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