VALUATION HIGHLIGHTS

1. Digital Subscriptions constitute 65% of the Trefis price estimate for Weight Watchers International's stock.
2. Studio + Digital Memberships constitute 31% of the Trefis price estimate for Weight Watchers International's stock.

WHAT HAS CHANGED?

Latest Earnings Q3’20

Weight Watchers reported a mixed performance in Q3 2020, with its digital business partly making up for the fall in-studio business, as customers reduced studio visits and in-person meetings with weight consultants. Overall, total revenue in the quarter stood at about $321 million, down 8% year-over-year. Digital subscription revenues grew by almost 23% year-over-year to about $189 million. However, Studio + Digital revenues declined by 35% y-o-y to $93.5 million. WW ended Q3 2020 with 4.7 million subscribers, up about 5% year-over-year. However, the number declined sequentially due to seasonality.

Impact of Coronavirus pandemic

The Covid-19 pandemic, coupled with a broader economic slowdown, has adversely impacted consumer spending in the wellness and fitness industry. As people stayed home and avoided public places, the company’s high-margin studio business took a hit, with Studio + Digital subscriptions down by over 30% in Q3 2020. However, the company’s digital member signup trends have remained upbeat, with digital subscribers up by over 23% year-over-year at 3.8 million in Q3 2020.

WW Freestyle continue to drive growth in Fiscal 2019

Weight Watchers is trying to transform itself into a wellness brand instead of a diet company. It revamped its image and rebranded itself as WW in late 2017. A favorable response to WW Freestyle drove positive member recruitment in 2019. Moreover, on a global basis, average retention continued to rise, crossing well over ten months in both Digital and Studio + Digital.

Weight Watchers ended 2019 with 4.25 million subscribers worldwide, a record level at year-end, and reflecting an increase of 8% or more than 310,000 subscribers over the prior year with growth across all the major markets. However, net revenue for the company declined by 6.7% (y-o-y), while gross margin contracted by 160 basis points driven primarily by decreased operating leverage across businesses, partially offset by a mix shift to the higher-margin digital business.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Weight Watchers’ value that present opportunities for upside or downside to the current Trefis price estimate for WW:

Service

• Total Digital Subscribers: We currently forecast that Weight Watchers’ total digital subscribers will increase from 2.98 million in 2019 to around 4.9 million by the end of the Trefis forecast period. An increase in digital subscribers is expected to be driven by the growing awareness among people regarding wellness and a healthy lifestyle. Additionally, as the number of overweight and obese people worldwide grows, the demand for an effective, scalable, and consumer-friendly weight management program will increase. However, there could be a 5% downside to the Trefis price estimate if Weight Watchers’ digital subscribers grow to only 4.50 million.


• Services Gross Profit Margin: The Gross Profit margin for WW’s services business has steadily increased from 49% in 2015 to 60.1% in 2018 primarily driven by improved operating leverage and shift in mix towards the higher-margin Digital business. However, this figure declined to 58.3% in 2019. We forecast the Gross Profit margin to decrease to around 58% by the end of the Trefis forecast period as competition will force WW to charge lower membership fees from its clientele. There could be a 5% upside to the Trefis price estimate if Weight Watchers’ services Gross Profit margin increases to 60% by the end of the forecast period.

Product Sales & Others

• In-workshop product sales: In-workshop product sales for the company has increased from around $127 million in 2015 to roughly $150 million in 2018 led by an increase in the number of our Studio + Digital subscribers. However, this figure declined sharply to $118 million in 2019. We expect in-product workshop sales to steadily increase to around $148 million by the end of our forecast as demand for high-nutrition and wellness products increases. However, there could be a 3% upside to our price estimate if Weight Watchers’ in-workshop product sales increase to around $200 million.

For additional details, select a driver above or select a division from the interactive Trefis split for Weight Watchers at the top of the page.

BUSINESS SUMMARY

Weight Watchers offers various products and services to assist in healthy habits, including weight loss and maintenance, fitness, and mindset. WW branded services and products include digital offerings provided through websites, mobile sites and apps, workshops conducted by the company and its franchisees, consumer products sold direct to consumers, licensed and endorsed products sold in retail channels, and publications.

The core philosophy behind Weight Watchers programs is to use a science-driven approach to help participants lose weight by forming healthy habits, eating smarter, getting more exercise, and receiving support.

SOURCES OF VALUE

Weight Watchers classifies its operations into the following four segments:

North America Continental Europe (CE) United Kingdom Other

We believe North America and Continental Europe are the most important sources of value for the company.

North America is Weight Watchers’ largest division

At the end of 2019, North America reported more than 2.7 million in total subscribers and over 150 million in total weeks paid for its North American Division. With service gross profit margins around 58%, the North America Division generated around $850 million in service revenues for the company. Taken together with product sales and other revenues, the division brought in approximately 70% of Weight Watchers’ total revenues. As the number of overweight and obese people in North America continues to grow, we believe that this division will continue to generate a bulk of the company’s revenue in the long run - making the division the single largest source of value for Weight Watchers.

Continental Europe (CE) is Weight Watchers' fastest growing division

Weight Watcher’s revenue from its CE division has grown at an average annual rate of 12% over the last four years. As obesity and health-awareness among people rise, these revenues could grow at a faster rate in the future.

Notably, WW’s total revenue has increased at a rate of roughly 7% annually over the last four years. This has led to a steady increase in the contribution by the CE division to the company’s top line from 18% in 2016 to more than 20% in FY 2019.

KEY TRENDS

Collaboration with Oprah Winfrey has been a game changer

In October 2015, WW entered into a strategic collaboration agreement with Ms. Winfrey, under which Ms. Winfrey granted the company the right to use her name, image, likeness, and endorsement for and in connection with the company and its programs, products and services. Since then, Oprah has played a central role in the company’s marketing campaigns. This is likely to continue to boost the company’s subscribers over the foreseeable future.

WW Freestyle likely to drive future growth

Weight Watchers offer services and products that are based on its new weight management program, known as WW Freestyle. The total recruitment and retention ratio received a boost over 2018-2019 following the successful launch of the program in 2017. WW Freestyle will not only help the company to achieve its mission to focus on overall health and wellness but also drive the company’s growth in the foreseeable future.

Failure to adopt ‘Keto Diet’ will negatively impact recruitment in the near term

The Keto Diet has risen in popularity over recent years. Keto Diet has been scientifically proven to help reverse type 2 diabetes, improve metabolic health, and enable many people to lose meaningful amounts of weight without hunger. However, Weight Watchers has not adopted the Keto Diet in its wellness programs as the company believes it is not a long-term sustainable solution for the weight loss program. Failure of the company to adopt to the Keto Diet will adversely impact recruitment in the near term as demand for Keto Diet surges.