Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WTW > SEC Filings for WTW > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for WEIGHT WATCHERS INTERNATIONAL INC

Form 10-Q for WEIGHT WATCHERS INTERNATIONAL INC


6-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Weight Watchers International, Inc. is a Virginia corporation with its principal executive offices in New York, New York. In this Quarterly Report on Form 10-Q unless the context indicates otherwise: "we," "us," "our" and the "Company" refer to Weight Watchers International, Inc. and all of its businesses consolidated for purposes of its financial statements; "WWI" refers to Weight Watchers International, Inc. and all of the Company's businesses other than WeightWatchers.com; "WeightWatchers.com" refers to WeightWatchers.com, Inc. and all of the Company's Internet-based businesses; and "NACO" refers to our North American Company-owned meeting operations.

Our fiscal year ends on the Saturday closest to December 31st and consists of either 52- or 53-week periods. In this Quarterly Report on Form 10-Q:

• "fiscal 2012" refers to our fiscal year ended December 29, 2012;

• "fiscal 2013" refers to our fiscal year ended December 28, 2013;

• "fiscal 2014" refers to our fiscal year ended January 3, 2015;

• "fiscal 2015" refers to our fiscal year ended January 2, 2016;

• "fiscal 2016" refers to our fiscal year ended December 31, 2016; and

• "fiscal 2017" refers to our fiscal year ended December 30, 2017.

The following terms used in this Quarterly Report on Form 10-Q are our trademarks: Weight Watchers®, PointsPlus® and ActiveLink®.

You should read the following discussion in conjunction with our Annual Report on Form 10-K for fiscal 2012 that includes additional information about us, our results of operations, our financial position and our cash flows, and with our unaudited consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q (collectively, the "Consolidated Financial Statements").

NON-GAAP FINANCIAL MEASURES

To supplement our consolidated results presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, we have disclosed non-GAAP financial measures of operating results that exclude or adjust certain items. Net income and earnings per fully diluted share are discussed in this Quarterly Report on Form 10-Q both as reported (on a GAAP basis), and, with respect to the first nine months of fiscal 2013, as adjusted (on a non-GAAP basis) to exclude the impact of an early extinguishment of debt charge recorded in connection with our previously announced April 2, 2013 refinancing of our long-term debt. We generally refer to such non-GAAP measures as excluding or adjusting for the impact of the early extinguishment of debt charge. Our management believes these non-GAAP financial measures provide supplemental information to investors regarding the performance of our business and are useful for period-over-period comparisons of the performance of our business. While we believe that these financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

USE OF CONSTANT CURRENCY

As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant currency basis in addition to reported results helps improve investors' ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant currency information compares results between periods as if


Table of Contents

exchange rates had remained constant period-over-period. We use results on a constant currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we calculate constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant currency basis as excluding or adjusting for the impact of foreign currency or being on a constant currency basis. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

For a discussion of the critical accounting policies affecting us, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for fiscal 2012. Our critical accounting policies have not changed since the end of fiscal 2012.

RESULTS OF OPERATIONS

OVERVIEW

Similar to each of the first and second quarters of fiscal 2013, the third quarter of fiscal 2013 experienced a decline in revenues versus the prior year period driven by declines in the meetings business globally. Third quarter 2013 revenues declined at a faster rate of 8.5% as compared to the first and second quarters. Operating income, which was essentially flat in the first and second quarters of fiscal 2013 versus the prior year periods, declined 5.7% in the third quarter of fiscal 2013 compared to the prior year period as cost savings initiatives only partially offset the impact of lower revenues.

In fiscal 2012, total paid weeks continued to grow at a decelerating rate in each fiscal quarter versus the prior year period due to a challenging recruitment environment, particularly from our global meetings business. This challenging recruitment environment continued for both the Online and meetings businesses into fiscal 2013, with increased competitive pressure, including the impact of activity monitors and free apps. In the first quarter of fiscal 2013, total paid weeks were still above the prior year period, up 1.4%. However, in the second and third quarters of fiscal 2013, driven by this negative recruitment trend, paid weeks declined 2.5% and 6.6%, respectively, as compared to the prior year period. Online paid weeks in the third quarter of fiscal 2013 declined 2.6% versus the prior year period. This is the first time in our history that Online paid weeks declined on a year-over-year basis. We expect this trend will continue in the fourth quarter of fiscal 2013. As a result of the increased competitive environment experienced throughout the first nine months of fiscal 2013, we expect that we will enter fiscal 2014 with equal or greater competitive pressures on each of our businesses creating a challenging recruitment environment which could result in negative recruitment trends.

