Douglas Cliff
In recent weeks, weight loss drugs have made headlines as a result of some companies saying that they could already be having an impact on the bottom line. While at first glance the impact of these medications — known as GLP-1 agonists — might just impact food and beverages, the reality is that they could influence many other consumer industries.
Apparel retailers, casino/gaming names, and even airlines are just some of the industries that could see an impact from the growing popularity of weight loss drugs. Some of the more popular ones are Novo Nordisk’s (NVO) Wegovy (semaglutide) and Ozempic (semaglutide) and Eli Lilly’s Mounjaro (tirzepatide).
In a recent note, BofA Securities noted that while the use of these new drugs is still early, it’s prudent to pay attention now to their potential influence. “The impact of these downstream effects is much less clear to the market but could change consumer behavior over the longer-term with some industries benefitting while others having higher risk.”
Regarding apparel retail, BofA’s Lorraine Hutchinson said the medications could be a boon to the industry as it could spur a wardrobe replacement cycle.
“Weight loss could aid demand for the offerings from traditional retailers…and less demand for plus size retailers like Torrid (CURV),” she wrote. “We also expect athletic apparel brands like lululemon (LULU) and Deckers (DECK) to benefit given the healthier lifestyles shown to be supported by GLP-1 drugs.
“If individuals using GLP-1 save money through lifestyle changes, they could use this money to fund the clothing spending,” she added.
Based on current research, there may be a relationship between obesity and problem gambling, according to BofA, which estimates this kind of gambling represents 10%-30% of all gaming revenue. If weight loss drugs are prescribed to even more people, this could potentially lead to a decline in problem gambling, negatively impacting the industry.
“This implies the usage of GLP-1 could create a 0-4% revenue headwind for US commercial gaming with higher risk for slot machines or regional gaming,” noted BofA analyst Shaun Kelley. He added that as a result, he is keeping an eye on Boyd Gaming (BYD), Caesars Entertainment (CZR), MGM Resorts (MGM), PENN Entertainment (PENN), and Red Rock Resorts (RRR).
While cigarette ads used to claim that tobacco could be a way to curb appetites, BofA believes that GLP-1 drugs’ impact on the sector will be minimal. Nicotine is known to suppress appetite, insulin levels and increase metabolism.
BofA’s Lisa Lewandowski maintains that nicotine is used primarily by teens and young adult women for weight management. “This small subsegment of the smoking population may have limited access to these weight loss drugs, due to their income, location, and insurance coverage. In addition, younger patients may find doctors hesitant to prescribe these drugs given the potential for long-term use of GLP-1 drugs and concerns about young adult eating disorders.”
However, given that there are ongoing studies on using GLP-1s to reduce cravings for addictive substances such as nicotine and alcohol, the drugs could potentially have an impact on tobacco usage. That could impact companies such as Philip Morris International (NYSE:PM), Altria Group (NYSE:MO), and British American Tobacco (BTI).
One industry that could benefit from weight loss drugs are airlines. Slimmer passengers mean less overall weight on board, and that could impact the bottom line in terms of less fuel burned. Fuel accounts for ~25% of an airline’s overall expenses.
In late September, Jefferies put out a note stating that United Airlines (UAL) could save $80M annually assuming the average passenger sheds 10 pounds. This is based on the assumption that each United (UAL) flight would be ~1.8K pounds less and save 27.6M gallons of fuel per year, according to analyst Sheila Kahyaoglu.
“This benefit should be recognized similarly across airlines,” Kahyaoglu wrote. Pay attention to future comments from management of other top airlines, such as Delta Air Lines (NYSE:DAL), American Airlines (NASDAQ:AAL), Southwest Airlines (LUV), JetBlue Airways (JBLU), and Spirit Airlines (SAVA), on this subject.
For further analysis on the impact of weight loss drugs, check out the Oct. 14 Wall Street Breakfast Catalyst Watch podcast.
