Eat This! Weight Watchers Best Buy in Dieting Market
Tedra is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You can hardly turn on the television without being bombarded by commercials touting what is supposed to be the latest and greatest weight loss program. There are plenty of choices, including recently approved prescription pills. However, two dominate: NutriSystem (NASDAQ: NTRI) and Weight Watchers International (NYSE: WTW).
These publicly-traded companies have a lot at stake in the increasingly competitive world of dieting. While their products may help you shed pounds, are they successful enough to add to the value of the company?
Let’s start with Weight Watchers, which is the larger of the two. It seems to be the most prolific in its advertising and it is paying off. Since signing songstress/actress Jennifer Hudson on as its national spokesperson in 2010, the company has seen its stock price take off. By its own admission, signing Hudson was a coup.
Over the last two years, the company’s stock has increased substantially, rising from around $30 a share to its current price of $49 a share.Prior to that, the company’s performance was weak, even by its own admission. Marketing campaigns were ineffective at recruiting customers.
Weight Watchers has been able to expand outside of its traditional meal offerings by allowing them to be sold outside of the company. Through licensing and endorsing agreements, Weight Watchers partners with third parties to offer its products. So, if you want to follow Weight Watchers meal plans you have options. For example, Applebee’s restaurants offer meals based on the company’s plans.
Hudson’s reign as spokesperson ends this year, and another singer, Jessica Simpson, has been chosen to take her place. It will be interesting to see if Simpson will have the same mass appeal and effectiveness as Hudson, who we saw shed tens of pounds and now boasts a figure she says was largely due to the company's portion size meal plans.
Simpson’s challenge is to lose at least 10 pounds over the next five months – weight she gained while pregnant with her first child. Recruiting Simpson should help the company reach the moms trying to get the “baby weight” off. Other spokespersons include Charles Barkley, whose weight loss drew men to the program, usually the group least likely to try to lose weight, let alone try weight loss programs.
Considering the multitude of reasons people have to lose weight, I think it is a good idea that Weight Watchers is trying to put faces on their product that can appeal to just about anyone. This is bound to help it attract more customers and increase its earnings.
In 2011, Weight Watchers raked in $5 billion from the sale of its products and services, including the meetings that it and its franchisees hold to help people meet and maintain their weight loss goals.
Its margins are pressured by the high costs it incurs from making its specialized meal products. Its operating margin is .28%, but that is better than its closest competitor, NutriSystem, which also has slim operating margins resulting from the costs of developing and producing its specialized meals. NutriSystem’s operating margin is .04%. It is the second largest diet program provider. It hasn’t been as widely successful as Weight Watchers, but that doesn’t mean it has not tried. In the spring, music legend Janet Jackson appeared in commercials for the company in which she showed her slimmed down shape.
NutriSystem can definitely benefit from whatever boost in sales Janet Jackson’s success story may bring to the company. Over the last 12 months, the stock is down roughly 22%. It currently trades around $12. A plus for NutriSystem is QVC. The television and online shopping network has helped NutriSystem sell its packaged meals since the partnership began in 2004.
In early July, the company announced that it had developed a meal specifically designed for people with Type 2 diabetes. This plan will allow NutriSystem to tap a growing population whose eating habits are leading to serious health problems, including diabetes. The American Diabetes Association estimates that about 26 million people or 10% of adults in the U.S. have diabetes. An additional 79 million adults are at high risk of developing the disease.
When it comes to gross margins, they are about the same for Weight Watchers and NutriSystem. It is .58% for Weight Watchers and .48% for NutriSystem. If you are looking for dividends, they both pay $.70. However, Weight Watchers yields 1.3%, while NutriSystem yields a considerably higher 6.4%. To get an even better idea of Weight Watcher’s strength over NutriSystem’s, look at their earnings per share. For Weight Watchers, it is $3.85, while it is just $.39 per share for NutriSystem. NutriSystem was trading around $11 a share at the time of writing.
Weight Watchers is in a better financial position than NutriSystem, and is thus the better investment. However, I wouldn’t count the latter company out. Its expanding profit margins, as well as its cash flow, are indicators that the stock’s performance is poised to improve. For example, net operating cash flow increased roughly 13% to $15 million during the first quarter of 2011. We’ll see how the stock fared during its most recent quarter when it reports its Q2 earnings on Thursday, July 26.
Weight Watchers and NutriSystem may have carved out large pieces of the pie in the diet plan market, but there are others chomping at the bit. They include eDiet and privately-held Jenny Craig. Medifast (NYSE: MED) is also a major player in this space. Like NutriSystem, its meals are delivered directly to the customer. At the time of writing, Medifast was trading at $20.61, which is approaching its 52-week high of $21.44. While it does not pay dividends, its earnings per share are attractive at $1.16.
Weight Watchers releases its earnings on Aug. 1, and after that, look for another post from about how the entire space fared for Q2.
The market will continue to heat up with the recent approval of weight loss drugs. For the first time in 13 years, the Federal Drug Administration has approved not one, but two drugs to help the obese lose weight. They are Qsymia, which is made by Vivus, and Belviq, which is made by Arena Pharmaceuticals. These drugs are offering promises that I know have the potential to be highly impactful and offer alternatives or supplements to the weight loss programs provided by Weight Watchers and NutriSystem.
TwillyD has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.