Tough Times for the King of Weight Loss

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Weight Watchers International (NYSE: WTW) may be celebrating its 50th anniversary this year, but investors haven’t had much to cheer about lately with the stock price down 19% over the past twelve months.  The company built a global weight loss empire by focusing on face-to-face interactions, starting with the first meeting in founder Jean Nidetch’s apartment in 1963.  Since then, Weight Watchers’ behavioral treatment program has become a global force against obesity, a condition that afflicts 78 million people in the U.S., according to the Centers for Disease Control.  However, with attendance levels at its meetings stagnating, should investors bet on this icon?

What’s the value?

The weight management industry is big business, $65 billion in 2012 according to most estimates, encompassing treatment programs, meal replacement products, and pharmaceuticals.  Weight Watchers primarily competes in the treatment segment through its weekly meetings around the world, as well as through its growing presence online.  In addition, the company attaches its name and trademark PointsPlus system to a variety of products, including frozen dinners, cookbooks, and restaurant guides.

In FY2013, Weight Watchers has reported weak financial results, with a 4% decline in overall revenues and flat growth in operating income versus the prior-year period.  The company’s top-line growth has been hurt by lower product sales and reduced attendance at its iconic weekly meetings.  On the upside, though, Weight Watchers continues to grow its online subscriber base and content offerings, including nutritional guidelines, weight trackers, and meal ideas.

Unfortunately, competition continues to intensify in the sector, leading to price compression for Weight Watchers' meeting segment, the source of most of its revenues.  Chief among the competitors is Medifast (NYSE: MED), a weight management company that focuses more on meal replacement options with a growing roster of nutrition and fiber rich food and drink options.  The company has also taken a page from Weight Watchers’ playbook with its Take Shape For Life unit that provides personal coaching and ongoing weight management support.

In its latest fiscal year, Medifast reported continued growth in its financial results, with increases in revenues and adjusted operating income of 19.6% and 10.2%, respectively, versus the prior year.  Its top-line growth benefited from more coaches in its Take Shape For Life unit, as well as a further expansion of its weight control center network.  However, Medifast’s profitability declined due to the rising costs of its network build-out and the administrative costs of its multi-channel business model.

A nation of D-I-Yers

Of course, the deluge of information that is available on the Internet, including on the websites of Weight Watchers and Medifast, is causing a large swath of people to think that they can lose weight on their own.  This notion doesn’t seem to be based on reality, based on the government health agencies’ statistics that show a rising percentage of overweight people in the general population.  However, the trend is helping the growing businesses of the health and wellness purveyors, led by retail giant GNC (NYSE: GNC).

With over 8,000 locations in 54 countries around the world, GNC is the retail leader in sales of vitamins, supplements, and diet products.  It has ridden the unrelenting drive for higher performance in a sports-crazed world to higher profits, with roughly 43% of its sales coming from the sports nutrition category.  In addition, GNC has enhanced its distribution opportunities through partnerships with leading retailers, including Rite Aid, PetSmart, and Sam’s Club.

In FY2013, GNC reported solid financial results, with increases in revenues and operating income of 7.9% and 8.3%, respectively, versus the prior-year period.  Its top-line growth was aided by higher comparable store sales, up 2.9% during the period, as well as the addition of stores to its global network.  While the introduction of favorable member pricing in 2012 provided a headwind to its overall sales total, a larger membership base should lead to higher growth in the long run.

The bottom line

While weight loss products might have been a fad at one time, rising obesity levels around the world are making the industry’s products a necessary part of the solution to lowering healthcare costs.  Given the current generation’s desire to do it themselves, though, investors might want to avoid betting on the success of an individual system.  Instead, they should go with the retailer selling a health and wellness lifestyle.  As such, GNC is one for the portfolio.

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Robert Hanley owns shares of Medifast,GNC, and PetSmart. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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