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Thursday, February 27, 2014

Software is eating the world, including Weight Watchers

Weight Watchers (WTW) is going through a secular decline not a cyclical bump.

Developing a newspaper post internet was a bad idea -- the distribution moat was impaired once technology allowed costumers to view articles online. Newspapers were not in automatic free fall when the internet started, but once web browser technology became widely available and enough online content was accessible, newspapers started a secular decline.

WTW is in the same technology cross hairs. The key to WTW moat is their in-person group meetings. You meet friends, you do your diet confessional and you develop your eating habits.

Myfitnesspal (MFP) is developing a free competitor to WTW moat, and is doing it because the technology is getting to point where you get all that WTW offers for free: message boards full of confessionals, support, facebook integration, smart phone apps, and calorie databases. As technology gets better and MFP offers more competitive weight solutions, WTW will be pushed closer to a broken a moat. If MFP does not succeed as the dominate free version of WTW, any likely replacement will most likely be free and therefore continue to eat away at WTW.

WTW will not go in free fall, and will have some ups here and there but this is not a cyclical decline in business dynamics but a secular one. Obviously at a certain price WTW might be compelling -- it very well could be right now, but it's hard going long a company that is highly leveraged and going through a secular decline.

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The market is already very bearish on WTW -- 64% of the float is short and the rebate is 47% on Interactive Brokers. Long investors need to be very confident when you are paying 47% a year to short a stock.



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