Investors unconvinced by Weight Watchers outlook

BANGALORE Fri Aug 5, 2011 1:37pm EDT

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BANGALORE (Reuters) - Weight Watchers International Inc's (WTW.N) raised 2011 outlook failed to impress growth-hungry investors, amid concerns over its high ad spend, wiping out almost a quarter of its market value.

Weight management companies have rebounded after the recession, when people had scaled back discretionary spending. However, this has also heightened investor expectations.

Weight Watchers' shares have nearly doubled this year as many investors have bet on it being the chief beneficiary of a resurgent weight loss industry.

In February, the stock jumped 45 percent after it reported market-topping results, but fell 5 percent in May even after it raised its profit outlook.

"Expectations for the back half of the year are higher than what the management brought out today," Morningstar analyst Peter Wahlstrom told Reuters.

Wahlstrom said the company is being cautiously optimistic and realistic in its forecast, while Wedbush Securities analyst Kurt Frederick reckons investors are probably worried the company's increased spending may hurt earnings.

"They have invested in IT, hiring people, increased salaries. Increased investments is the reason why their guidance is a little bit weaker than what people thought it would be," Wedbush analyst Frederick said.

The company has ramped up spending on marketing and selling and administrative operations, to gain an edge on their rivals like Nestle's (NESN.VX) unit Jenny Craig Inc and Medifast Inc (MED.N).

Weight Watchers, known for its ads featuring American Idol contestant Jennifer Hudson, launched an ad campaign targeting men through the NBA playoffs earlier this year.

The company, which helps customers lose weight through organizing meetings and offering nutritional advice, raised its full-year earnings outlook to $3.85-$4.05 a share from its prior view of $3.75-$4.00 a share.

Analysts, on average, were expecting earnings of $3.96 a share, according to Thomson Reuters I/B/E/S.

Weight Watchers second-quarter net income came in at $1.17 a share, topping analysts' expectations by 5 cents. Sales jumped 29 percent to $486 million, also beating market estimates of $470.2 million.

Last week, peers Nutrisystem (NTRI.O) and Herbalife (HLF.N) also posted market-beating profits spurred by increasing fitness awareness among consumers.

Shares of the company were down 16 percent at $62.52 on Friday afternoon on the New York Stock Exchange.

(Additional reporting by Abhishek Takle and Mihir Dalal; Editing by Viraj Nair)

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