Too Much Weight Hard to Handle for Weight Watchers?

Too Much Weight Hard to Handle for Weight Watchers?

While investors consider companies being torn down by the upsurge of tablets and smartphones, they generally tend to concentrate on PC manufacturing companies like Hewlett-Packard and big box retailers like Best Buy.

However, recently, Weight Watchers International , fell prey to the mobile revolution, blaming the ascent of mobile technology as a major contributor to its folding bottom line. The company, eminently noted for its weight loss programs, warned that its recruitment trends and earnings are expected to deteriorate throughout the rest of the year, since free fitness applications and other electronic fitness monitors were gaining an edge over its obsolescent core business.

Intensifying the impact of that bad news, CEO David Kirchhoff, set forth his proposal for resignation. After the announcement, restless investors beat a retreat and hurriedly discarded the stock, and the shares dipped nearly 20%, dropping close to the 52-week low.

The second-quarter slide
Preceding the aforementioned plunge, Weight Watchers stated earnings of $1.36 per share, showcasing a 2.21% increase as compared to the previous year quarter, coming up $0.03 short of analysts' expectations. It was also noted that the revenue declined by 4% to $465.1 million.

The company's newly appointed CEO, Jim Chambers, conceded that "Current business conditions are challenging" and also that the company will "start 2014 with fewer active members and therefore a lower earnings base." The CFO, Nick Hodgkin, also added that he holds the "sudden explosion of interest" in free fitness applications and activity monitors responsible for deeming the core business of Weight Watchers down and out during the quarter.

The not-so-sudden explosion
The judicious investors, who have had their eyes fixated on the progressively intertwining relationship between the fitness and the mobile tech industries should however realize that there is nothing so "sudden" about the aforesaid explosion.

Apple and Nike (NYSE: NKE) anticipated the technological advancements, and gave the revolution in the Activity Tracking Technology a kick start, with Nike+ FuelBand in January 2012. The FuelBand is a fitness bracelet, which synchronizes to an iOS application on the iPhone. It can be used to track daily physical activities such as footsteps covered and the amount of calories burnt on a daily basis. The application tracks the performance over a period of time, thus, empowering the user with a game-like experience in personal fitness.

Also, positive progress is rewarded with NikeFuel points, which is later made instrumental to unlock achievements. The application also allows the user's achievements to be shared across social networking platforms like Facebook and Twitter, thereby, encouraging healthy competitions and interactions among friends across the Internet.

In fiscal 2012, Nike's equipment division reported an 18% year-on-year escalation in earnings as a direct outcome of FuelBand's popularity. Ensuing the wide acceptance of Nike's FuelBand, other competitors, such as FitBit, Motorola MOTOACTV and Jawbone up Rev B, assertively paraded into the market.

In addition to these fitness bracelets and apps, an incessant growth has been observed in the number of free fitness tracking applications swarming the market. The Apple App store, now offers over 10,000 mobile fitness applications - many of which are free for download.

Weight Watchers also own apps for iOS and Android, which can be accessed only by the company's paid members. This acts as a shortcoming that puts a severe constraint on their appeal.

Affixed to the past
Weight Watchers is unfortunately, still, tightly fastened to its archaic business model of paid memberships. This requires the customers to purchase membership plans, which include meal and fitness plans, as well as meetings with other Weight Watchers' members in person or online.

Previously, this scheme worked fairly well as an all-in-one solution to weight management. However, time has flown by rapidly, and the ever-more networked individuals now prefer to achieve a sense of self-accomplishment and competition like the one offered by Nike's FuelBand and its collaterals.

In other words, there was nothing so "sudden" about the outburst of activity monitors and fitness applications in the market. Weight Watchers' management was focusing on its traditional competitors, NutriSystem and Medifast, remaining oblivious to the technological progression that was alongside materializing.

Talking about the traditional competitors, NutriSystem faced a revenue decline of 21.7% year on year in the previous quarter, although earnings increased by 54.5%, pointing out that it is facing the same snags that are weighing Weight Watchers down. The difference being that, NutriSystem's products and services are sold separately, making its business model more flexible than that of Weight Watchers. In addition to this, NutriSystem offers special programs strategized for diabetics.

On the other hand, Medifast, sells weight management food products like, pancakes and cookies, runs Medifast Weight Control Centres across the United States, and sells disease management products via its pharmaceutical spin off. So far in the tussle against technological advancements, of the three companies, Medifast has fared better, with an 8% and 48.7% growth in its year-on-year earnings and revenue, respectively.

Of unwise fundamentals
As we conclude, a peek into the fundamentals also reveals that the expectations for Weight Watchers are quite low compared to NutriSystem and Medifast.

Considering clean balance sheets and strong price performances over the past year, NutriSystem surprisingly emerges as the strongest fundamental pick of the three companies, the other two being Weight Watchers and Medifast. Although Weight Watchers maintains the most robust margins, it has a poor PEG ratio which points out negative earnings growth in the years to come.

The losses of Weight Watchers are only going to heap up as people become more involved in their fitness routines using FuelBand's and other fitness applications. Weight Watchers would probably try to counter this, with free or tweaked-up versions of its mobile applications, but they will be too insignificant to bring back the lost members.

Therefore, there is no substantial reason to own Weight Watchers - It is just another company that got side tracked during the technological upsurge, and just like Hewlett-Packard and Best Buy, it must put its obsolete strategies under the microscope, bend over backward and make a headstrong reentry.

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Ashley Sales has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike and Weight Watchers International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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