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Commentary

Don’t Count Out Weight Watchers Yet

The market may be disappointed that the Oprah effect hasn’t had a more pronounced impact yet, but Morningstar’s R.J. Hottovy sees the firm on track to make gradual progress.

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Although  Weight Watchers' (WTW) shares are down sharply following its fourth-quarter update and initial 2016 outlook, we see encouraging signs, including strong reception to Oprah Winfrey-led marketing efforts, "Beyond the Scale" platform enhancements, and increased levels of digital engagement. We've consistently stated that 2016 will be a transitional year for Weight Watchers and that it will take time to build consumer awareness of recent platform changes. Nevertheless, we view positive global recruitment trends during the fourth quarter and management's guidance calling for low-single-digit revenue growth in 2016--including high-single-digit growth in North America--as clear signals that features like SmartPoints (which replace the PointsPlus system and emphasise eating leaner proteins, fruits, and vegetables), the Fitbreak app (which provides activity targets), and Connect (a new social tool that gives users access to a Weight Watchers community member) are better addressing consumer demand for a more holistic approach to weight management.

The market may have been looking for a more pronounced "Oprah effect" in 2016, likely explaining today's pullback. However, full-year 2016 guidance (calling for low-single-digit revenue growth, 100 basis points of gross margin expansion to just over 50%, flat marketing and general and administrative costs as a percentage of sales, and adjusted EPS between $0.70 and $1.00) is consistent with our expectations for a more gradual recovery. This guidance strikes us as realistic when factoring in structural industry changes, including mobile apps and other technologies disrupting industrywide pricing power (the basis for our no-moat rating). The changes to our model to conform to management guidance will be insufficient to change our $14 fair value estimate, but we believe the market may be overly discounting Weight Watchers' chances for recovery, and the stock may be worth a look with a moderately wider margin of safety.

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