Weight Watchers takes hit from Atkins

Diet products company blames popular low-carb diets for its weak 1Q and lowers full-year forecasts.

May 12, 2004: 11:47 AM EDT

http://money.cnn.com/2004/05/12/new..._watchers.reut/

NEW YORK (Reuters) - Shares of Weight Watchers International Inc. tumbled Wednesday after the company said first-quarter earnings fell, and blamed the low-carbohydrate diet craze in the United States for a lower full-year forecast.

Since last spring, high-protein, low-carbohydrate diets like Atkins and South Beach have marked one of the biggest U.S. eating trends. About 17 percent of Americans have said they've tried the Atkins diet, while 4 percent are on it now, according to a recent survey by market research firm NPD Group.

Weight Watchers (WTW: down $2.77 to $34.97, Research, Estimates) stock fell as much as 9 percent on the report.

The diet products and services company, which uses a reduced-calorie "points" system that does not forbid certain foods, has since seen membership at its U.S. weight loss centers wane.

"In America, we did not see that balance of media presentation (as in Europe). Extreme diets were not being questioned but actively supported, so it's not surprising that many people took them up," Chief Executive Linda Huett said on a conference call.

First-quarter weakness

The Woodbury, N.Y.-based company, citing an accounting charge from consolidating its Weightwatchers.com unit and early debt retirement, said net income in the first quarter dropped to $36.8 million, or 35 cents per share, from $40.6 million, or 38 cents per share, a year earlier.

Excluding charges, net income rose to $48.7 million, or 47 cents per share -- in line with Wall Street expectations, the company said.

Net revenue rose to $281.4 million from $251.5 million a year ago as worldwide attendance increased 10.4 percent.

But the lower-than-expected U.S. weight loss center attendance, which increased slightly to 9.9 million from 8.9 million a year earlier, spurred the company to cut its 2004 outlook to a range of $1.70 to $1.80 per share, excluding charges.

Analysts had expected the company to post 2004 per share earnings of $1.93, according to Reuters Research.

Huett said that the Atkins diet "has peaked," but the growing popularity of new low- and no-carb food products -- part of "self-styled" eating regimens -- poses another obstacle. Sales of Weight Watchers' own line of branded food products have taken a hit.

"We knew there was going to be a glut of low-carbohydrate products in the beginning of the year, but we probably saw it with a lot more intensity than any of us expected," Huett said. "There's a mistaken belief that all you have to do is eat low-carb food to lose weight."

Watch Out, Weight Watchers

By Alyce Lomax, The Motley Fool, May 12, 2004

http://www.fool.com/News/mft/2004/mft04051212.htm

Weight Watchers (NYSE: WTW) itself is on a diet, it seems. The company, which should be poised to benefit from the perception that most of us are fatties, served up a warning of lower annual earnings last night. It should come as no surprise to anyone that the company is blaming the shortfall on extreme low-carb dieting, as well as a new, unstructured "do-it-yourself" approach on the same.

Excluding certain items, net income came in 20.5% higher at $48.7 million, or $0.47 per share, a figure that met analysts' estimates. However, if you include charges related to early debt retirement and an accounting change, profits were down 9.6%. Revenues increased nearly 12%, due to strength overseas that made up for lagging meeting attendance here in the U.S.

What's really got investors is that Weight Watchers slimmed down its full-year 2004 guidance to $1.70 to $1.80 per share. The consensus estimate previously called for earnings of $1.93 per share; the company had said it expected earnings of $1.90 to $2.00 before.

The climate for Weight Watchers has changed a lot since the last time we weighed in on it. In its conference call (courtesy of CCBN StreetEvents), the company said that while it believes "extreme" low-carb, high-fat dieting is peaking, that with the recent addition of so many low-carb foods to grocery shelves everywhere, lots of people are now taking an unstructured approach to dieting, only thinking about cutting carbs.

These people think that by eating these items that food companies have been releasing (or maybe even relabeling as low-carb) without paying attention to fat and calories, they will lose weight. Based on that assumption, the company believes that when they find they're still tipping the scales, they will return to the Weight Watchers way of life.

Months ago, I thought the low-carb trend (in particular Atkins) was a force to be reckoned with. Recently, though, I would have to say that I agree with this and other companies, who believe that its influence -- at least as something that you can define as a craze -- is peaking. (However, I'm quite sure that the diet itself -- which is by no means new -- is here to stay, for those who conscientiously follow its regime.)

Lots of health pundits say that the real key to losing weight is simply reducing calorie intake and exercising, plain and simple, and right now, that's Weight Watchers' company line. (Low-carb dieting is also perceived as a vehicle to take the easy way out -- Don Crotty examined Bally Total Fitness' (NYSE: BFT) recently flagging membership, which might be a case in point.) The desire for a magic bullet is all too human.

If you buy into Weight Watchers' idea that soon most people will find "low-carb" weight loss unsustainable or even nonexistent, then today's possibly just a temporary setback, especially given the health ramifications of being overweight. However, even with an 8% dip in stock price in recent trading, Weight Watchers is still trading at 20 times forward earnings. Today, anyway, Weight Watchers shares don't sound too tempting.

Are you a low-carb dieter? The trend is big enough that we have a whole discussion board dedicated to it here at the Fool: Low Carb Way of Life http://boards.fool.com/Messages.asp?bid=115811.

Alyce Lomax does not own shares of any of the companies mentioned.

I had some good results with WW points system. Tooooo slow though. Lots of convenience if you are trying to keep calories in a range. Some have to do that to lose. Others are more fortunate. I am actually combining a points range w/counting carbs and trying to eat healthier fats(mostly). Also thinking about using the old "banking points" system for my weekly splurge meal. I just can't go carte blanche with the proteins. Kind of like the Carpender article...referenced in another posting. I read it and it made perfect sense for me. People just have to find what works for them.