June 2017

Stock Story: Weight Watchers International (WTW) – A Turnaround

CVF News

Stock Story: Weight Watchers International (WTW) – A Turnaround

Gary Hui

“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”[1] WTW is one of our fund’s largest positions and has advanced over 50% in the last 3 months, yet valuation remains undemanding, offering potential large upside.

Background

WTW – listed in the US – is the world’s leading commercial provider of weight loss services, operating globally through a network of company-owned and franchise operations since 1963. WTW’s leading competitive position was built from providing a scientifically proven program[2] which powered its strong brand in providing a solution to a growing societal problem.

Source: WTW

Since 2012, WTW had seen its market share erode quickly due mainly to free fitness mobile applications. Coupled with this, they had a crushing net debt load, which at the end of FY16, was 2.6x the market cap and 7.5x EBITDA. Short investors positioned aggressively – by Feb 2017, an astonishing 67% of the total free float of shares were short!

Source: WTW and AWQ Analysis

Company transformation

Turnarounds are rarely spontaneous and WTW’s has been no different. In late 2014, management embarked on a multi-year transformation plan which included:

 

Source: WTW

Evidence of a turnaround

Execution is everything, as they say. When a company announces a transformation plan, we take notice – but are unlikely to invest until we see a mosaic of evidence that shows the business trajectory has changed. So what was the crucial piece of evidence that we saw?

Recruitment trajectory turned positive & has gathered momentum: The business naturally has a high amount of churn[3] given customers on avg. stay on the program for ~8-9 months. Thus, recruitment is the key driver for the business as they need to replace customers frequently.

Source: WTW and AWQ analysis

Strong growth of subscribers means that revenues should grow materially higher for the rest of 2017 given the avg. retention period & strong 1Q17 subscriber growth.

The upside case includes mgt succeeding in increasing the avg. subscriber value by lengthening the retention period – which would materially increase revenues. Whilst we don’t value this in, we think there is a reasonable chance that mgt can do this due to:

Conclusion

There are clear signs now that the company is on a transformative path. The company has strong growth prospects and a new CEO who has a successful track record in leveraging technology & consumer insights to drive revenue.

On the current trajectory, we think the company can deleverage fast due to its high operating leverage and strong FCF. WTW trades on an extremely undemanding 14x forward earnings and 9x EV/EBITDA[4].