Weight Watchers reports 4.9% decrease in first-quarter 2010 revenue

Weight Watchers International, Inc. (NYSE: WTW) today announced its results for the first quarter of fiscal 2010, which ended April 3, 2010, and reaffirmed its fiscal 2010 earnings guidance.  

First quarter 2010 highlights:

• Revenue of $388.0 million and EPS of $0.58
• As expected, US and UK meeting paid weeks declined 8.0% and 3.0%, respectively
• Successfully launched a new program innovation -- ProPoints® -- in Continental Europe; CE meeting paid weeks increased 9.9%
• Online paid weeks increased 11.3%
• Successfully negotiated an extension of debt maturities, subsequently closed on April 8, 2010

"The first quarter of fiscal 2010 proved to be one of the more challenging quarters that Weight Watchers has faced. The combination of residual slowness in the economy, unprecedented bad weather in our largest markets, and cycling against the new program launch last year in the US and UK created uniquely difficult operating conditions," commented David Kirchhoff, President and Chief Executive Officer of the Company.  "However, trends in the second quarter of fiscal 2010 have been much more favorable following the launch of our Spring marketing campaigns."

"Regarding our EPS outlook for the duration of the year," added Kirchhoff, "we are anticipating that improved volume trends versus our earlier expectations will likely be offset by a stronger than expected US dollar as well as the impact of higher interest expense resulting from more debt maturity extensions than originally factored into our guidance.  With this in mind, we are maintaining our full year EPS guidance range of $2.25 to $2.50."

First quarter fiscal 2010 net income was $44.6 million versus $47.3 million in the prior year period.  Earnings per fully diluted share (EPS) for Q1 2010 were $0.58, a 4.9% decrease compared to the first quarter of fiscal 2009.  First quarter 2010 EPS included a $0.02 increase in interest expense compared to the prior year period.  

As previously reported, in February 2010, the Company received an adverse tax court ruling with regard to leader self-employment status in the UK which resulted in a charge to the fourth quarter of fiscal 2009 for fiscal 2009 and prior years.  This adverse ruling also has an ongoing impact on earnings which for Q1 2010 was a $1.1 million pre-tax expense.  Adjusting Q1 2009 EPS for the expense attributable to that quarter reduces EPS by $0.01. Further, in Q1 2009, the Company incurred restructuring charges of $3.1 million (pre-tax), or $0.02 per fully diluted share, associated with its previously reported cost savings initiatives.  After adjusting Q1 2009 EPS for these amounts, EPS would have been $0.63.

First quarter 2010 revenues declined 4.5% on a constant currency basis.  Performance weakness in the North American (NACO) and UK meeting businesses offset strong performance in the WeightWatchers.com business and in the Continental Europe (CE) meeting business, where attendance was above the prior year period as a result of the new ProPoints program innovation which launched in late 2009.  

Operating income for Q1 2010 was $91.4 million, down 5.0% on a constant currency basis.  After adjusting Q1 2009 operating income to eliminate $3.1 million of restructuring charges and adding $1.1 million of charges associated with the UK self-employment tax court ruling, Q1 2010 operating income would have declined 7.0% in constant currency.  On this same basis, Q1 2010 operating income margin of 23.6%, which decreased 40 basis points from 24.0% in the prior year period, would have decreased 90 basis points.

First quarter 2010 NACO meeting revenues decreased 7.6%, driven by an 8.0% decline in paid weeks and a resultant 8.7% decline in meeting fees.  In-meeting product sales performance versus the prior year period was relatively strong, down 3.6% despite a 16% decline in attendance in the quarter.  Severe weather and cycling against the introduction of a new program innovation in Q1 2009 resulted in weaker paid weeks and attendance performance versus the prior year period.

First quarter 2010 International meeting revenues declined by 2.5% on a constant currency basis with UK performance shortfalls offsetting stronger performance in CE.  

• UK: The combination of severe weather in 2010 and cycling against a new program innovation in the prior year quarter drove Q1 2010 paid weeks down 3.0% and attendances down 12.8% as compared to Q1 2009. First quarter 2010 revenues declined 11.6% on a constant currency basis, primarily driven by lower price realization per paid week resulting from higher Monthly Pass penetration and a return to higher VAT rates after a temporary UK government abatement.
• CE: First quarter 2010 paid weeks and attendances increased 9.9% and 3.4%, respectively.  First quarter 2010 revenues increased 3.5% on a constant currency basis on the strength of the new program innovation introduced at the end of fiscal 2009 and promotional activity, and in spite of the negative impact from bad weather in Q1 2010.  

The WeightWatchers.com business delivered double-digit top-line growth on the strength of both US and International performance, with internet revenues up 14.2% versus the prior year period.  Paid weeks and end of period active Online subscribers grew globally as well, up 11.3% and 11.5%, respectively, versus the prior year period.  

Recent Developments

As previously disclosed, during Q1 2010, the Company successfully negotiated modifications of its debt with certain of its lenders, which resulted in the extension of maturities by approximately three years on average.  These modifications, which closed on April 8, 2010, affected approximately 55% of the Company's term loans and 66% of its revolving loan.  As a result, almost $700 million of the Company's outstanding term loans now have maturities in 2015 or 2016.  

Full Year Fiscal 2010 Earnings Guidance

The Company reaffirms its full year fiscal 2010 earnings guidance range of $2.25 to $2.50 per fully diluted share.

First Quarter 2010 Conference Call

The Company has scheduled a conference call today at 5:00 p.m. ET.  During the conference call, David Kirchhoff, President and Chief Executive Officer of the Company, and Ann Sardini, Chief Financial Officer of the Company, will discuss first quarter 2010 results and answer questions from the investment community.  Live audio of the conference call will be simultaneously webcast over the Internet on the Company's corporate website, www.weightwatchersinternational.com.  A replay of the webcast will be available on this site for approximately 90 days.

Statement regarding Non-GAAP Financial Measures

The following provides information regarding non-GAAP financial measures used in this earnings release:

To supplement the Company's consolidated statement of operations presented in accordance with accounting principles generally accepted in the United States (GAAP), the Company has disclosed non-GAAP financial measures of operating results that exclude or adjust certain items.  Net income, operating income, operating income margin and earnings per fully diluted share are discussed in this release both as reported (on a GAAP basis) and, with respect to the first quarter of fiscal 2009, as adjusted (on a non-GAAP basis) to include the impact of the previously reported adverse UK tax court ruling relating to the self-employment status of the Company's UK leaders and to exclude the impact of the restructuring charges associated with the Company's previously reported cost savings initiatives.  In addition, the Company presents certain of its financial results on a constant currency basis in addition to GAAP results. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. In this release and any attachments, the Company calculates constant currency by calculating current-year results using prior-year foreign currency exchange rates.

Management believes these non-GAAP financial measures provide useful supplemental information for its and its investors' evaluation of  the Company's business performance and are useful for period-over-period comparisons of the performance of the Company's business.  While the Company believes that these financial measures are useful in evaluating the Company's 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.  See "Reconciliation of Non-GAAP Financial Measures" attached to this release and reconciliations included elsewhere in this release for a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures.