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Weight Watchers Stock Slims Down Poor Expectations

WW International Inc. (NASDAQ: WW), the company formerly known as Weight Watchers International, has tripped on poor earnings. Its weight management programs have hit a formidable wall of competition. It remains to be seen whether, as one of the earliest companies in the sector, it can make a comeback as the industry changes. A major industry analyst recently upgraded the stock to a Buy rating, which may help its chances.

Why It’s Tough to Miss Numbers

The next move in shares of WW depends largely on fourth-quarter earnings. For now, investors have to rely on the figures for the third quarter of the year.

The primary concern about those figures is that revenue dropped. It fell to $349 million from $366 million year over year. Net income was even worse. It fell to $47 million from $70 million.

The one bit of good news when earnings were announced is that WW confirmed its full-year guidance. The company expects revenue of $1.4 billion, with earnings between $1.63 and $1.75 per share.

Mindy Grossman, president and CEO, pleaded with investors to look toward the long term: “Next week, we will be launching our new program – our most customized yet – which we believe will have broad appeal among current, returning, and first-time members.”

However, shareholders are beyond impatient. While the S&P 500 is up 24%, WW’s share price has fallen 50% in the past two years. About a year ago, WW stock hit a 52-week low.

Oprah Winfrey to the Rescue

WW International has one ace in the hole. Oprah Winfrey is the company’s spokesperson and a shareholder. Because she is among the most famous people in the country, and one of the richest with a net worth of $2.8 billion, Winfrey has given the company visibility it could not possibly have otherwise.

Winfrey recently renewed her deal with the WW through 2025. She is already a board member and investor. In exchange for the services, she will get a fully vested option to purchase approximately 3.3 million shares. The deal has to be approved by shareholders.

Winfrey is not only a good spokesperson due to her visibility. She also has publicly struggled with her weight for decades.

Winfrey commented that, among other reasons, she wants to support the company’s mission of “inspiring people around the world to lead a healthier and a more fulfilling life.” In other words, it is about more than the money.

Weight Watchers Faces Tremendous Competition

The list of companies in the weight loss game is long. Organizations with weight loss program plans include Nutrisystem, Beachbody, Jenny Craig, Diet to Go, Optifast and Herbalife. In a new Consumer Affairs poll, Weight Watchers did well.

A number of these companies regularly roll out new products and diet programs. Nutrisystem launches as many of these as any of its competition. Most experts see it as the primary Weight Watchers rival.

Weight Watchers recently gained an important edge in the market. Among the most widely followed diet evaluations is that from U.S. News & World Report. Weight Watchers finished first in the study this year, based on rankings of “best commercial diet plans.”

However, the U.S. News poll shows that competition goes well beyond the commercial diet segment. Diets based on people’s own cooking include popular choices like the Mediterranean diet, the DASH diet and the Mayo Clinic diet. Most people who follow these do not subscribe to commercial diet plans at all. These diets include some restaurant foods.

Been Around a Long Time

Weight Watchers was founded in 1963 by Queens housewife Jean Nidetch. She had been obese for years.

Nidetch decided her weight loss plan should not be based on deprivation but rather on portion control and healthy food choices. In essence, she created a food and fitness program.

Nidetch also began to form support groups so that people who wanted to lose weight could rely on one another. In 1968, Weight Watchers went public. She cashed in, along with her management group, when Heinz bought the company for $72 million in 1978.

Heinz sold the company to a private equity firm in 1999. It went public again in 2001.

The Business Model

The fundamental way Weight Watchers makes money has not changed in a number of years. People buy subscriptions that allow them to go to workshops with others who want to lose weight and build healthy habits. Or, for more money, they can receive support with WW coaches. The company also sells food directly to its members.

Live coaching allows people to get personal assessments to set realistic goals. Not all these are doctor-recommended weight loss programs, which may be a drawback of the system.

Plans, excluding food, cost from $4.22 to $12.69 a week. Much of the contact between the company and its customers happens online.

Who Runs the Company?

The WW International board has 10 directors. The CEO, Mindy Grossman, is not the board chair. That job is held by  Raymond Debbane. Grossman has made an extraordinary $40 million over the two years listed in the proxy.

Other senior executives have made between $3 million and $6 million over the past three years, which is, once again, a lot for a struggling company. Most board members make about $150,000.

Winfrey owns 10% of the company, which makes her the second-largest shareholder after institutional investor Artal Group.