Over the weekend, professional football player Tony Gonzalez tweeted that his flight was delayed at the gate because the aircraft did not have enough seat belt extenders on board. That's a pretty good reflection of the expanding market opportunity for weight loss companies like Weight Watchers (NYSE:WTW). However, the company reported a 30% jump in revenue this quarter, almost tripling off its lows, leaving analysts to wonder whether this stock still has another notch in its belt. Let's take a look at this company and where it might be headed. (Find out how finances and weight are related in 5 Financial Moves That Can Make You Fat.)
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A Healthy Start to the Year
Weight Watchers has had its challenges on the top line over the years, but the company's current plan seems to be working. Weight Watchers reported a 30% jump in revenue this quarter, the best quarter ever to date, and ahead of even the highest number on the Street. Growth was pretty balanced; meeting fees climbed 23% (a little more than half the total), product sales climbed 26%, and online revenue jumped more than 66% to make up nearly 20% of the total.
Profitability also improved with revenue. Gross margin moved up about 160 basis points from last year (and 170 from the fourth quarter); administrative expense growth was pretty well-contained, while marketing expenses grew more than 28%. Still, as better (or rather, more effective) marketing has been a key factor in this company's turnaround, that seems like a prudent spending decision. All in all, operating income grew nearly 49% this quarter, and the operating margin expanded nicely.
Now Comes the Hard Part
It will be interesting to see how much of this first-quarter momentum the company can hang on to throughout the year. It's pretty common for the company to see a strong first quarter (New Years resolutions, perhaps?) and then see revenue trail off as the year progresses.
That said, the company seems to be pulling some of the right levers now. The ad campaign with Jennifer Hudson seems to be resonating with customers, and the new points-plus program is apparently pretty popular as well.
The company is also getting more realistic about how to penetrate its untapped market. There are a lot of people who simply have no interest in attending the traditional Weight Watchers meetings, and the company's progress with its online offerings is a big step in accessing this market. What's more, the company is also trying to target some new advertising toward men; a market that weight loss companies like Weight Watchers and NutriSystem (Nasdaq:NTRI) have found hard to tap into. (For more, see NutriSystem: Right Idea, Wrong Stock.)
A Crowded and Ignoble Field
Although there is legitimate data that shows the Weight Watchers approach can work for people, the field of non-medical weight loss intervention has a dodgy history. There have been far more scams than successes, and that hangs over companies like Medifast (NYSE:MED), Herbalife (NYSE:HLF) and USANA Health Sciences (Nasdaq:USNA) as they try to sell their supplements and programs.
At the same time, companies like Unilever (NYSE:UL), Abbott Labs (NYSE:ABT) and Kellogg (NYSE:K) have made the market all the more crowded with food/nutritional products aimed at helping people lose weight. What that all means, then, is that consumers are faced with a huge array of choices and advertising messages - and that can make it hard for any one system or product to rise to the top.
Not So Much Competition From Medical ... For Now
Right now, the gastric banding products offered by Johnson & Johnson (NYSE:JNJ) and Allergan (NYSE:AGN) are the only real medical options for weight loss, apart from various prescription regimens that use old drugs in new combinations. What's more, it is still unclear whether Vivus (Nasdaq:VVUS), Arena (Nasdaq: ARNA) or Orexigen (Nasdaq:OREX) will ever get approval for their weight loss drugs, let alone whether patients will suffer through the side effects. (For more, see FDA To Obesity Drugs: Drop Dead.)
The Bottom Line
Weight Watchers has a good brand, good margins, great cash flow leverage and a large untapped market. Unfortunately, it also has ample coverage and a valuation that seems to fully account for the company's positives. Although Weight Watchers would be a fine stock to consider on a pullback, today's price does not seem to leave much potential in its shares. (For more, see Can Investors Fatten Up On Weight Loss?)
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