Written by Jae Jun follow me on Facebook Twitter

I lost 40% on Weight Watchers.

That doesn’t tell you anything about the investment. But taking a 40% loss is tough in any situation and I know that a lot of value investors own it.

But here’s why I took the blow to the gut and why you should consider selling Weight Watchers too.

I Sucker Punched Myself Into the Value Story

The value story is short, simple and compelling.

Well known brand

Credible studies and proven results

Not a quick scam or fad

Currently in a marketing down cycle

Free mobile apps are the true fad

If you dig deeper into the value side, it’s really good. Comes across as a once in a decade opportunity. But I’m against it now.

The Moat and Brand Value isn’t Durable

Weight Watchers is supposed to have a strong and durable brand moat but I don’t buy it.

Name a soda.

Coke.

Name a weight loss program.

umm…

Coca Cola is a moat and brand. Unfortunately, Weight Watchers isn’t as wide or deep as you think.

Even if Weight Watchers has a strong within the industry, it doesn’t stop companies from going bankrupt.

Blockbuster was a brand.

Kodak was a brand.

Hotmail was a brand.

My point? The Weight Watchers brand is easily erodible.

The Younger Generation Doesn’t Care or Have any Loyalty to Weight Watchers

If you look up weight loss forums or other weight loss programs online, it’s clear that younger folks are more comfortable with online forums. People post their underwear photo for the whole world to see but won’t attend a live group.

The very act of meeting a bunch of strangers and discussing weight loss and life style changes is not something a person in their 20’s or 30’s is interested in.

People are just less willing to open up and interact with other humans. When I attend events or social gatherings, I see people build a “I’m not interested in socializing” barrier. They stand in a corner or lean against a wall and stare at their phone.

Why?

Because it’s easy and “safe”.

I’ve done it. You’ve done it. Everyone has done it.

The Weight Watchers support group is a broken model the longer it goes.

The Dying Trend of Group Meetings

I admit that the meetings are extremely important in achieving weight loss.

It works.

But the program isn’t the problem. The program is good.

The mistake is to believe that the group meeting format will continue to be the heart and soul of Weight Watchers.

Unfortunately, that was 3 fiscal years ago when the Points Program was launched in Dec 2010. Problem is, the meeting fees declined immediately after one year. Not to mention that the Points Program was delayed by several years to get it perfect.

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Consecutive years of revenue declines immediately following a new program launch is a big red flag.

I don’t see how the group meetings can continue to be the cornerstone strategy for Weight Watchers.

As meeting enrollments go down, in-meeting product sales also go down. Licensing has been flat and will likely remain flat. How many restaurants or ice creams will license the Weight Watchers brand?

That means the only revenue stream with growth potential is the online business.

But with management focusing on reducing costs and improving inefficiencies, the chance of being left behind on the technological front is very real.

*cough* Blockbuster Video *cough*

Weight Watchers is NOT a Lifestyle Change Company

A huge mistake is how value investors view Weight Watchers as a lifestyle changing company.

I also fail to see how this adds value to Weight Watchers as an investment opportunity, but I see it come up all the time.

The truth?

Weight Watchers is a weight loss program pure and simple.

Overweight people don’t want to hear lectures about changing habits and eating healthier.

Weight Watchers knows it. That’s why all of their ads focus on how much weight Jessica Simpson and Jennifer Hudson lost.

Here’s something to think about.

Two friends were talking and one was smoking. Non Smoking Friend: If you put the money you spend on cigarettes into an index fund and let it compound at 8-10% you’d be a millionaire in 10 years. Smoker: You don’t smoke, so why aren’t you a millionaire yet?

Changing people’s behavior is one of the hardest things to do and that’s why apps, diet plans, pills, fads and scams will continue to do so well and keep eating away at Weight Watchers.

There is so much noise and crap in the weight loss industry that it’s extremely difficult for Weight Watchers to penetrate the market.

From the looks of things, it’s only going to get noisier.

The BIGGEST Mistake is Believing that Free Apps are Competitors

Free apps are NOT the competitors.

It’s the start of a massive trend as new companies also see the market potential and start crossing boundaries into the fitness and weight loss category.

Nike, Apple, Samsung, mobile apps that sync with web apps and the huge shift towards wearables.

I’m not talking about free or 99c apps here.

There are huge players invading the weight loss territory. Look at what mint.com did to the personal finance space. It’s getting easier to track your goals and manage weight with the help of gadgets.

Nike uses sensors and partnered up with Microsoft to offer a Kinect weight loss training game.

Game on Weight Watchers.

Defense isn’t going to cut it for Weight Watchers when competitors are innovating like crazy.

Everybody knows how big of a market this is.

Weight Watchers needs a big shift in strategic direction instead of focusing on cost cutting.

Weight Watchers is a Dinosaur and a Value Trap

Ironically, Weight Watchers it the big, fat, stubborn incumbent in the weight loss industry.

I just wrote 1,000 words explaining two words. Value Trap.

Weight Watchers is working with a broken model. They need to start innovating, making itself known and getting consumers excited. Otherwise, expect margins, FCF and memberships to continue falling to the point where intrinsic value does become $20 per share.

Value investors are mistaking the width of the moat.

It isn’t as wide as it seems.

Free apps aren’t the problem. It’s just the start of its problems.

Have Your Say

Do you own WTW? Let me know what you think and why you are holding.