Weight Watchers Bottom Line is Slimming
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Will the obesity epidemic cook up off-the-scale profits for weight loss companies such as Weight Watchers International (NYSE: WTW)?
Weight Watchers performed well several years ago, with earnings per share of 2.5 in 2007. Its success grew in 2008, with revenue of $1.53 billion representing an EPS of 2.8.
But as consumers tightened their belts during the recession, Weight Watchers’ profits slimmed. The year 2009 was tough for this company, as its revenue sank to $1.39 billion.
Its future looks especially questionable thanks to encroaching competition from NutriSystem (NASDAQ: NTRI), eDiets.com (NASDAQOTCBB: DIET), Kraft Foods (NASDAQ: KRFT), which makes South Beach Diet products, and Nestle, which owns Lean Cuisine.
And let’s not forget the good old-fashioned internet, which is seeing an explosion in fitness and food bloggers creating programs, forums and e-books to help the average person lose a few pounds.
Given that Weight Watchers business model revolves around offering both face-to-face and Internet-based weight loss support, its moat is virtually nonexistent. The company’s product is replicable and offers low barriers to entry.
While Weight Watchers sells its own branded products, such as snack bars and low-fat desserts, product sales only account for 20 percent of its revenue. This nearly matches the revenue that comes from its website subscriptions and advertising sales. The vast majority of revenue – nearly 60 percent -- comes from the fees people pay to attend Weight Watchers meetings.
But with the availability of free online forums and Meetup.com face-to-face support groups, the long-term viability of maintaining these revenue streams comes into question.
Weight Watchers can benefit from increased awareness of the dangers of obesity. And with nearly 1 in 3 American children suffering from obesity, the weight management industry will have clients for a long time ahead.
Weight Watchers may also benefit from increasing obesity in Asia. The CEO announced that Weight Watchers is targeting new customers in China, as the growing middle-class population is beginning to grapple with their waistlines.
The company is also trying to attract more American male customers, and recently announced that it has signed athlete Charles Barkley – a man’s man – to act as a spokesperson.
But can Weight Watchers stand up to the competition? That remains to be seen.
Weight Watchers posted a comeback in 2011, posting revenues of $1.4 billion with an EPS of 2.5. Its future seems tied to the ups and downs of consumer discretionary spending and confidence in the overall economy.
In other words: people will spend money on weight loss if their wallets feel heavy.
But when the economy takes a plunge, people will likely turn to the plethora of free available weight-loss help. That won’t fare well for Weight Watchers’ bottom line.
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