp
the relationship between Artal/Debbane and WTW management (who I'm sure he
selects).

-In terms of industry trends, what are your thoughts? I think more
customers are migrating to their online platform versus meetings where the
company would cross-sell other products.

-In terms of valuation...when I looked at WTW about 2 months ago, my
purchase price was $2bln, at the time the company traded hands for $2.4bln.

Essentially those are my thoughts. Most importantly I believe is how heavy the transition from in-person meetings to online apps for customers is. This will provide proof of how wide WTW's moat really is.

I view the case of Artal as a majority shareholder as more of an oddity than anything. I give them credit for allowing shareholders to participate in the buyback, despite saddling the company with floating rate debt. 

[obtuse_investor]

Before I clicked any of those links posted by the OP, I went to the SEC's site and downloaded the latest 8-K.

Right away, I am seeing a book value of ($1.56B). The net debt is $2.3B!

Even though they are cash flow positive, it will take them a heck of a long time (and good luck) to get out of the hole. What am I missing in this, admittedly quick, back of the envelope, analysis?

[Saidal]

A note on the debt, the Company opportunistically tapped the credit markets with a ultra low spread and low amortization of 1%...so you could potentially view the terms as an asset compared to a liability.

[hellsten]

In our view, the Company’s business model has strengthened in recent years due the explosive growth
experienced by the Company’s online business. Over the past 5 years, WW.com has increased revenues at a
27% CAGR and the business now represents a disproportionate amount of the Company’s overall profitability.
Notably, operating margins posted during 2012 in its online segment of 51% significantly outpaced the 17%
margins generated by WTW’s traditional meetings business

Weight Watchers is a significant free cash flow generator thanks to its subscription-based and asset
light business model that is characterized by extremely low capital intensity. Over the past three years the
Company has generated an average of $297 million in free cash flow (12.5% FCF yield).

http://boyarresearch.com/emails/pdfs/Boyars-Intrinsic-Research-Report-Weight-Watchers.pdf

At the beginning of August, we acquired shares in Weight Watchers International. At just over
$43/share and with 2012 EPS expectations between $4.00 and $4.20/share, WTW traded at
approximately 10x earnings and a 10% free cash flow yield. This was incredibly cheap for a
company that consistently generates EBITDA margins in the high 20s, return on invested capital
in the mid to high-30s, and has grown sales an average of 8% per year for the last five years
(which includes the 2007-2009 recession).

While we recognize the operational and capital allocation errors, we think the market’s reaction
was overdone. The company is an incredible business franchise (refer back to the financial
fundamentals in the first paragraph of this section) addressing a significant and growing need.
Nearly one-third of US adults and 15% of the world’s population are obese. 70% of the US
population is overweight or obese. While the US leads the pack, this is a consistent trend
across most wealthy, developed nations. Japan is the exception.

http://www.greyowlcapital.com/uploads/letters/GOLetterQ32012.pdf

[hellsten]

Great study on what professionals and consumers think about WTW:

