Business context and reporting period
Weight Watchers International, Inc. filed this Form 10-K for the 52-week fiscal year ended December 28, 2013. The company provides weight-management services through meetings and online subscriptions, and sells related products and licenses its brand. Fiscal 2013 reporting segments were WWI and WeightWatchers.com; a reorganization into geographic segments took effect at the start of fiscal 2014.
Financial results and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Revenue | $1,724.1 million | $1,839.4 million |
| Gross profit / margin | $1,001.1 million / 58.1% | $1,093.8 million / 59.5% |
| Operating income / margin | $460.8 million / 26.7% | $510.8 million / 27.8% |
| Net income attributable to the company | $204.7 million | $257.4 million |
| Diluted EPS | $3.63 | $4.23 |
| Cash from operations | $323.5 million | $336.7 million |
| Cash and cash equivalents at year-end | $174.6 million | $70.2 million |
| Total debt at year-end | $2,388.0 million | $2,406.4 million |
Revenue declined 6.3%; operating income fell 9.8% and net income fell 20.5%. Fiscal 2013 included a $21.7 million pretax ($13.3 million after-tax) debt-extinguishment charge; excluding it, diluted EPS was $3.87 and net income was $218.0 million. Reported gross and operating margins also reflect changes in revenue mix and lower meeting volumes.
Revenue by category: meeting fees were $851.6 million, down 8.9%; internet revenue was $522.2 million, up 3.5%; in-meeting product sales were $212.0 million, down 16.3%; and licensing, franchise royalties and other revenue were $138.3 million, down 5.9%. Global meeting paid weeks declined 10.1%, meeting attendance fell 15.5%, and active Online subscribers declined 6.7% to 1.7 million at year-end. Internet paid weeks rose 1.7% for the year but declined in the second half.
Cash used in investing was $145.3 million, including $83.8 million for franchise acquisitions; cash used in financing was $74.4 million. Working capital was negative $30.1 million, compared with negative $229.9 million a year earlier; management said advance payments under subscription and meeting commitment plans contribute to the deficit. The revolving facility had $248.4 million of unused availability. Debt was variable-rate; a 50-basis-point rate change was estimated to affect annual interest expense by about $9.6 million. The company reported a 4.21:1.00 consolidated leverage ratio.
Material changes versus the prior comparable period
- Meeting fees weakened across major markets, particularly North America and the UK. Annual meeting paid weeks fell to 89.1 million from 99.2 million.
- Internet revenue growth slowed sharply, with fourth-quarter revenue down 5.2% year over year; management attributed sign-up weakness in part to free apps and activity-monitor competition.
- Product sales declined with attendance, and product sales per attendee fell 1.0%.
- Marketing expense decreased 16.4%, while selling, general and administrative expense increased 6.7%. Lower marketing costs partly offset weaker revenue and higher overhead.
- Interest expense rose 13.9% to $103.1 million, reflecting higher average debt and borrowing rates. The April 2013 refinancing generated the $21.7 million early-extinguishment charge.
- Quarter-four revenue was $366.1 million versus $411.1 million; operating income was $79.1 million versus $122.5 million; and net income was $30.8 million versus $58.0 million.
Outlook, risks and unusual items
Management expected fiscal 2014 revenue to decline at a higher rate than in fiscal 2013. It anticipated steeper declines in paid weeks, meeting attendance and Online paid weeks, citing weak recruitment, competitive pressure from free apps and activity monitors, and limited impact from the Simple Start launch. The company planned targeted growth investment and cost reductions, including a global termination plan expected to generate about $10 million of restructuring charges in the first half of fiscal 2014.
The company suspended its quarterly dividend in October 2013 to preserve financial flexibility, fund growth initiatives and build cash for debt repayment. It reported a $2.5 million charge connected to its decision to shut down China operations, plus impairment charges for China-related assets, software, and Mexico and Hong Kong franchise rights. The UK leader employment-tax dispute was settled for approximately $36.8 million, with the remaining payment made in January 2013. Ordinary-course legal matters were not expected by management to have a material effect, though outcomes could not be predicted.
Key risks include high debt and variable interest rates, restrictive credit covenants, continued recruitment and subscriber weakness, competition, foreign-exchange exposure, reliance on technology and customer data, brand and franchisee risks, seasonality, and Artal’s control of the company. The company’s credit facilities are secured by substantially all assets. Management stated that operating cash flow and revolver availability should cover anticipated requirements for the next 12 months. The filing reports an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether fiscal 2014 revenue and paid-week declines matched or exceeded management’s stated expectations.
- Whether Online subscriber trends and meeting recruitment stabilized, especially in North America and the UK.
- Debt repayment capacity, covenant headroom, interest-rate exposure, and the effect of the February 2014 rating-related margin increases.
- Actual restructuring costs and savings, and execution of the China shutdown and other cost initiatives.
- How the geographic segment reorganization affects reported performance and comparability.
- The consequences of the dividend suspension and the company’s very large total shareholders’ deficit.