Sales and Earnings are in a Downward Spiral
The Balance Sheet is a Wreck
Is Buying Weight Watchers Worth the Gamble?
Weight Watchers International (WTW 15.75) received a huge boost on the news that Oprah Winfrey had invested $43 million in the stock and will take a seat on the company’s board of directors and become a spokesperson. The news sent Weight Watchers’ stock price soaring 132% last week to 15.75.
Weight Watchers, founded in 1968 with headquarters in New York City, is 47% owned by Artal Holdings, a hedge fund managed by Invus Group and Raymond Debbane. The story of Weight Watchers is a long one, but going directly to what I see as problematic, Artal Holdings has pocketed $3.8 billion on the initial investment of $224 million it made back in 1999. Artal Holdings’ 30 million shares gained $200 million last week.
I am wondering why Oprah invested in Weight Watchers. In no way has Mr. Debbane acted illegally, but he has used the company as his fund’s piggy bank and left all other shareholders with huge losses.
From 2001 to 2012, Debbane sold millions of shares in five big Artal stock sales. His largest sale, in 2012, included $1.3 billion of stock that was purchased by Weight Watchers at 82 per share. Weight Watchers financed the purchase entirely from bank debt and the sale of corporate bonds. The $1.3 billion that the company paid Mr. Debbane’s hedge fund could have certainly been used in a much more constructive way to enhance shareholders’ value.
The huge addition to debt has caused Weight Watchers to spiral downhill since 2012. Sales dropped 6% in 2013, 14% in 2014, and an estimated 22% in 2015. Earnings per share plummeted from $4.23 in 2012 to an estimated $0.70 in 2015. Weight Watchers’ balance sheet is a wreck with a ton of debt rated in the “junk” category.
Here’s a look at Weight Watchers’ sales and earnings history during the past 10 years:
Weight Watchers stock dropped dramatically during the last four years:
Does Oprah know the ugly history of Weight Watchers? Can Oprah deal with Raymond Debbane, who controls 47% of the stock and is currently the chairman of the board of directors?
I don’t claim to have the answers to these and many other questions. However, Oprah stated, “Weight Watchers has given me the tools to begin to make the lasting shift that I and so many of us who are struggling with weight have longed for. I believe in the program so much I decided to invest in the company and partner in its evolution.”
Raymond Debbane, Chairman of the Board added, “Weight Watchers and Oprah Winfrey make a powerful combination. Oprah is a force of nature in connecting with people on a very personal level to live inspired lives. This partnership will accelerate our transformation and will meaningfully expand our ability to impact many millions of people worldwide.”
I think Jim Chambers, president and CEO of Weight Watchers, provided the biggest clue to the company’s future when he stated, “We are expanding our purpose from focusing on weight loss alone to more broadly helping people lead a healthier, happier life.” If Weight Watchers can reinvent itself, the sky is the limit.
In order for Weight Watchers to rebound, an aggressive marketing campaign will need to be launched with Oprah front and center, but with other celebrities joining her. Creative new ideas will need to be introduced to help people lead healthier and happier lives. Oprah has already developed a worldwide reputation for inspiring people to realize their full potential. She is America’s defacto life coach.
In my opinion, Weight Watchers’ potential is great, but the turn-around attempt will be costly. Oprah paid $43 million at $6.85 per share and has an option to buy another $20 million at $6.97 per share. She has committed to hold her stock for a minimum of two years. In addition, Weight Watchers will generate about $94 million from cash flow this year and $86 million next year. Oprah’s contributions and the company’s cash flow will go a long way toward kick-starting new marketing and new health-related programs. Last, but not least, debt will need to be restructured to cut interest expense and stretch the payment schedule.
My Conclusion: Weight Watchers will shed its past, and reinvent itself. Perhaps the company will even become a role model for the people it plans on helping! The process will take at least two years, but an investment at 16 or below could triple within two to three years. Weight Watchers is highly speculative because of its current shaky financial position, so I advise making small purchases if you are interested in buying WTW stock.
Until next time, be kind and friendly to everyone you meet.
J. Royden Ward
Chief Analyst of Cabot Benjamin Graham Value Investor
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