She said local NHS commissioners likely will choose a single provider that performs
best, which may give Weight Watchers a monopoly in some areas.
…
Weight Watchers performed best because its
leaders showed greater professionalism. Weight Watchers had a higher percentage of clients in Obese Class 3 (morbidly
obese) than the other two providers. When allowed a choice, patients chose Slimming World first, Weight Watchers
second, and Rosemary Conley third.
…
Most NHS commissioners look at their neighboring PCTs, and conclude that if they’re using Weight
Watchers, it must be OK. We forget at our peril that these providers are commercial organizations, that they’re
there to make money.
…
“I see the possibility of Weight Watchers becoming a sort of monopoly.
We have a big obesity problem, and we need a service that can handle
big numbers. We don’t have the money or the specialized knowledge to
run these programs. To use the commercial providers is very useful.
…
“Overall, commercial weight-management services work better than
the NHS’ and save the NHS money. The patients are dispersed and
NHS locations are too few and centralized.”
…
“Referral of patients to commercial slimming services works extremely well, better than NHS-provided services.
It’s more cost-effective. They have a good local infrastructure, and it’s much more convenient for the patients.
It’s much harderfor us to get people together in the same place at the same time.”
…
Outsourcing obesity treatments will inevitably grow because commercial weight-loss programs have considerable backing
and are much cheaper than drugs or surgery. The referral program could have 2 million UK patients in a few years. Only
Weight Watchers and Slimming World have the capacity to treat obesity on a massive scale. Weight Watchers has a
virtual monopoly because of short-term results in a pilot study and because of the scale of operations it offers the NHS.
…
“Weight Watchers is becoming a monopoly because of all the results
they’re getting through the NHS referral scheme. Slimming World is
claiming very similar results. But the other competitors are small and
don’t have the capacity.”
…
“There are a thousand different ways to lose weight. The problem it keeping it off. I have lost 30 pounds on
Weight Watchers three different times. We have a huge number of repeat members, and they invariably stated
that the Weight Watchers program worked, that it was their personal failure that brought them back. A lot of
people just need that accountability.”
…
With Weight Watchers you eat real food, so you feel like a normal person.
…
Weight Watchers is a solid program that is recommended by physicians, which
should help it to sustain membership levels. The company’s advantages are
accessibility, affordability, flexibility and nutrition education. Celebrity
endorsements do not really have an influence
…
“Most people find out about Weight Watchers through advertising or their health professional. Doctors do
recommend this diet, but I don’t think people who were recommended by their doctors necessarily have a higher
rate of success.”
…
“Weight Watchers gives you the information you need to successfully
lose weight. And you can do it with your own food. That’s a big
advantage. Other programs like Jenny Craig and Nutrisystem require a
person to eat their packaged foods. But you can’t solve a permanent
problem with a temporary solution. Those other programs are a shortterm fix. What happens when you quit eating their food? When I meet
someone who is on one of the pre-packaged plans, I always think: I’ll
see you at Weight Watchers in a fewyears.”
…
“The program rates are very reasonable. My company offered additional discounts, so the cost was a complete
nonissue.”
…
“I would never consider one of the competitive programs like Jenny Craig or Nutrisystem. I don’t like the idea of
prepackaged foods, with all the preservatives and additives. My husband and I prefer natural and organic foods.
The Weight Watchers approach is healthier; it lets you eat your own food.”
…
Celebrity endorsements definitely increase membership. When Dr. Oz promoted an introductory Weight
Watchers offer, the meetings were packed. It really gets a lot of people in the door.”
…
“Weight Watchers has a great program. I have referred hundreds of patients to their program specifically, and I
know for a fact that other physicians do so as well.”
…
[Weight Watchers] promotes the program as a healthy lifestyle, not a diet.
…
Weight Watchers needs
to improve its maintenance program and is missing a big business opportunity. People who reach their goal have a
Lifetime Membership—as long as they keep the weight off.
…
This source believes Weight Watchers’ membership is growing based on the number of her own friends who recently
have joined the program. Weight Watchers has a very convenient online program, and the price is right. Some employers
and insurance companies even pay for the program.
…
For online, I pay about $15 a month. It is automatically taken off my
credit card each month. So if I want to stop, I’ll have to cancel that
credit payment. But given that I’m online all the time, it is a steal.”
…
Slimming World is Weight Watchers’ biggest competitor. Like Weight Watchers, it uses meetings. … But they
don’t have a points system.
…
The Lancet publication on Dr. Susan Jebb’s study of Weight Watchers had a big
effect in France. The source’s location received many calls from dietitians and doctors who had read the article. Weight
Watchers’ biggest competitor in France is weight-loss guru Pierre Dukan, but his program reportedly is more difficult and
not as balanced. Weight Watchers frequently takes on clients who started with Dukan’s diet.
…
Weight Watchers costs a lot less than a traditional dietitian or nutritionist, which costs €35 to €40 per session
versus €40 each month for the Weight Watchers subscription, including the meetings, online services and the
dietitian.
…
“I think Weight Watchers is a really healthy diet. A lot of people we see are prediabetic. Some have bad knees,
and they have been told by their doctors to lose weight. A lot of people are referred by doctors. Other people
need to drop 50 pounds before surgery.”
…
This source left Weight Watchers because corporate was pressuring leaders to promote the Weight Watchers brand of
packaged products. He tried to resist the trend and continued to lead his group based on lifestyle support and tips to
maintain good eating habits. The one consistent complaint he heard from members was on the very topic of brand
promotion; other leaders reportedly turned meetings into “infomercials.”
…
Most new members started Weight Watchers based on a personal
recommendation from someone who had success with the system. The
celebrity endorsements certainly had an impact too.
…
There are a lot of competitors to Weight Watchers. Jenny Craig and Nutrisystem are two big ones. But they both
require purchase of prepackaged food. Some people prefer this very tightly controlled approach to dieting, but it
is not sustainable. Gyms, DVD programs and supplement programs are all competitors also.
…
NHS commissioners and the government are too focused on short-term results and budgets are too tight to make the fixed investment needed to scale up such an
intra-NHS designed program.
- “The government wants headline results: to cut waiting times for surgery and emergency room visits. They want
quick changes to get these headline results and don’t want to wait five years for them.”
…
since it’s a big initial investment to design a program from scratch, most PCTs prefer to [outsource] because they don’t have
the funds to treat obesity. I had to go there several times, design the book, train up the staff, show them how to
manage the data and to evaluate it. But they don’t get paid for treating obesity, just for things like reducing
patients’ blood pressure.
…

