Weight Watchers Bulks Up Earnings with New Ventures

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Weight Watchers (NYSE: WTW) is expanding—but in a good way.  The nearly 50-year-old company, popular among women for its successful weight control program, is now reaching out to men.  It is also venturing into China, where newfound affluence is translating into higher rates of obesity.   

 What is prompting all this activity?  Growth — and not just that of people’s waistlines.  The company hit a plateau between 2007 and 2010, with stagnant growth and not much going on to interest investors.  It had created an online product, Weight Watchers for Men, but hadn’t promoted it.  All that changed in 2011, as the company began to advertise itself as a viable weight maintenance system for men; previously, according to CEO David Kirchhoff, 90% of the company’s clientele were women.  Recently, basketball star Charles Barkley signed on as a paid celebrity pitchman even as he lost nearly 30 pounds on the program.  The idea, as Kirchhoff says, is to show men that it is “manly” to lose weight using the Weight Watchers system. 

 Another excursion into previously untapped territory involves China.  The company notes that China has one of the world’s fastest-growing obesity rates, due to a rising middle class and western influence — which scientific research supports.  Weight Watchers opened an office in Shanghai, China two years ago and is working on promoting its weight loss program more heavily. 

 Weight Watchers has also moved into the workplace, a lucrative arrangement whereby employers pay for at least half (but sometimes all) of the costs associated with the weight management program in order to make it available to their employees.  Recent contracts include American Express and the New York Stock Exchange.  For their part, employers enjoy increased employee wellness and lower health insurance costs.

 The company hit a rough patch in November of last year when investors punished the stock for perceived overspending on expansion and advertising, despite nearly doubling its Q3 profit from one year previous.  WTW did admit that its advertising budget had increased by 20% -- celebs such as Barkley and Jennifer Hudson apparently don’t come cheap — but results have spoken for themselves.  A recent article in Barron’s notes that Weight Watchers seems to be thinning the competitive herd by stealing customers from other diet plans such as Medifast (NYSE: MED); it seems that customers prefer Weight Watchers PointsPlus system for rating meals rather than Medifast’s meal delivery program.  Medifast’s stock fell by half in 2011, compared with WTW’s boost of 60%. 

 Consumer Reports magazine reviewed diet plans last year and rated WTW in the top third, behind privately held Jenny Craig.  However, the report relied on information prior to 2011 and noted that Jenny Craig’s meal plan, which provides clients with prepackaged food, is less than tasty.  Weight Watchers, unlike many other plans, allows users to make their own food, which seems to be gaining popularity over purchasing ready-to-eat products. 

 Although most programs provide counseling or support, none use the WTW model of group support sessions.  This component has worked extremely well for other groups as well, most notably Alcoholics Anonymous.  Interestingly, the report was unable to adequately rate competitor NutriSystem (NASDAQ: NTRI), which also uses celebrity hawkers but provides customers with branded meals, because no data on client results were available.  Barron’s reports that NutriSystem’s sales were down 22% last year.

 Weight Watchers has always been a heavyweight in the diet and weight control field, and their new business plan will continue to plump their market share.  Their new recipe for success is undoubtedly working, which should put them on any wise investor’s radar screen.  As long as the company continues in this new direction, I’d say it can’t lose.

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