“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”* WTW is one of our fund’s largest positions and has advanced over 50% in the last 3 months, yet valuation remains undemanding, offering potential large upside.
WTW – listed in the US - is the world’s leading commercial provider of weight loss services, operating globally through a network of company-owned and franchise operations since 1963. WTW’s leading competitive position was built from providing a scientifically proven program^ which powered its strong brand in providing a solution to a growing societal problem.
Since 2012, WTW had seen its market share erode quickly due mainly to free fitness mobile applications. Coupled with this, they had a crushing net debt load, which at the end of FY16, was 2.6x the market cap and 7.5x EBITDA. Short investors positioned aggressively - by Feb 2017, an astonishing 67% of the total free float of shares were short!
Source: WTW and AWQ analysis
Turnarounds are rarely spontaneous and WTW’s has been no different. In late 2014, management embarked on a multi-year transformation plan which included:
- Aggressive cost cutting: $150m gross annualised savings target.
- Investing in technology: Increased investment to enhance value in digital offerings, which had been previously neglected.
- Innovative marketing: WTW entered into a long term partnership with Oprah Winfrey in 2015. Winfrey bought 10% of the company and uses her profile & social media presence to market the programs which she herself uses to lose weight - at minimal additional cost to WTW.
Evidence of a turnaround
Execution is everything, as they say. When a company announces a transformation plan, we take notice – but are unlikely to invest until we see a mosaic of evidence that shows the business trajectory has changed. So what was the crucial piece of evidence that we saw?
Recruitment trajectory turned positive & has gathered momentum: The business naturally has a high amount of churn** given customers on avg. stay on the program for ~8-9 months. Thus, recruitment is the key driver for the business as they need to replace customers frequently.
Source: WTW and AWQ analysis
Strong growth of subscribers means that revenues should grow materially higher for the rest of 2017 given the avg. retention period & strong 1Q17 subscriber growth.
The upside case includes mgt succeeding in increasing the avg. subscriber value by lengthening the retention period – which would materially increase revenues. Whilst we don’t value this in, we think there is a reasonable chance that mgt can do this due to:
- Implementation of “Beyond the Scale Program”: program goes beyond a singular focus on weight loss to encompass a holistic approach – giving customers impetus to stay with the program once weight goals have been met.
- Long term opportunity in corporate and healthcare markets: health services for employees paid by companies/insurance companies would likely increase stickiness.
- Positive mix shift: Online is growing faster than in-person meetings. Online has a longer retention rate than meetings (9mths vs 8mths). As online grows quicker than meetings, avg. retention period will grow.
There are clear signs now that the company is on a transformative path. The company has strong growth prospects and a new CEO who has a successful track record in leveraging technology & consumer insights to drive revenue.
On the current trajectory, we think the company can deleverage fast due to its high operating leverage and strong FCF. WTW trades on an extremely undemanding 14x forward earnings and 9x EV/EBITDA^^.
Source: AWQ Analysis
If you are interested in receiving updates from the Arowana AVOF team, please visit the AAVOF website.
* George Soros
^ American Journal of Medicine (2013) - WTW program is 8x more effective for weight loss than do-it-yourself
** Average retention period is ~8-9 months – up from 2-3 months in mid 2000’s when it was largely a pay-as-you-go model rather than the subscription model today.
^^ WTW is currently trading at ~$27 at the time of writing. AAVOF initiated a position at ~$18 in March 2017.