If Weight Watchers (WTW) customers were shedding pounds as fast as the stock is shedding points, this would be considered a great success.
Shares are getting hit again Tuesday following Friday’s massive 28% Valentine’s Day decline in the wake of disappointing earnings. In late-day trading, the stock was down more than 4% to $21.13. Year to date, Weight Watchers shareholders have seen 35% of their investment decline, whereas in the past year the stock has lost more than half its value.
Barclays downgraded the stock following its sluggish quarter, taking it from equal weight to (ironically) underweight, cutting its price target from $31 to $15.
Why is this company, a highly personalized weight-loss institution for more than half a century, getting so hammered at the start of 2014? Friday’s drop was directly tied to the fourth-quarter earnings report. While revenue beat (although it saw an 11% year-over-year decline to $366.1 million), the bottom line, at 54 cents a share, fell short of analyst consensus. Projected 2014 earnings, at $1.60 a share, also lagged estimates of $2.73. Additionally, the company saw fewer users attending its meetings and using its online services.
It seems the very fact that the company is a 50-year-old institution might be part of what’s hurting it. The Weight Watchers method involves tracking your food intake through a points system, along with attending in-person meetings and weigh-ins for support. But, in an age of free calorie-counter apps such as MyFitnessPal.com and Livestrong.com’s MyPlate Calorie Tracker, the Weight Watchers model is simply falling behind the curve. No longer is it just competing with the likes of Jenny Craig and Nutrisystem (NTRI) – now the competition lies increasingly in the iPhone and Google Play app stores. Although an online program and app do exist at Weight Watchers, for a fee, the company needs to step it up in order to compete with the gratis products available to anyone with a smartphone. After all, is the $17.95 a month online fee consumers need to pay to download the app going to provide any more than the free programs offer?
At the same time, reports over the weekend said Apple (AAPL) was considering getting into the wearable health-technology field, with the possibilities including devices using sensor technology to detect whether you are about to have a heart attack. In this brave new world of product options in an increasingly health-obsessed environment, Weight Watchers is going to have to step firmly into the 21st century.
CEO Jim Chambers, who has led the company since last summer, conceded in the earnings call that the company has an innovation issue.
“First, our offerings have become less appealing in this changing market largely because our innovation approach and our approach to the consumer in general have not been sufficiently market driven,” he said. “In addition, we have a big task at hand to modernize our technology architecture and create a more efficient product development engine.”
Meanwhile, even as Weight Watchers shareholders are feeling indigestion, there must be some happy shorts out there. The short interest in the stock is at a very substantial 64% of the float, according to Yahoo Finance data.