Weight Watchers International (WTW) may be down but it’s certainly not out … at least, not if today’s 15% gain from WTW stock is any indication. Shares are up sharply on the heels of rumors that an activist hedge fund is interested in acquiring the struggling company.
While the big bounce is compelling, it only unwinds a small part of the near-90% loss we’ve seen WTW dish out over the course of the past three years. On other hand, given the rate of revenue and earnings deterioration we’ve seen from Weight Watchers International during that time, this may the last opportunity those owners of WTW stock have to get out at anything close to a palatable price.
The $64,000 question remains: Why would anyone want to jump on a sinking ship like Weight Watchers stock?
Deal or No Deal?
Above all else, investors should understand that no official public offer has been made. The New York Post simply reported this morning an unnamed hedge fund known for taking an activist approach was considering a total takeover of the company after buying most of the $144 million worth of the near-term debt Weight Watchers International presently has on its books.
While the potential buyout offer is a welcome relief for some owners who’ve patiently (and erroneously) waited for a turnaround to materialize, a deal isn’t expected to come too easy. According to the same Post report, majority shareholder Artal Group — which owns 51% of all WTW stock — isn’t keen on selling its stake in the once-great company even though it seems to be headed beyond the point of salvage.
Weight Watchers Losing Ground
Though Artal reportedly doesn’t want to let go of Weight Watchers at anything but a fantastic price, it’s not clear why the fund would want to stick with it. Revenue has fallen sharply since peaking at $1.8 billion in 2012, to a top line of only $1.4 billion for the past four quarters combined. Worse, the year-over-year comparisons continue to deteriorate, with the company swing to its first GAAP loss in years just this past quarter. The number of active subscribers also fell 17% during Q1 on a year-over-year basis.
At the heart of the weakening numbers is the issue of relevancy.
Simply put, Weight Watchers International is still touting analog solutions in a digital world. The weight-loss market is now being won by the likes of activity-trackers made by Apple (AAPL), FitBit (FIT), and others.
As CFO Nick Hotchkin explained of the matter in May:
”We were slow to react to the realities of the mobile revolution. Our systems were old and creaking and made us susceptible to free [diet] apps.”
While it’s encouraging that Weight Watchers now sees and understands its shortcomings, it may be too little, too late, and of little comfort to current holders of WTW stock who are now well underwater with their trade. In many ways the competitive weight-loss landscape has been recast, and Weight Watchers no longer dominates it.
As for Artal Group’s role in Weight Watchers’ demise, as majority owner it had the right and opportunity to adapt the business in 2012 when revenue was peaking. And, one could argue the naming James Chambers as the new CEO in mid-2013 was a step toward that end. It simply wasn’t enough, or not the right solution, or a combination of both. Analysts expect the numbers to continue slipping, from earnings of only 57 cents per share of WTW stock this year to 43 cents per share next year.
In light of today’s suggestion from the Post that Artal plans to hold tight, it begs the question: What can the company’s current owners and management team do that it hasn’t done yet? A buyout may be the only graceful, or even viable, exit before the company’s reaches the point of no return.
Bottom Line for WTW Stock
In many ways this is crunch-time for anyone who owns WTW stock, including Artal Group.
In that there was no offer on the table before, a turnaround was the only viable option for the WTW die-hards. With an offer rumored to be on the way though, shareholders now have a potential (and much-needed) exit plan they probably never thought they’d need.
Though Artal may want to stay in, it can afford to take that chance. The average investor isn’t apt to feel the same way at this point.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
