Weight Watchers International Inc (WTW)

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Weight Watchers International (WTW)

Q3 2012 Earnings Call

November 05, 2012 5:00 pm ET

Executives

Lori Scherwin

David P. Kirchhoff - Chief Executive Officer, President, Executive Director and Chief Executive Officer of Weightwatchers Com

Nicholas P. Hotchkin - Chief Financial Officer and Principal Accounting Officer

Analysts

Glen J. Santangelo - Crédit Suisse AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Brian Wang - Barclays Capital, Research Division

Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division

Peter Wahlstrom - Morningstar Inc., Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Presentation

Operator

Ladies and gentlemen, welcome to Weight Watchers International's Third Quarter 2012 Earnings Teleconference call. [Operator Instructions] As a reminder, this conference call is being recorded today, November 5, 2012.

At this time, I'd like to turn the call over to Lori Scherwin of Weight Watchers International. Please go ahead.

Lori Scherwin

Thank you, operator, and thank you to everyone for joining us today for Weight Watchers International's Third Quarter 2012 Conference Call. With us on the call is Dave Kirchhoff, President and CEO; and Nick Hotchkin, CFO. At about 4:00 p.m. Eastern Time today, the company issued a press release reporting its financial results for the third quarter of fiscal 2012.

The purpose of this call is to provide investors with some further details regarding the company's financial results as well as to provide a general update on the company's progress. The press release is available on the company's corporate website located at www.weightwatchersinternational.com.

Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measure are also available as part of the press release.

Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements.

All forward-looking statements are made as of today and, except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I would now like to turn the call over to David. Please go ahead.

David P. Kirchhoff

Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the third quarter of fiscal 2012. Overall, 2012 is ramping up very much in line with our prior guidance, with Q3 coming in somewhat better than our expectations and Q4 expected to come in somewhat below on the bottom line because of factors we will discuss.

On a constant currency basis, Q3 2012 total revenue was up 2.7% over the prior year period, with meeting fees down 2.4% and meeting product sales down 8.4% and Internet revenue growing 24%. Global combined paid weeks were up 9% in Q3 2012 versus the same period last year, global meetings paid weeks were down 4.2% in Q3, while global paid weeks for our online product were up 23%.

For Q3 2012, our operating income margin was down 160 basis points versus the prior year period, up 30.7% -- to 30.7%. While gross margin was up 80 basis points versus prior to 59.4%, marketing as a percentage of revenue was up 90 basis points, primarily reflecting continued investment in driving awareness of our Weight Watchers Online product. G&A as a percentage of revenue was up 150 basis points versus prior, primarily reflecting investments in technology and staff to support our key strategic initiatives such as B2B.

Q3 2012 EPS was $1.20 compared to $1.09 for the same period in 2011, benefiting from our share repurchases earlier this year. We experienced about $0.04 of unfavorable ForEx impact from the third quarter this year versus prior. Before Nick reviews our financial results in greater detail, I'd like to provide additional context on our Q3 performance.

Our results on our meetings business remained under pressure in our North American and U.K. markets and were more bouyant in our Continental European market. As expected, Q3 NACO attendances as a percentage were down high single digits versus prior, while paid weeks as a percentage performed somewhat better at low single-digit declines versus prior.

As we noted on our last call, we're now at the tail end of our 2-year innovation cycle, and we've been running our current marketing campaign for over 2.5 years. On the positive side, our annual brand-tracking measures during the third quarter showed continued overall strengthening of the Weight Watchers brand in key measures such as relevance, effectiveness and modernity. However, right now, we're lacking news in either program or marketing to drive the kind of cut-through necessary for the current economic environment, particularly in the midst of an all-encompassing political campaign season. As I will discuss later, we plan to change this as we enter January 2013.

The U.K. meetings results were more of a disappointment for us in Q3 but not entirely unexpected. The combination of a very difficult macroeconomic context in that country with a lack of program news and a much less effective 2012 marketing campaign has put pressure on this business all year long. Again, this changes as we enter 2013.

Consistent with our expectations, our Continental European meetings business performed quite well in the third quarter, particularly given the very difficult economic conditions across Europe. Having attendance growth in positive mid-single digits and paid weeks growth in double digits, reflects the impact that program news and fresh marketing can have to help offset the effects of a retrenching consumer economy.

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