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Stock Strategist

Oprah Lifts Weight Watchers

But even with a superstar on board, a turnaround won't come easy.

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We view  Weight Watchers' (WTW) partnership with Oprah Winfrey as a clear positive that should help improve the company's brand relevance, open up potential marketing synergies, and bring a new voice to efforts to become a more holistic health, fitness, and emotional-wellness provider. While it is difficult to put numbers on the financial impact of the Oprah partnership--especially given Weight Watchers' asset-light model, with its high degree of operating leverage--we've raised our 2017-20 revenue growth assumptions to the mid-single-digit range (versus earlier low-single-digit estimates) and our operating margin outlook to the mid- to high 20s (versus our prior low to mid-20s outlook) as a result of the improved brand and marketing synergies. This increases our fair value estimate to $10 per share from $5.

However, with the stock price soaring since the partnership announcement, we believe Weight Watchers has moved into overbought territory, and we would exercise caution for several reasons. First, despite improving recruitment trends in the most recent quarter, we forecast a transitional year in 2016, including a low-to mid-single-digit revenue decline amid the lingering effect of recruitment difficulties in early 2015. In addition, we forecast operating margins declining to 14%-15% as a result of expense deleveraging (but partly mitigated by a $100 million cost-reduction plan), which may not be reflected in the market price. Second, many of the factors that hurt Weight Watchers during the past several years--including calorie-counting mobile apps and activity monitors--remain in place. We still believe these disruptive technologies have diminished the brand's pricing power, which ultimately led to the removal of our narrow moat rating. Finally, while Oprah's involvement is likely to resonate with Weight Watchers' traditional over-50 female demographic, it's unclear how the company plans to better position its brand for a younger audience.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.