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Monday, November 8, 2010

Alternatives to Weight Watchers (WTW) and President Clinton's Example (Different from Classic SNL Skit?)

Shares of Weight Watchers (WTW, $34.69) continue work their way higher as the Market gains comfort that consumers are slowly opening their wallets and spending on weight loss programs. That said, while competitor Nutrisystem (NTRI) recently beat bottom-line expectations for 3Q10, the company's top-line was down 4% Y/Y. We'll see how Weight Watchers fared during the September quarter when it reports results tomorrow (Tuesday) afternoon.

In our late September post, Weight Watchers (WTW): Plenty of Embedded Upside, we shared a video titled Weight Watchers CEO Unfazed by Obesity Pill News. We also relayed that we were also not overly fazed by other weight loss remedies and noted our view that reasonable fair values are in the $40 range and could extend into the $50s if historical multiples are awarded to the company.

Yet, competition is a risk for any company and, in this case, is the number one risk factor listed in Weight Watchers' Annual Report Form 10-K (from last year):
  • Competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods could result in decreased demand for our services and products.

  • The weight management industry is highly competitive. We compete against a wide range of providers of weight management services and products. Our competitors include: self-help weight management regimens and other self-help weight management products and publications such as books, tapes and magazines; commercial weight management programs; Internet weight management approaches; dietary supplements and meal replacement products; weight management services administered by doctors, nutritionists and dieticians; surgical procedures; the pharmaceutical industry; government agencies and non-profit groups that offer weight management services; and fitness centers. Additional competitors may emerge as new or different products or methods of weight management are developed and marketed. More effective or more favorably perceived diet and weight management methods, including pharmaceutical treatments, fat and sugar substitutes or other technological and scientific advances in weight management, also may be developed. This competition may reduce demand for our services and products.
So, competition may encroach from all sides -- especially since innovators never sleep -- trying to break down Weight Watchers established, high-margin moat. Nonetheless, while we're a big fan of innovation in any field, we're less certain of the potential success in the field of weight loss management.

As an example, this headline in the The New York Times from just the other week:

  • F.D.A. Rejects a Third Weight-Loss Drug - Regulators seem to have heightened their scrutiny of diet pills that could pose risks to the heart or other organs, diminishing the options available to overweight Americans.
Although we're not schadenfreudes, we were -- as shareholders -- pleased for Weight Watchers when we saw this news. YET, as the NYTs posits, regulators are "Diminishing the options available to overweight Americans."

Really? While we know the FDA garners some negative reviews from industry participants (e.g. it's "extremely slow," or "very political"), we think it's unsettling that we -- as a people -- might look to pills to lose weight. But, wait, there might be other non-traditional methods, too.

The WSJ featured the following article on 9/14/10:
  • Freeze! Zap! Bye-Bye, Fat. Fat cells, watch out. Two new devices—one that deflates fat cells, one that destroys them—have just been cleared for "body contouring" in doctors' offices by the Food and Drug Administration. The FDA has approved two new devices that will literally freeze and empty fat cells to reveal a thinner you with no incisions or needles.
Perhaps this isn't such a big surprise given American's obsession with cosmetic/plastic surgery?

What about tried and true options, such as following a healthy, leaner diet and avoiding processed foods? After all, research increasingly shows that we literally are what we eat. Did you know that concrete evidence suggests that "our behaviors can predispose our children to developmental problems and disease, even before they are born?" This field of study is called epigenetics, which we hadn't heard of until last week. For reference, Wikipedia defines epigenetics as:
  • In biology, and specifically genetics, epigenetics is the study of inherited changes in phenotypegene expression caused by mechanisms other than changes in the underlying DNAepi- (Greek: επί- over, above) -genetics. These changes may remain through celldivisions for the remainder of the cell's life and may also last for multiple generations. However, there is no change in the underlying DNA sequence of the organism;[1][2] sequence, hence the name (appearance) or instead, non-genetic factors cause the organism's genes to behave (or "express themselves") differently.
We learned of this research from the 7th Nestle International Nutrition Symposium, which was in late October in Switzerland:
Truly fascinating and we recommend reviewing certain of the presentations. Clearly, an important research area with findings that might positively influence public health (should behaviors shift toward leaner diets).

On a related note, another extremely interesting presentation well worth a listen comes from an April 2010 talk by Gary Taubes, author of Good Calories, Bad Calories: Fats, Carbs, and the Controversial Science of Diet and Health - (via Swedish Weight Loss Services with Mediasite):
With detailed, well-researched historical evidence, Mr. Taubes points to carbs as the major problem and says, "anything that makes us fat, makes us sick also," noting the numerous chronic diseases associated with obesity (click to enlarge):

Finally, we come to President Bill Clinton. The other month we learned that he's gone vegan, captured in this blog post:
  • "Well, the short answer is, I went on essentially a plant-based diet," Clinton tells CNN in an interview airing Wednesday night. "I live on beans, legumes, vegetables, fruit. I drink a protein supplement every morning. No dairy."
Here is the CNN video featuring President Clinton:

We're afraid that our Fannie May Fine Chocolates and Pixies (part of our 1-800-Flowers.com/FLWS) don't fit too well into this picture....
Dark Pixies®
Dark Pixies® ???????
Hazelnut Clusters
Hazelnut Clusters ???????
Honey Almond Nougat
Honey Almond Nougat ??????
Here, we personally strive for moderation and recently consumed a few pixies at some birthday parties.... Uh oh.

Where are we going with all of this? We're pointing out that there are options besides Weight Watchers, including life choices that may also fit in with Weight Watchers' time-tested healthy living (lifestyle) approach. Nonetheless, we continue to believe the company's established franchise is durable and, quite likely, will be bigger, better, and stronger in five years. As this happens, we should see higher earnings, excess cash flow, and dividends, which may well garner higher valuation multiples.

Our hat is off to President Clinton and we wish him all the best. Of course, we can't help but recall the SNL skit - thanks to SNL, NBC and Hulu.com, we have "Clinton at McDonald's - Better bolt everything down before Clinton eats it all."

Classic. We suspect even President Clinton might smirk while watching this one. May Phil Hartman rest in peace.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long WTW, SOFO, FLWS.

© 2010 Jeffrey Walkenhorst
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