Weight Watchers International Inc (NYSE: WTW)

Back in the fall of 2015, Weight Watchers stock gained a surge in popularity and momentum on the back of the announcement that Oprah Winfrey had taken a large stake in the weight management business, boosting the price of the stock from just under $7 to almost $27 per share. Over the course of 1 month, you saw the share gain and eye-popping 285%. Since it’s peak, it has settled back down to just around $15 per share as of market close on February 19, 2016.

Upon first glance at the financial statements of the company, you may notice that it has bought back an impressive amount of stock over the past 10 years, shrinking total shares outstanding from 100 million to 55 million – almost half of its stock has been bought back. However, this has not translated into much improvement in the earnings per share or free cash flow per share.

Earnings per share has actually decreased from where it was at in 2005 to an estimated $0.73 for 2015 and free cash flow hasn’t really done much better, going from $2.46 per share in 2006 to $3.66 per share in 2014. This is rather astonishing given that the company has been able to shrink the ownership pie in half over the past decade. The reason the massive share buybacks haven’t produced any results for earnings per share is because revenue is where it was at in 2006: $1.2 billion.

Revenue, net income, operating cash flow, and free cash flow has all either shrunk or have gone nowhere over the past ten years. Continuing this depressing trend, gross margin, operating margin, and net profit margin has all shrunk over this period. So Weight Watchers has been hit by a double whammy of decreasing/stagnant profits and shrinking margins. This has been disastrous for owners of the company, as their share of the profits has also remained stagnant over a 10 year period.

To make matters worse, Weight Watchers carries almost $2.3 billion in long term debt on its balance sheets. It took on $1.3 billion in debt in 2012 to fuel its share repurchases. While this allowed the company to repurchase 17 million shares over 2012 and 2013, the problem is it has had negligible effect for shareholders in the face of stagnant and declining revenues and profits. The company saddled itself with an enormous amount of long term debt for little to no benefit for shareholders.

Making the situation even worse, the company owes about $2 billion of that debt back in 2020. This is a puzzling situation for a company that has historically made about $200 million in net profit in the past, only $100 million in net profit in 2014, and is expected to make around $50 million in net profit in 2015. Short of a miracle – or rolling the debt down the line by taking on additional debt – I don’t really understand how Weight Watchers is going to pay back $2 billion by 2020.

With the excitement of Oprah joining the company as a major investor and member of the board of directors, there are promises of synergies and strong tailwinds for a turnaround. But it’s important to keep in mind Warren Buffett’s wisdom that turnarounds seldom turn. With the way revenue and profits have been trending downwards and the massive amount of debt carried on its balance sheets, the turnaround has high barriers to success.

While Weight Watchers itself is probably a fine enough business that operates in its niche and generates a tidy little profit on an ongoing basis providing weight loss and weight management solutions to a large and stable market, when viewed in light of its per share performance and questionable balance sheet, as an investment for the individual investor, it displays little signs that it is an attractive investment opportunity at this time. There are just too many other, more attractive opportunities out there that it would make little sense to consider Weight Watchers a candidate for inclusion as a core part of a portfolio.

Disclosure: This author has no positions in any stocks mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.