In other words, there was nothing “sudden” about the explosion in activity monitors and fitness apps. Weight Watchers management was simply looking in the wrong direction, and focusing more on its traditional competitors, NutriSystem Inc. (NASDAQ:NTRI) and Medifast, Inc. (NYSE:MED).
NutriSystem uses a similar system to Weight Watchers, selling monthly food packages which include breakfast, lunch, dinner, and desserts. It sells a weight management program separately. Last quarter, NutriSystem Inc. (NASDAQ:NTRI)’s revenue declined 21.7% year-on-year, although earnings improved 54.5%, indicating that it is also facing the same struggles that are dragging down Weight Watchers. However, since NutriSystem’s products and services are sold separately, its business model is more flexible than Weight Watchers. In addition, NutriSystem offers special programs designed for diabetics.
Medifast, on the other hand, sells weight management food products, such as pancakes and cookies, runs Medifast Weight Control Centers across the United States, and sells disease management products through its pharmaceuticals arm. Medifast, Inc. (NYSE:MED) has fared slightly better than Weight Watchers and NutriSystem, reporting year-on-year earnings and revenue growth of 8% and 48.7%, respectively.
The Foolish fundamentals
In conclusion, a look at the fundamentals also shows that expectations for Weight Watchers are quite low compared to NutriSystem and Medifast.
| Forward P/E | 5-year PEG | Price to Sales (ttm) | Debt to Equity | Profit Margin | 12-month price change | |
| Weight Watchers | 10.30 | 20.54 | 1.19 | N/A / total debt: 2.38B | 13.35% | -14.5% |
| Nutrisystem | 25.98 | 2.85 | 0.98 | No debt | 0.95% | +19.1% |
| Medifast | 12.67 | 1.02 | 1.02 | 0.94 | 4.90% | -2.9% |
| Advantage | Weight Watchers | Medifast | Nutrisystem | Nutrisystem | Weight Watchers | Nutrisystem |
Source: Yahoo Finance, 8/5/2013
NutriSystem is surprisingly the strongest fundamental pick of the three, considering its clean balance sheet and strong price performance over the past year. Even though Weight Watchers has the most robust margins, it also has a horrible PEG ratio that suggests negative earnings growth for years to come.
Weight Watchers’ losses will keep piling up as people become more proactive in their fitness routines through the use of FuelBands and fitness apps. Weight Watchers will probably try to counter with free or enhanced versions of its mobile apps, but they will be too insignificant to bring back its lost members. Therefore, there’s not much reason to own Weight Watchers — it’s just another company that got left behind the technological curve, and just like Hewlett-Packard and Best Buy, it must rethink its strategy from the ground up to get back in the game.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple and Nike. The Motley Fool owns shares of Apple and Nike.
The article A Smartphone-Induced Crash Diet Crushed This Company’s Bottom Line originally appeared on Fool.com and is written by Leo Sun.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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