Weight Watchers (WTW) capped off a transformative 2016 in strong fashion, with North American paid week (up 13%) and subscriber (up 12%) results validating the "Beyond the Scale" enhancements put in place in late 2015 and indications that this approach is starting to gain traction in Continental Europe (where paid weeks and subscribers were up 4% and 6%, respectively). While the U.K. business remains a work in progress and technology and new sources of competition continue to reshape the weight-management industry--both of which are considerations behind our no-moat rating--we believe investors should walk away from the fourth-quarter update convinced that Weight Watchers' core platform has sufficiently addressed the technology and innovation challenges it has faced in the past, implying more consistent revenue growth and margin expansion in the years to come.
Armed with a platform that better addresses consumer demand for a more holistic approach to weight management--encapsulating healthier eating, fitness, and technology--and new innovative approaches to marketing that capitalize on its Oprah Winfrey relationship, we believe the company is better positioned to extend its reach beyond its traditional over-50 female demographic. As such, we plan to raise our 2017-21 average annual revenue growth targets to the midsingle digits from the low single to midsingle digits, which will add a dollar or two to our $13 fair value estimate. We believe a return to operating margins in the high 20s is possible during this time frame--compared with 17.2% posted in 2016--which balances the operating leverage inherent in the business with additional platform or technology investments. We find shares fairly valued and believe investors still must approach this name with a wide margin of safety, given evolving consumer expectations; however, we also have greater confidence that Weight Watchers' digital and other improvements better position the platform for growth.
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