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Investors who owned Weight Watchers International (NYSE: WTW) shares on Friday were sitting in some pretty high cotton come Monday evening.
By the close of trading Monday, Weight Watchers shares had doubled in price on the news that pop-media icon Oprah Winfrey had accumulated a 10% stake. The cotton continued to pile higher on Tuesday, with Weight Watchers shares adding another 35% to Monday’s tally.
Of course, the cotton is accumulating mostly to newcomers. Anyone who’d bought Weight Watchers stock prior to March is likely wallowing in mud, and a lot of it. As recently as December, Weight Watchers shares were trading close to $30. Go back to 2012 and you’ll find the price was close to $80.
Recent SEC filings show that Winfrey paid roughly $43.2 million for 6.36 million newly minted shares. This works out to $6.79 per share. Given that Weight Watchers shares are trading above $18 as I write, Winfrey has realized quite a windfall (though she is locked up for a couple years). Winfrey also gets a board seat and an option (exercisable at $6.79 a share) to buy another 5% of the company’s shares.
Winfrey is obviously bullish on Weight Watchers. Does that mean the rest of us should be bullish too?
The Cult of Personality
Watch Watchers certainly has cult of personality working in its favor now. Winfrey is a proven rainmaker: She has turned obscure authors into overnight successes. Twenty of her book recommendations have hit No. 1 on USA Today’s Best-Selling Books list. Without Winfrey, we’d all be oblivious to Dr. Phil or Dr. Oz. Few moviegoers would have given “The Color Purple” a second thought without her acting presence. It’s even possible that we’d have a different president had it not been for her endorsement and promotion of Barack Obama.
That said, don’t take transferability of expertise as a given. Winfrey’s historical promotional expertise and successes have centered on passivity: They’ve required little initiative from her followers. Promoting a business that requires membership dues, willpower and discipline is another matter. Winfrey’s mixed results with her personal weight also raise questions on her expertise.
But the business model, more than anything, could prove insurmountable, even for Winfrey.
Why pay a monthly fee to count calories, which is basically the Weight Watchers point system, when free apps are readily available for smartphones and wearable fitness trackers? And how do you overcome the long-term dreariness of the dieting process itself? People eventually tire of counting calories and monitoring their food. Once someone has tired of the process, they quit and they’re unlikely to return. Someone new must be recruited to take the quitter’s place.
Bloated Financials
But Weight Watchers’ financial position might be the most off-putting aspect of the investment proposition. Weight Watchers has $2.3 billion in long-term debt. Even after the “Oprah Effect” that produced the spike in equity value, debt still exceeds equity by a 2-to- 1 margin.
At the same time, there’s little cash in the till. Weight Watchers has only $150 million of cash and cash equivalents. The current ratio – current assets to current liabilities – is only 0.55. The current portion of long-term debt due was $80 million last year alone. Financial risk runs high.
Weight Watchers’ share price received a nice bump from Oprah Winfrey, but how long that bump will last is anyone’s guess. I suspect it will prove ephemeral. The hype will pass soon enough, and reality will again take over. The reality is that Watch Watchers’ business leaves much to be desired.
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