Consumers could spend less on weight loss and fitness, but Disney caters to family and Charles Schwab can lure investors vowing to do better
As 2008 becomes a bitter and fading memory, it's fair to assume U.S. consumers are doing what they usually do as they ring in a New Year: make yet another round of resolutions that range from losing weight to eating more healthfully, and to spending more quality time with their families. This year there's a catch. Most lifestyle changes call for discretionary spending, and with the recession expected to deepen and bring more job losses, people tend to forego changes until they feel more financially secure.
Losing weight is usually the top priority when it comes to making New Year's resolutions. Over the long term the weight loss industry has been benefiting from increasing obesity both in the U.S. and abroad. Weight Watchers (WTW) and NutriSystem (NTRI) are two of the leading diet programs—and each work, says Greg Badashkanian, an analyst at Citigroup Global Markets.
Over the last two quarters, attendance in both programs has slowed a little as fewer new users have joined because of the softening economy, says Badashkanian. Feeling besieged by worries about shrinking home values and investment portfolios—as well as the looming threat of unemployment—some people may seek refuge in comfort foods and make shedding pounds a lesser priority. "January is obviously the most important time for diet companies because you have all these New Year's resolutions that dieters make," he says. "With the tough economy and the negative headlines from news stories on their minds, will they decide to go on a diet or maybe forgo that?"
Dieting can save money
Weight loss programs are a low-cost discretionary purchase compared with much more expensive items like recreational vehicles, whose sales are down more than 50%, says Badashkanian. Since NutriSystem customers get all of their food needs filled for just $10 a day, he sees that program as more of a staple. But while $10 a day for food is a bargain, NutriSystem still shows up on credit cards as a $300-a-month charge. "So,in their minds, there could be some reluctance to make that purchase," Badashkanian says.
Weight Watchers charges $10 a week for a support service with information to help people diet. That translates to a lower monthly expense, but doesn't include food, he says.
Given the weak economic outlook for 2009, Karen Howland, an analyst who covers healthy lifestyle stocks for Barclays Capital, expects the companies she follows to increase sales by only 3.3% this year, vs. 8.6% growth in 2008. "Most of our stocks have strong free cash flow and limited financing needs and should not need to access the capital markets in 2009 or 2010," she said in a Dec. 18 research note.
The $163 million of debt that Weight Watchers has to repay in fiscal year 2009 represents roughly 90% of what Barclays estimates will be the company's free cash flow, which includes the annual dividend.
Health and exercise clubs such as Life Time Fitness (LTM) and Town Sports (CLUB) also typically benefit from New Year's resolutions, but economic stress may hamper their growth this year, some analysts say, In her note, Howland at Barclays warned that earnings for the healthy lifestyle stocks she covers could fall 7.9% on average in 2009—much more than the 1.9% drop projected by Wall Street, and compared with no change in 2008 from the prior year. These companies tend to be highly sensitive to consumer confidence and spending, she said.
Even though Howland trimmed her fiscal 2009 earnings estimate for Life Time to $2.09 per share, from $2.20, she predicts it will still increase profits by 4.6% over fiscal year 2008 "as centers opened in the past three years become more mature (and subsequently more profitable)."
There's also the possibility that Leonard Green & Partners, which bought a 9.2% stake in Life Time between Oct. 3 and Nov. 24, could take the company private. This "is likely to give owners of the stock some reassurance and a reason to hang on, while potentially causing short sellers (31% of the float) to cover and take profits," Credit Suisse analyst Paul Lejuez said in a Nov. 24 research note.
Spend More Time with Family
Even when things at their workplace are relatively stable, many people view the start of a new year as a chance to rearrange priorities in order to spend more time with their families. That can be done on the cheap by staying home more frequently to play games and by volunteering time to help coach after-school sports programs. Resolutions might also include plans for family vacations and other outings.
Theme parks such as those run by Walt Disney (DIS) could benefit from such determination, but they're also more vulnerable to consumer pullbacks in the tough economic environment. Disney's theme parks generate about 20% of the company's operating income, according to Jeffrey Logsdon, an analyst at BMO Capital Markets.
David Miller, an analyst at Caris & Co. in Los Angeles, thinks the Wall Street consensus forecast for Disney's profits in fiscal year 2009 is overly pessimistic. "We believe sufficient evidence exists to suggest that Disney will block and tackle against this recession more nimbly that what is currently reflected in the stock price," he wrote in a Dec. 9 research note. Therefore the opportunity to buy shares at less than 12 times fiscal 2009 earnings is too compelling to ignore, he said.
Miller predicts Disney's theme park revenues will decline 6.4% this year, with attendance expected to drop by 7.4%, and per-person spending to improve by 1%. That translates to a projected 13.2% drop in earnings before interest and taxes—which he believes is conservative, given that Disney hasn't backed off from last August's price hikes at both U.S. parks and hasn't cut park hours, as it did during the 2001 recession.
A weakened U.S. dollar helped Disney attract visitors from overseas for most of 2008, and the recent strengthening of the greenback has taken only a little of that benefit off the table, says Jeffrey Logsdon, an analyst at BMO Capital Markets. He doubts many Europeans will opt against a Disney vacation because of minor swings in the euro's value against the dollar.
The tendency of U.S. consumers to stay closer to home during recession probably works in Disney's favor, says Logsdon. Locals account for about two-thirds of the visitors to Disneyland in California and for between 33% and 40% of visitors to Disney World in Florida, he estimates. Disney is also maintaining traffic through promotions such as offering seven nights in its hotels for the price of four, which should drive bookings at least until the summer, he predicts.
Taking Charge of Finances
After seeing so much of their hard-earned retirement savings evaporate as financial markets collapsed—plus the Bernard Madoff investing scandal—people are considering changing the way they manage their investment portfolios as well. No matter which type of investment or adviser they favored, pain has been widespread. "They're inclined to reevaluate and for that reason there's likely to be a fair amount of movement between [financial services] firms," says Jeffrey Hopson, an analyst at Stifel Nicolaus in St. Louis. But because it's clear that people who handled their own portfolios didn't necessarily do any better, it remains to be seen if there will be greater demand for online brokers, he adds.
Charles Schwab (SCHW) came through the financial debacle pretty well, and is "likely to pick up market share from traditional brokerage firms that have had bad publicity," such as Merrill Lynch, says Hopson.
Besides being fairly low-cost, Schwab's platform is also user-friendly, allowing clients to decide how they want to be serviced. They can choose telephone, Internet, or personal service from a dedicated financial adviser. Plus the company's product line doesn't have a lot of biases—meaning its advisers don't try to push certain investment products on clients. "The quality of the company and the fact they've gotten through this [financial crisis] without any issues, I think, gives people comfort," says Hopson. Another advantage is that Schwab derives less of its revenue from broker fees than many of its peers.
For now, there's no question that many people are glad 2008 is ending. They'll ring in the New Year with hopes of better times and opportunities to come.