Markets & Finance

Weight Watchers Debt Rating Raised


On Mar. 11, 2003, Standard & Poor's raised its corporate credit and senior secured debt ratings on Woodbury, N.Y.-based Weight Watchers International (WTW) to 'BB' from 'BB-', and its subordinated debt rating on the company to 'B+'from 'B'.

All ratings were removed from CreditWatch, where they were placed Dec. 19, 2002. The outlook is stable.

Weight Watchers had about $455 million of total debt outstanding at Dec. 31, 2002.

The upgrade reflects the company's improving financial profile and better-than-expected operating performance, driven by increased classroom attendance and product sales across most of its geographic segments. Also reflected in the ratings is the company's announced plan to acquire nine Weight Watchers franchises. Terms of the transaction were not publicly disclosed; however, Standard & Poor's expects the company to finance part of this transaction by increasing its senior secured credit facilities.

The ratings on Weight Watchers reflect its narrow business focus and high debt levels. Somewhat offsetting these factors is the company's leading market position, geographic diversity, predictable cash flows, and favorable demographic trends.

Weight Watchers competes in the commercial weight loss segment of the weight-control industry (other segments include self-help weight-loss products, weight-loss drugs, and weight loss services administered by doctors, nutritionists, and dieticians). Among these other segments, commercial weight loss is relatively narrow, and in the U.S. (Weight Watchers' largest market), it represented only about 7% of the overall industry in 2000.

Despite the somewhat narrow focus, Weight Watchers is the world's largest provider of commercial weight loss services and is the market leader in most of the 30 countries in which it operates. The company's international operations, which accounted for about 33% of fiscal 2002 sales, provide some geographic diversity to its revenue stream. Also, the consistent nature of member reenrollment rates provides a steady, predictable revenue stream. Favorable demographic factors such as increasingly sedentary lifestyles, an aging population (particularly in the U.S.), and an increasing percentage of adults worldwide who are overweight or obese should help support growth in the weight-control industry.

For the fiscal year ended Dec. 31, 2002, Weight Watchers managed to grow top-line revenues by 30% through organic growth in attendance (13%), acquisitions (5%), increased product sales per attendee (5%), and other revenue sources (7%). The company maintained strong EBITDA margins in the mid- to high-30% range, largely due to its highly variable cost structure. Most leases for meeting locations are short term in nature, and compensation for the group leaders is on a revenue-based commission system.

Lease-adjusted EBITDA coverage of interest was about 6.6x and lease-adjusted total debt to EBITDA was about 1.6x in fiscal 2002. Standard & Poor's does not expect the acquisition-related debt to have a significant impact on credit protection measures due to the company's strong cash flows. Standard & Poor's expects credit protection measures to improve modestly in fiscal 2003 through lower debt-servicing costs as the company pays down debt.

Liquidity: Weight Watchers's liquidity is expected to be adequate for the current ratings. At Dec. 31, 2002, the company had about $57.5 million in cash. After the acquisition, Weight Watchers is expected to have substantial availability under its $45 million revolving credit facility.

Standard & Poor's expects Weight Watchers to generate a significant amount of operating cash flow in the intermediate term. Debt amortization and capital expenditure requirements are minimal, and Standard & Poor's expects the company to apply its free operating cash flow after capital expenditures toward further debt reduction.

Outlook: The outlook is stable. Standard & Poor's expects Weight Watchers to maintain its leading market positions and credit protection measures appropriate for the ratings.


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