Home Diet Plans What’s Eating Weight Watchers Stock? It’s Not Just the Keto Craze – Barron's

What’s Eating Weight Watchers Stock? It’s Not Just the Keto Craze – Barron's

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I’ve heard some humdinger excuses for earnings misses. Back in 2013, suit seller Men’s Wearhouse called out would-be brides for not wanting to get married in a year ending with an unlucky 13. The company, now called
Tailored Brands
,
trades below where it did then. In 2015, sandwich chain Cosi blamed a same-store sales decline on Pope Francis’ visit to Washington, New York, and Philadelphia. His Holiness might have fed hungry souls too well, because Cosi filed for bankruptcy the following year.

This past Tuesday, however, was surely the first time a chief evoked “keto doughnuts” in explaining a miss.
Weight Watchers International

(ticker: WTW) came up short on fourth-quarter results and predicted 2019 earnings of less than half of what Wall Street was expecting. Its shares shed 34% in a day. CEO Mindy Grossman blamed marketing missteps and competition. Asked for details, she added, “If we look out there and we look at surges and things that, you know, come into culture, right now we have a keto surge. You know, it’s a meme. It’s not like a company. You know, people have keto doughnuts.”

Keto is short for ketogenic diet, which calls for eating plenty of fat, a moderate amount of protein, and limited carbohydrates. Keto dieters eat things like eggs, avocados, lettuce, cheese, and meats, and they can make low-carb facsimiles of treats, even doughnuts, using ingredients like almond flour and stevia, a natural sweetener.

If keto were just a meme and Weight Watchers could sharpen its marketing, value investors would have reason to fill up on shares, which trade for less than 16 times projected earnings, down from 26 a year ago. Last year, the company rebranded itself as WW, launched a plan called Freestyle, and expanded its digital offerings, including for dieters who prefer not to attend meetings. Membership grew nicely before a sudden December slowdown. Oprah Winfrey remains a spokeswoman and key shareholder. In a report last fall, Morgan Stanley found that Weight Watchers had penetrated only 8% of its addressable market.

But investors probably should wait and watch, rather than buy shares here. For one thing, “meme” might not be the right word for the keto diet. A grumpy-cat photo online, with captions expressing ironic human thoughts—that’s a meme. Keto was the most-searched diet last year, according to Google. Among the 10 most-searched foods were keto pancakes, keto cheesecake, keto chili, keto brownies, and keto cookies. With fat in fashion, prices of avocados, olive oil, butter, and salmon have jumped over the past five years, while those of corn, sugar, and wheat have stalled or slumped, The Wall Street Journal reports.

The same Morgan Stanley report that found plenty of growth opportunity also found enough trouble spots to warrant analyst Vincent Sinisi initiating coverage of the stock at Equal Weight. For example, Weight Watchers has repositioned itself as a lifestyle brand and social-media platform, but users were spending only a couple of minutes a day with its smartphone app, which the company has since updated. And there is already a social-media specialist that caters to dieters—and plumbers, and cellists, and everyone else. It’s called Facebook.

JPMorgan analyst Christina Brathwaite was negative on Weight Watchers heading into earnings, with an Underweight rating and $25 price target. With the stock recently selling for only $22, Brathwaite added it to the firm’s Focus List—as a top short—and lowered her price target to $14.

Among Brathwaite’s concerns: Although digital recruitment is up, recruitment for pricier meeting-based plans, which have higher overhead, is falling. The company plans to consolidate underperforming meeting centers. However, “recruitment is down most among lapsed subscribers, which could be attributable to a lack of newness in the actual diet program,” Brathwaite wrote on Wednesday. She also notes share gains by competing diet plans with online subscribers, including Diet Doctor, which caters to keto fans.

“We’re not going to change our DNA,” said CEO Grossman on the earnings call. “We’re not going to play a game. We never have. And that’s why we’ve been able to do what we do for 57 years.”

Excellent point. Dieters are notoriously fickle. Trends come and go. I’ve been known to carry around an extra 15 pounds or so—and by “15” I mean 40. Since New Year’s Eve, I’ve tried to cut carbs. But on Wednesday night, I ate two bowls of Chocolate Toast Crunch cereal so fast that my
Apple

Watch registered the hand movements as exercise.

Maybe Weight Watchers works. Then again, I’m not sure 57 years of experience in the diet business is a selling point. The average man’s weight has ballooned by 30 pounds, to 196, over that stretch. If the answers were easy, widespread success would be more obvious.

Weight Watchers is partnering with
Blue Apron

(APRN) to provide meal kits. That seems to fit nicely with a recent shift in shopping, away from shelf-stable food and toward fresh food. But Blue Apron has plunging sales and a stock that sells for $1 and change. Speaking of which, Weight Watchers, which briefly topped $100 a share last year, now trades below its 2001 initial public offering price of $24. The stock has soared and swooned over the years like a yo-yo dieter. Next year, the company plans to introduce program improvements. If it can crack the code of not only what works best in dieting, but also what people will pay for, its stock might become a good deal.

Meanwhile, there’s comforting news: We needn’t worry about Oprah’s finances. Although the recent stock plunge might have reduced the value of her holdings by tens of millions of dollars, she got in at a single-digit share price, so she’s still up nicely. And last year, she exercised options and sold the resulting stock, for a profit of more than $100 million.

Write to Jack Hough at jack.hough@barrons.com

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