Investors owning WW International (NASDAQ:WW), formerly Weight Watchers, stock have lost a ton of weight (money) over the last few years and may soon be down to just skin and bones. There are three major reasons that could collectively lead to the demise of Weight Watchers: 1) they have way too much debt; 2) their operating business model no longer works; 3) more and more overweight people are taking new drugs to reduce weight. Now, there was a report on March 13 that lenders are hiring lawyers. Oprah Winfrey leaving the board of directors is another strong indicator that it is over. In addition, S&P lowered the company debt rating from B- to CCC+ with a negative outlook on Mar 11. I consider WW stock a "sell".
Extreme Financial Leverage
WW International has way too much debt. Their long-term debt is a staggering $18.24 per share compared to the latest after-hours WW stock price of $2.08. Operating income of $22.3 million did not even cover their $95.9 million interest expense last year. The EBITDA interest expense coverage was only 1.1x and debt leverage was 13.2x. Their long-term debt consists of $945 million term loan facility due April 13, 2028 (text of the amended credit agreement including covenants) and $500 million 4.5% secured notes due April 15, 2029. They have no borrowings as of December 31, 2023 under the $175 million revolving credit facility, but the available amount under the revolver is actually only 35% of that amount or $61.3 million because their current 1lien leverage ratio is 8.55 to 1.0. In order to be able to draw the full $175 million that ratio needs to be below 5.5 to 1.0 and that steps down to 5.0 to 1.0 in 1Q 2025, which is highly unlikely, in my opinion.
While there are no debt maturities coming due in the near future, lenders might be worried about the assets securing the debt they hold. Almost all of the assets are intangibles such as trade names, websites, and computer software that have value only if these intangible assets are able to help to produce revenue/profits. It is not like owning secured debt of an oil company, where the collateral securing the debt are oil fields that can be bought/sold at some marketable price. So, the secured oil company debt holders have much less to worry about compared to WW secured debt holders. I assume this is why, according to a media post by a distressed debt reporter with 9Fin that lenders are hiring lawyers for debt talks.
I also assume some of the concerns by lenders are that WW International is currently a very different company than it was in April 2021 when the terms were negotiated. The covenants are actually not very restrictive, in my opinion. There is, however, one very critical section in 4.5% secured note indenture (text of the indenture). The "change of control" section 10.16 would require a buyer to redeem the $500 million notes for 101 plus interest and not just assume the note liability. This would make it less likely there would be some future buyer of WW International, especially since the notes are currently selling at a deep discount to par. Of course, this could be waived under new negotiated terms.
S&P lowering the company rating from B- to CCC+ on March 11 was not a surprise given their continued financial losses and very high debt level. The secured debt rating was lowered from B to B-. Lucky for WW there are no restrictive debt covenants regarding a specific debt rating requirement.
Management asserted during a recent webcast that they expect cash flow to improve this year from last year when there were a number of special cash charges, such as $45 million for restructuring. In 2023 cash from operations was $6.686 million, which was down from $76.646 million in 2022 and $157.281 million in 2021. Sorry, but I disagree with management. I think cash flow from operations will actually be negative in 2024 because of the multiple problems with their operating model.
Serious Business Model Problems
There are a number of problems with their current operating model. First, there has been a dramatic shift in the last few years regarding the stigma associated with being overweight. Now there is much less of an incentive to reduce body weight/size because of social pressure. The health risk pressure from being overweight is still there, but not the need to look like a model. Second, most of their membership activities are now conducted via the internet and not in person. This is a major change from before when members shared experiences in group face-to-face meetings. I am not asserting that I am some expert, but I would think that direct contact would help reduce the anxieties associated with being overweight and trying to maintain some weight reduction plan more effectively than via a screen.
Membership Pricing
Third, WW is trying to transition to a clinical health platform. This is a major change from just dieting. There was a discussion of this change during the recent webcast. Weight Watchers has a very marketable dieting name. It is unclear, however, if that can now apply to a telehealth internet platform selling Glucagon-like peptide-1 (GLP-1) after they acquired Sequence for $132 million in 2023. This is a risky transition, in my opinion, especially when they have so much debt and are entering into a completely different business market. Next, they are actually competing against themselves by marketing drugs as an easier way to lower weight. I think people are waiting to see if side effects develop before they start using drugs. The drugs are also not cheap. Last, their business model depended heavily upon Oprah Winfrey for the last few years. Now that she is leaving the board of directors, that significant magnet drawing customers to their website and becoming a member is gone.
In addition, If the public learns about the financial troubles WW International/Weight Watchers is facing, they might be less willing to make a membership commitment because they worry that Weight Watchers may go out of business. Once this starts, it could spiral downward as more negative news leads to fewer subscriptions, which leads to more negative news, and it just continues to spiral down. After potential subscribers' confidence is shaken, it is hard to regain their trust, in my opinion.
Income Statements 4Q 2023 and 2022
Conclusion
Assuming the tweet by a reporter was correct, I think it is rational for lenders to retain a law firm and begin negotiations to restructure WW International's extremely large debt load. Lenders want Weight Watchers to be successful because their assets have very little value in a complete liquidation. The lenders most likely remember what happened to Bed Bath & Beyond when it liquidated, and assets were auctioned off for just token amounts, but a Ch.11 bankruptcy filing at some point in the future is not completely off the table, in my opinion.
More of society now accepts overweight people, and it is much less of a stigma, which is actually a negative development for Weight Watchers. Their transition from in-person socialization regarding dieting to mostly internet socialization reduces that special personal touch when trying to deal with anxieties associated with being overweight and dieting. This could partially explain why their membership subscriptions have become problematic. Adding to the membership problem is that more people are using drugs to reduce weight because it does not take any self-discipline or effort. I consider WW stock a sell, but given the low stock price, I would not sell the stock short.
WYCO Researcher
B.A. in Economics; M.S. in Finance. I usually write about distressed companies and companies in Ch.11 bankruptcy. I am semi-retired after spending decades in investments.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I recently covered my short sales.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
