Weight Watchers International Inc. (WTW, Financial) shares plunged almost 35% following the company’s weak fourth-quarter earnings report and a weak 2015 outlook that fell short of analyst expectations. With the revenues continuing on a downward trend for the eight consecutive quarters, the company’s stock saw the steepest drop in its 13 years of business. The company attributed its poor show to a decline in subscriptions and revenue as users migrate to digital methods to count calories and keep in shape such as Jawbone and FitBit, causing a 15% fall in memberships to 2.51 million users in the last quarter. The company is also finding it difficult to justify its $20 per month subscription charge at a time when activity trackers paired with free mobile apps offer customers easy analysis of caloric output and input. The Weight Watchers stock closed at $11.34 following the results.
Revenues fall on low subscriptions
Weight Watchers reported a 10.4% drop to $327.8 million in its fourth-quarter revenues for fiscal 2014 compared to the prior-year period, with the overall paid weeks declining 7%. Consequently, the company logged net loss of $16.1 million in Q4 2014, compared to net income of $30.8 million in the year-ago quarter along with a negative EPS of $0.28 per share, inclusive of one-time structuring charges as well as non-cash impairment charges, compared to an income of $0.54 per share in Q4 2013. The company’s non-GAAP diluted EPS for the quarter stood at 7 cents a share.
For the full-fiscal 2014, Weight Watchers reported a 14.2% drop in revenues and a 41.7% fall in its operating income on a constant currency basis compared to FY2013, with the decline being driven mainly by lower revenues from North America. Further, owing to a reduced number of active subscriber bases at the beginning of fiscal 2014 and lower recruitments through the year for both online and meeting businesses compared to the previous fiscal, the company saw a 12.2% drop in online paid weeks and 12.3% drop in meetings paid weeks for the year.
Regionwise, service revenues for North America declined 12.7% on a constant currency basis during the fourth quarter compared to the prior-year period, driven by a 12.8% drop in total paid weeks. Weight Watchers continued to face strong competition in the region for consumer trial from a developing competitor set that includes digital interfaces such as mobile apps and activity monitors. The company also logged a 2.6% slide in service revenues for the UK, while revenues for Continental Europe grew 3.3% on a constant currency basis compared to the year-ago quarter. Total paid weeks for the CE region grew 8.3%, on the back of a 13.0% rise in online paid weeks and a 0.7% rise in meetings paid weeks.
Outlook for 2015
Weight Watchers also announced its earnings outlook for fiscal 2015. The company projected an EPS of 40-70 cents per share, falling well short of consensus expert estimates that had pegged the figure at $1.43 per share. The company, which competes with businesses such as NutriSystem Inc. (NTRI, Financial) in the weight management services and products market, is also looking at a $100 million cut in operations and costs as part of its resizing plan in the new fiscal.
Weight Watchers, which earlier tried to rebrand itself with a redesigned magazine and new ad campaign, also embraced activity trackers, allowing members to use the company’s ActiveLink tracker along with the more popular Jawbone and FitBit to track exercise and diet. However, with around 51.2 million adults in the U.S. using digital applications to track their health, experts opine that the company requires pushing the envelope further in endorsing the digital technology and lifestyle in order to gain lost ground.
Final thoughts
The Weight Watchers stock took a beating following poor Q4 2014 results and a weak outlook for 2015. However, the company’s plans towards gaining lost ground could salvage it from further decline. In line with expert sentiments that the company’s greatest opportunity for growth lies in partnering with health plans and corporations, Weight Watchers recently announced a partnership with health-care company Humana Inc. to provide diet programs at discounted rates on some of Humana’s health insurance plans. While experts foresee the company’s downward trend continuing through 2015, the trend could witness a reversal from 2016 provided its restructuring plans pan out as envisaged. Considering the current low price of its share, the Weight Watchers stock carries "hold" guidance for the short to mid-term.