As we entered fiscal 2013, our meetings business active base was lower than the beginning of fiscal 2012. Conversely, though our active Online subscriber base had a declining growth trend throughout fiscal 2012, this subscriber base was higher at the beginning of fiscal 2013 than at the beginning of fiscal 2012. The difficult recruitment environment in the first nine months of fiscal 2013 had the impact of further reducing the active bases in both our meetings and Online businesses as we progressed through the first nine months of fiscal 2013. As a result, we expect that we will enter fiscal 2014 with lower active bases in both our meetings and Online businesses as compared to the beginning of fiscal 2013. If our expected negative recruitment trends in the fourth quarter of fiscal 2013 persist through fiscal 2014, this, combined with the lower starting active bases in both businesses, would result in decreased revenues in fiscal 2014.

Our cost savings initiatives were driven primarily by significant marketing savings in fiscal 2013. While we expect to benefit from additional cost savings initiatives in fiscal 2014, we do not expect to further reduce our marketing spend in fiscal 2014. In addition, our recently announced improved compensation program for our US service providers is expected to increase our operating expenses by approximately $23.0 million annually. Given we recently introduced this new compensation program, we expect to only recognize approximately $8.0 million of this increased cost in fiscal 2013.


Table of Contents

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2013 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 29, 2012

The table below sets forth selected financial information for the third quarter of fiscal 2013 from our consolidated statements of net income for the three months ended September 28, 2013 versus selected financial information for the third quarter of fiscal 2012 from our consolidated statements of net income for the three months ended September 29, 2012:

                       Summary of Selected Financial Data



                                                      (In millions, except per share amounts)
                                                             For the Three Months Ended
                                               September 28,          September 29,         Increase/          %
                                                    2013                   2012            (Decrease)       Change
Revenues, net                                 $        393.9         $        430.6        $   (36.7)         (8.5%)

Cost of revenues                                       163.9                  174.8            (10.8)         (6.2%)


Gross profit                                           230.0                  255.8            (25.9)        (10.1%)
Gross Margin %                                           58.4%                  59.4%

Marketing expenses                                      46.4                   65.9            (19.5)        (29.6%)

Selling, general & administrative expenses              59.1                   58.0              1.1           1.9%

Operating income                                       124.5                  132.0             (7.5)         (5.7%)
Operating Income Margin %                                31.6%                  30.7%

Interest expense                                        26.9                   23.2              3.7          15.8%
Other income, net                                      (0.4)                  (0.8)              0.4         (53.5%)

Income before income taxes                              98.0                  109.5            (11.5)        (10.5%)

Provision for income taxes                              37.7                   42.2             (4.4)        (10.5%)

Net income                                    $         60.3         $         67.4        $    (7.1)        (10.5%)


Weighted average diluted shares outstanding             56.5                   56.1              0.4           0.7%


Diluted EPS                                   $         1.07         $         1.20        $    (0.13)       (11.2%)

Note: Totals may not sum due to rounding.

Consolidated Results

Revenues

Net revenues were $393.9 million in the third quarter of fiscal 2013, as compared to $430.6 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which negatively impacted our revenues for the third quarter of fiscal 2013 by $0.2 million, net revenues in the third quarter of fiscal 2013 declined 8.5% versus the prior year period. The revenue decline in the third quarter of fiscal 2013 was driven by declines in the meetings business globally, most notably in the NACO and the UK meetings businesses. The decline in the NACO and UK meetings businesses was driven in large part by a lower incoming active base at the start of the third quarter of fiscal 2013 as compared to the start of the third quarter of fiscal 2012, as well as recruitment softness in the third quarter of fiscal 2013 caused by difficulty in attracting new members into the brand and, in the case of the United Kingdom, competitive pressure. Our Continental European meetings business, also experienced a decline in revenue on a constant currency basis driven by cycling against a new program innovation and new advertising campaigns in the prior year period. These declines in the meetings businesses were slightly offset by minimal growth in WeightWatchers.com, as the active Online subscriber base at the start of the third quarter of fiscal 2013 was only 1.4% above the active subscriber base at the start of the third quarter of fiscal 2012. This minimal growth in WeightWatchers.com was a deceleration in period-over-period growth from the prior fiscal 2013 quarters.