Weight Watchers doesn’t address long-term problems. You need to get
to the root of the [obesity] problem. For the most part, people regain
the weight.
…
Some patients say Weight Watchers works. Some say it’s too costly [after the 12 weeks paid by the NHS
vouchers end]. Some say they like the leaders.
…
The programs are “better than
nothing” but fail to address the lifestyle changes and nutritional understanding
people need to permanently lose weight. Approximately 90% of clients who tried
such programs initially lost weight but plateaued within 60 days.
…
Weight Watchers’ easy-to-follow program and support meetings may account for its success. However, the meetings are
taught by nonprofessionals, and the program does not treat the underlying cause of weight gain.
…
“Weight Watchers has been using a sound nutrition plan, and I hope that does stay the same. The company
updates their program along with the recommended guidelines, and that’s commendable.”
…
Medicare costs could be cut by $15 billion if commercial or community-based weight-loss programs were reimbursed for
overweight and obese patients.

http://blueshiftideas.com/reports/101109WeightWatchersWillSustainGrowthThankstoPublicityStudyResults.pdf

[WarrenWatsa]

My take: there seems to be many free, alternative online resources that are very effective. Nerdfitness is an example of a free support group with good information.

I agree. I'm having a hard time believing much of Weight Watchers' online component (and to some degree its brick-and-mortar component) can't get eaten away by competitors fairly easily in the coming years. In a world evolving as technologically quickly as the current one, I wouldn't be surprised if you can get a lot of the stuff (including the support and such) WTW provides for free and in a pretty convenient mobile package - soon, if not already.

So, I'm using pretty conservative growth projections on FCF and upping the discount rate I'd normally apply due to the massive amount of debt. Still coming up with a fair value of about $45. Looking at EV/EBIT, I'm coming up with a similar number.

If you believe WTW's growth is highly sustainable - in other words, you believe in the superiority of what they're offering versus what competitors may offer - I believe you can come up with a significantly higher fair value and that is maybe what Gannon is seeing.

[wellmont]

3/22/2012-4/9/2012:
WTW completes
$1.5 billion debt financed
stock repurchase/ tender
(18.3 million shares or
~25% of outstanding
shares) at $82 a share.

[hellsten]

My take: there seems to be many free, alternative online resources that are very effective. Nerdfitness is an example of a free support group with good information.

I agree. I'm having a hard time believing much of Weight Watchers' online component (and to some degree its brick-and-mortar component) can't get eaten away by competitors fairly easily in the coming years. In a world evolving as technologically quickly as the current one, I wouldn't be surprised if you can get a lot of the stuff (including the support and such) WTW provides for free and in a pretty convenient mobile package - soon, if not already.

IMHO, I don't think this is likely to happen. WTW has a moat through not only human behavior, but also scale, marketing, brand, partners, media, the point-based system, and so on.

I think the question is more something like: can a company with a similar concept (eat what you want) take over WTW's global position in the weight loss industry.

WU seems to be in a similar position; an old company that people think will be replaced by cheaper and cheaper technology.

[hellsten]

In "Moats: Sources and Outcomes | June 2012", Morningstar says WTW has a wide moat; the moat is categorized as coming from "intagible assets".