Description

WTW has been written up on VIC 3 times.  I've been told that borrowing WTW stock today to short it is very dififuclt and incredibly expensive (50-60% borrow).  So this write up is a public service to bulls.  

Short – Weight Watchers

• The ultimate “value” stock, sitting at almost a 5-year low, down from $80 in 2012
• Good brand, largest player in the industry, 43% market share in the US
• Jessica Simpson just lost 70 pounds on WTW.
• Looks cheap on past multiples, 6x 2013 earnings
• Primary beneficiary from global obesity epidemic

About

• Meeting fees (think AA for weight loss), product sales, and licensing revenues – 70% of revenues, gross margins 50% – ½ of operating profits – $43 a month (meetings and eTools)
• Internet revenues – 30% of sales but 75% gross margins – ½ of operating profits - $19 a month, from 2008 to 2012 grew 28% a year
• 17% of locations franchised, but company has been buying franchisees
• Between 2007 and 2012 WTW added $2b of debt, which it used to buy back stock.
• $2.2 of net debt is not alarming in relation to rearview cash flows; in 2012 it paid between $72-83 for its stock – all-time high.
• All debt is floating.

The problem

• Free weight loss/exercise apps available, they are good and are taking market share from WTW.
• Till now the impact has been most pronounced on WTW's meeting business, which has a peer-pressure element that apps don’t have.  Top-line numbers don’t do justice to actual decline of revenues, because WTW was buying out franchises.
• Last quarter, internet revenues declined for the first time ever!  Revenues were down 5.3% – not a huge number, but remember, in the past they were growing 28%.  This is very important for two reasons:

1. WTW app costs $228 a year and is not superior to free apps (I used a few free apps they were great), unlike WTW's meeting business, where there is the peer-pressure element – WTW has no competitive advantage online.
2. Internet business, though only 30% of revenue, has a 75% gross margin = ½ of profits.

• Bulls are looking in the rearview mirror and don’t see a structurally broken business, while free apps are only getting better.  Also, iWatch and the like (other wearables like FitBit  etc...) will only increase the pressure on WTW.
• WTW is a fixed-cost business – high operational leverage.  This is great when revenues are growing, not so good when revenues decline.  Last quarter, revenues declined but COGS remained flat.  Decline in sales will lead to very fast erosion of profitability.  (Also, I don't have data points to prove it, but the decline in traditional (AA-type) business most likely has been caused by virtual accountability.  You can share your goals and milestones with online strangers and Facebook "friends".  Free apps have chat boards etc... )
• Huge debt – so WTW has high operating and now high financial leverage ($2.2 billion of debt). 
• If meeting revenues are down 5% (very conservative assmption) and internet revenues decline 50%, WTW cannot cover interest expense.  

Catalyst