Table of Contents

The combination of the above factors also led to an 11.2% decline in global meeting paid weeks in the third quarter of fiscal 2013 versus the prior year period. Although starting the third quarter of fiscal 2013 with a slightly higher active Online subscriber base, WeightWatchers.com experienced a decline of 2.6% in Online paid weeks versus the prior year period. The decline in Online paid weeks coupled with the decline in meeting paid weeks, resulted in a 6.6% decrease in global paid weeks in the third quarter of fiscal 2013 versus the prior year period. Global attendance in the third quarter of fiscal 2013 declined 15.5% in comparison to the third quarter of fiscal 2012. We have been seeing a widening in the gap between attendance and paid weeks, which is a natural function of the increase in the average tenure of our Monthly Pass active base. Our end of period active Online subscriber base decreased 5.3% in the third quarter of fiscal 2013 versus the prior year period, driven by recruitment weakness with declines in US recruitment levels in the first nine months of fiscal 2013 and, to a lesser extent, in UK recruitment levels in the second and third quarter of fiscal 2013, as compared to the prior year periods.

Gross Profit and Operating Income

Gross profit for the third quarter of fiscal 2013 of $230.0 million decreased $25.9 million, or 10.1%, from $255.8 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which positively impacted gross profit for the third quarter of fiscal 2013 by $0.1 million, gross profit in the third quarter of fiscal 2013 decreased by $26.0 million, or 10.2%, versus the prior year period. Operating income for the third quarter of fiscal 2013 was $124.5 million, a decrease of $7.5 million, or 5.7%, from $132.0 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which positively impacted operating income for the third quarter of fiscal 2013 by $0.2 million, operating income in the third quarter of fiscal 2013 decreased by $7.7 million, or 5.8%, versus the prior year period. This decrease was primarily driven by lower revenues in the meetings business, which was only partially offset by lower marketing expense resulting largely from the reduction of digital advertising spend, with a focus on inefficiencies, and lack of a men's campaign in the United States. Our gross margin in the third quarter of fiscal 2013 decreased to 58.4% from 59.4% in the third quarter of fiscal 2012, while operating income margin in the third quarter of fiscal 2013 increased to 31.6% from 30.7% in the third quarter of fiscal 2012. See "-Components of Expenses and Margins" for additional details.

Net Income and Earnings Per Share

Net income in the third quarter of fiscal 2013 declined 10.5% from $67.4 million in the third quarter of fiscal 2012 to $60.3 million. The decrease in operating income, coupled with higher interest expense related to our debt refinancing, reduced net income in the third quarter of fiscal 2013. Earnings per fully diluted share, or EPS, in the third quarter of fiscal 2013 were $1.07, a decrease of $0.13 from $1.20 in the third quarter of fiscal 2012.

Components of Revenue and Volumes

We derive our revenues principally from meeting fees, Internet revenues, products sold in meetings and licensed products sold in retail channels. In addition, we generate other revenue from royalties paid to us by our franchisees, subscriptions to our branded magazines, and advertising in our publications.

Meeting Fees

Global meeting fees for the third quarter of fiscal 2013 were $198.7 million, a decrease of $24.5 million, or 11.0%, from $223.2 million in the prior year period. Excluding the impact of foreign currency, which decreased our global meeting fees for the third quarter of fiscal 2013 by $0.2 million, global meeting fees in the third quarter of fiscal 2013 decreased by 10.9% versus the prior year period. The decline in meeting fees was driven by an 11.2% decline in global meeting paid weeks in the third quarter of fiscal 2013 to 21.2 million from 23.9 million in the prior year period. The decline in meeting paid weeks was driven by a lower meetings active base at the beginning of the third quarter of fiscal 2013 versus the beginning of the third quarter of fiscal 2012 as well as by the lower enrollments in the third quarter of fiscal 2013 as compared to the prior year period. Global attendance decreased 15.5% to 9.5 million in the third quarter of fiscal 2013 from 11.3 million in the third quarter of fiscal 2012.

