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If you like volatility, and if you like entertainment served with volatility, Weight Watchers International (NYSE: WTW) might be a stock for you. Ten-percent-or-more daily price movements are hardly unknown occurrences.
But even by Weight Watchers’ high-volatility standards, Friday was an exceptionally volatile day. Weight Watchers shares finished down 29% after management stunned investors with terrible quarterly numbers.
Weight Watchers reported an adjusted loss per share of $0.03 for the quarter, missing the consensus estimate of a $0.02 gain. More disconcerting, Weight Watchers’ number of active subscribers fell 4.8%. This was during a quarter when Oprah Winfrey pledged her allegiance and revealed a 10% stake in the company.
Since Winfrey’s arrival, in late October, it appears Weight Watchers’ volatility has been amplified. When Winfrey’s stake was announced, Weight Watchers’ share price immediately doubled. Over the subsequent two months, they moved higher still – to above $25 each. Winfrey had more than tripled her initial cost basis investment of $6.79 per share.
Since then, it’s been mostly a jolting roller coaster ride down, with the occasional hope-endearing spike offered by Ms. Winfrey.
(Sick of unending volatility like this? Click here.)
Oprah’s Investing Lesson
On Jan. 25, Winfrey got Weight Watchers shares moving when she (or more likely one of her many attendants) thumbed, “Eat Bread. Lose Weight. Whaaatttt?” and delivered it into cyberspace via Twitter. By the end of the trading day, Weight Watchers shares were up 20%. Winfrey gushed in a follow-up testimonial video that she had lost 26 pounds – and she had lost it while eating her daily bread.
Price volatility can be entertaining. It’s certainly a day trader’s dream. But when you scrutinize Weight Watchers and its business model, you realize there is little to like from an investor’s perspective.
Winfrey’s January tweet, with no enthusiasm-crushing details, implied that dieters could lose weight eating what they want. This is exactly what the marginal dieter – the dieter seeking painless weight loss – begs to hear. Coincidentally (or not), the vast majority of dieters are marginal. They’ll diet until the novelty wears thin, which usually occurs before the body wears thin.
There are details to weight loss, whether you care to hear them or not. The enthusiasm-crushing detail is that you can lose weight eating anything, as long as you eat a controlled quantity of it. Eat all you want, as long as you limit your intake to fewer than 1,500 calories. Of course, this detail is usually fatal. Caloric constraint requires discipline, and discipline requires work. Who wants that?
To be sure, enthusiasm can be extended if a carrot – or a roll, in Winfrey’s case – is dangled in front of the customer’s nose. If extended long enough, enthusiasm can evolve into habit – success. Much more often than not, enthusiasm devolves into ennui – failure.
That’s the insuperable problem for the Weight Watchers International business model, and for Weight Watchers shareholders. No one has yet discovered how to overcome the long-term dreariness of the dieting process to make it palatable to the masses. People eventually tire of counting calories and monitoring their food intake. Once someone has tired of the process, he quits and is unlikely to return. Someone new must be recruited to take the quitter’s place. New recruits are a finite resource.
Not surprisingly, Weight Watchers’ numbers – and the trend of the numbers – are as dreary as the dieting process. Two years ago, Weight Watchers reported $366 million in quarterly revenue. The latest quarterly report shows revenue of $259 million. Over the same period, $0.51 per share income has given way to a $0.03 loss. Margins – gross, operating and net – have trended in mostly one direction – down. It’s all a bit ominous when a company carries $2 billion in long-term debt against an $800 million equity market cap.
Weight Watchers International is at best a speculation, though I’ll concede an entertaining one. That said, I prefer a staid investment over an entertaining speculation every time. Unfortunately, not even Oprah Winfrey’s considerable promotional skills can transform Weight Watchers International into a staid investment.
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