Investors Gobble Up Weight Watchers Stock, But the Binge Won’t Last

Oprah Winfrey finally got would-be buyers off the couch, but Weight Watchers is still a flawed business model

Congratulations to anyone who happened to still be hanging on to Weight Watchers (WTW) stock as of Tuesday’s close. WTW shares are up more than 22% today, leaving behind a sizable gap at the open.

Binge Buying of Weight Watchers Stock Wasn't Built to LastOn the other hand, you may not want to get used to these kinds of gains, or even the current price of Weight Watchers stock. It was a surge driven by an event that, though impressive, doesn’t actually change the fact that the business model is a flawed one and no amount of celebrity association can change that.

Yes, I’m talking about Oprah Winfrey, who stirred the pot again Tuesday afternoon and inspired a bunch of stock-buying on Wednesday as a result. A reality check is in order.

Oprah Joins the Team, But…

As a refresher, Oprah Winfrey shook things up in a much-needed bullish way in mid-October by purchasing 10% of the weight-loss assistance company and, apparently, agreeing to become a spokesperson.

I’ll confess (as I said then) she’s marketing gold; most everything she touches becomes a relative hit. That’s why I wasn’t terribly surprised that Weight Watchers stock more than doubled the very day news of her investment came out, and in the meantime has doubled again.

Still, there’s only so much one celebrity can do, and it takes a certain amount of time for any celebrity to have a measurable effect as a spokesperson.

Translation: Enough already. At some point, Weight Watchers will have to contend with the fact that, at one time, it was the powerhouse in the weight-loss arena, but has since lost ground due to a cornucopia of alternative weight-loss systems. Most of them are online and many of them are free.

It’s a detail most investors were willing overlook between October 19th and mid-December, with WTW shares finally starting to roll over a couple of weeks ago. The market’s euphoria over Weight Watchers was fully rekindled this week, however, thanks to a television ad from Weight Watchers that featured none other than Oprah, who has publicly dealt with weight issues of her own.

Oprah Speaks, But Will Consumers Listen?

Though it didn’t resonate with investors until today, the 60-second TV spot — a bit of a tear-jerker — actually debuted on Christmas Eve. This small snippet speaks volumes about the connection she makes with potential Weight Watchers customers:

“Inside every overweight woman is a woman she knows she can be. Many times you look in the mirror and you don’t even recognize your own self because you got lost, buried in the weight that you carry,” she says. “Nothing you’ve ever been through is wasted. So every time I tried and failed, every time I tried again, and every time I tried again, has brought me to this most powerful moment to say, ‘If not now, when?'”

Television advertising isn’t what it used to be, however, and while the commercial touched people, it remains to be seen if the emotionally-charged spot will actually translate into dollars.

Just for the record, I’m not optimistic.

I could write a book on the subject of how the inundation of marketing messages all consumers now get from all angles has made us immune to all of them. Fortunately, I don’t have to write a book on the matter because one statistic makes the point well enough: 80% of the companies that advertise during the Super Bowl — the one event each year watched as much for the great commercials as the event itself — confess they don’t see a sales bump spurred by the ads.

The counter-argument is that Super Bowl ads are just a competition in and of themselves, and it’s a distracting three hours. Even so, one would think there’d be some sort of consumer response at some point after the game, given it’s the most-watched event of the year; companies rarely spend big money just for bragging rights.

We’ve simply disconnected our eyes and ears from our wallets, having been numbed to all the advertising we’re exposed to every single day, and Weight Watchers isn’t immune to that effect.

Bottom Line for Weight Watchers Stock

It wouldn’t be fair to say Oprah Winfrey can’t drive some level of new revenue for the company. The question is, will it be enough? It’s going to take a massive amount of traction to pull Weight Watchers’ proverbial fat out of the fire and make it viable again.

For perspective, per-share profits for WTW were more than cut in half in 2015, and sales fell more than 20% for the year. As of the latest look, before the commercial aired, analysts weren’t calling for meaningful growth for the top or bottom lines. That translates into a forward P/E of 30.9. Earnings would have to nearly double in 2016 to push the P/E down to the more palatable 15 area, and earnings would have to grow by that amount again in 2017 to justify any real price appreciation for WTW.

That’s a tall order in a world where alternatives continue to pop up every day… even for Oprah Winfrey. Never mind the fact that it took investors three trading days to collectively decide WTW was a must-have. That’s a red flag in itself.

Enjoy the bullishness…while it lasts.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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