In NACO, meeting fees in the third quarter of fiscal 2013 were $139.7 million, a decrease of $18.1 million, or 11.5%, from $157.8 million in the third quarter of fiscal 2012. The decline in meeting fees was


Table of Contents

driven primarily by a 10.7% decline in NACO meeting paid weeks from 16.0 million in the third quarter of fiscal 2012 to 14.3 million in the third quarter of fiscal 2013. The decline in meeting paid weeks primarily resulted from the lower meetings active base at the beginning of the third quarter of fiscal 2013 versus the beginning of the third quarter of fiscal 2012 as well as by lower enrollments in the third quarter of fiscal 2013 versus the prior year period. Lower enrollments in the third quarter of fiscal 2013 were driven by difficulty in attracting members to our brand. Although we introduced our new Weight Watchers 360° program in December 2012, this new program was not as effective in driving consumer trial as our PointsPlus innovation. Adding to this decline in NACO meeting fees was a 0.9% decrease in meeting fees per paid week in the third quarter of fiscal 2013 as compared to the prior year period. This decrease in meeting fees per paid week was driven by a discount offer in the United States in the third quarter of fiscal 2013 that was not offered in the third quarter of fiscal 2012. A 2011 US price increase for new members, the impact of which was more significant in fiscal 2013 due to the cycling of new members throughout 2012, only partially offset the impact of the discount offer. In the third quarter of fiscal 2013, NACO attendance decreased 14.7% to 6.1 million from 7.2 million in the third quarter of fiscal 2012. The Company completed three franchise acquisitions in NACO in the second half of fiscal 2012 as well as five franchise acquisitions in the first nine months of fiscal 2013. These franchise acquisitions benefitted NACO meeting fees in the third quarter of fiscal 2013 by approximately 2.4%.

International meeting fees in the third quarter of fiscal 2013 were $59.0 million, a decrease of $6.4 million, or 9.8%, from $65.4 million in the prior year period. Excluding the impact of foreign currency, which increased international meeting fees for the third quarter of fiscal 2013 by $0.3 million, international meeting fees declined by 10.3% in the third quarter of fiscal 2013 versus the prior year period. In the third quarter of fiscal 2013, the decline in meeting fees was driven by a 12.3% decline in international meeting paid weeks in the quarter versus the prior year period. Meeting paid weeks performance in the third quarter of fiscal 2013 was driven by declines in enrollments in most of our international markets in the quarter versus the prior year period. Partially offsetting the decline in international meeting fees was a 2.8%, or 2.3% on a constant currency basis, increase in meeting fees per paid week. This increase in meeting fees per paid week was driven primarily by higher volumes within the international business in markets that derive a higher price for a meeting paid week. International attendance decreased by 16.9% in the third quarter of fiscal 2013 versus the prior year period.

In the third quarter of fiscal 2013, UK meeting fees decreased by 20.4% to $20.2 million from $25.3 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which decreased UK meeting fees for the third quarter of fiscal 2013 by $0.5 million, UK meeting fees declined by 18.5% in the third quarter of fiscal 2013 versus the prior year period. Third quarter fiscal 2013 meeting fees were driven lower primarily by a decline of 21.1% in UK meeting paid weeks versus the prior year period. Meeting paid weeks performance in the third quarter of fiscal 2013 was driven by the lower meetings active base at the beginning of the third quarter of fiscal 2013 versus the beginning of the third quarter of fiscal 2012 coupled with lower enrollments in the period as compared to enrollment levels in the prior year period. In the third quarter of fiscal 2013, local competition in the United Kingdom negatively impacted enrollments. Partially offsetting the decline in UK meeting fees was a 0.8% increase, a 3.2% increase on a constant currency basis, in meeting fees per paid week. This increase in meeting fees per paid week was driven primarily by a UK price increase in the third quarter of fiscal 2012 for all members. UK attendance decreased by 22.7% in the third quarter of fiscal 2013 versus the prior year period.

Meeting fees in Continental Europe in the third quarter of fiscal 2013 were $31.1 million, an increase of $0.5 million, or 1.6%, from $30.6 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which increased Continental European meeting fees in the third quarter of fiscal 2013 by $1.6 million, Continental European meeting fees decreased by 3.8% in the third quarter of fiscal 2013 as compared to the prior year period. The decrease in meeting fees on a constant currency basis was driven by a decrease of 1.7% in Continental European meeting paid weeks in the third quarter of fiscal 2013 versus the prior year period. The decrease in meeting paid weeks was driven by lower enrollments in the third quarter of fiscal 2013 as compared to the prior year period. These lower enrollments were the result of cycling against the successful launch of the new program and new advertising campaigns in the prior year period. In Continental Europe, attendance decreased by 8.2% in the third quarter of fiscal 2013 versus the prior year period.


Table of Contents

In-Meeting Product Sales

Global in-meeting product sales for the third quarter of fiscal 2013 were $43.7 million, a decrease of $10.9 million, or 20.0%, from $54.6 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which decreased global in-meeting product sales for the third quarter of fiscal 2013 by a de minimis amount, global in-meeting product sales in the third quarter of fiscal 2013 declined 19.9% versus the prior year period. This decrease resulted primarily from a 15.5% decline in global meeting attendance in the third quarter of fiscal 2013 versus the prior year period. In addition, product sales per attendee also declined in the third quarter of fiscal 2013 versus the prior year period. On a per attendee basis, in the third quarter of fiscal 2013, global in-meeting product sales decreased 5.2% versus the prior year period. This decrease in global in-meeting product sales per attendee in the third quarter of fiscal 2013 was driven primarily by enrollment weakness in NACO which negatively impacted the sales of consumables, enrollment products and electronics.

In NACO, third quarter fiscal 2013 in-meeting product sales of $24.1 million decreased by $7.9 million, or 24.7%, versus the prior year period. This decrease resulted primarily from a 14.7% attendance decline in the third quarter of fiscal 2013 as compared to the prior year period. In-meeting product sales per attendee decreased by 11.7% in the third quarter of fiscal 2013 versus the prior year period driven by enrollment weakness in NACO which negatively impacted the sales of consumables, enrollment products and electronics.

International in-meeting product sales were $19.7 million in the third quarter of fiscal 2013, a decrease of 13.2%, or 13.5% on a constant currency basis, versus the prior year period. This decrease was driven primarily by an attendance decline of 16.9% in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012, which was largely driven by the United Kingdom. In-meeting product sales per attendee in the third quarter of fiscal 2013 increased by 4.5%, or 4.1% on a constant currency basis, as compared to the prior year period. This increase was the result of strong sales of consumables and cookbooks in the United Kingdom driven by strong new product introductions and successful promotions.

Internet Revenues

Internet revenues, which include subscription revenues from sales of our Weight Watchers Online and Weight Watchers eTools products as well as Internet advertising revenues, increased $1.3 million, or 1.0%, to $125.5 million in the third quarter of fiscal 2013 from $124.2 million in the third quarter of fiscal 2012. Excluding the impact of foreign currency, which increased Internet revenues in the third quarter of fiscal 2013 by $0.2 million, Internet revenues increased 0.9% in the third quarter of fiscal 2013 versus the prior year period. This increase in Internet revenues was driven by an increase in global e-Tools revenue and the benefit of an increase in pricing for Online in many of our markets introduced prior to the third quarter of fiscal 2013. The slightly higher active Online subscriber base at the start of the third quarter of fiscal 2013, up 1.4%, versus the beginning of the third quarter of fiscal 2012, was more than offset by lower sign-ups in the quarter. These lower sign-ups drove a 2.6% decline in Online paid weeks in the third quarter of fiscal 2013 versus the prior year period. The growth in Internet revenues was a deceleration from the period-over-period increase of 6.6% and 10.9% experienced in the second and first quarters of fiscal 2013, respectively, as compared to the prior year periods. This deceleration was primarily driven by declining sign-ups in the US business which continued through the third quarter, as consumer trial in the commercial weight loss category continued to be influenced by activity monitors and free apps. End of period active Online subscribers decreased by 5.3% to 1.9 million at the end of the third quarter of fiscal 2013 as compared to the end of the third quarter of fiscal 2012.

Other Revenues

Other revenues, comprised primarily of licensing revenues, franchise royalties, revenues from the sale of products by mail and to our franchisees, and revenues from our publications, were $26.0 million for the third quarter of fiscal 2013, a decrease of $2.6 million, or 9.0%, from $28.5 million for the third quarter of fiscal 2012. Excluding the impact of foreign currency, which decreased other revenues for the third quarter of fiscal 2013 by $0.2 million, other revenues were 8.4% lower in the third quarter of fiscal 2013 compared to the prior year period. Franchise commissions and sales of products to our franchisees declined in the aggregate by 39.3%, or 39.8% on a constant currency basis, in the third . . .

  Add WTW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WTW - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.