Is Weight Watchers Overvalued After Its Recent 40% Jump In Share Price?

by Trefis Team
Weight Watchers International
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Weight Watchers International, Inc.  (NASDAQ:WW), a global wellness company and a leader in the commercial weight management program, saw its share price rocket by more than 40% in a single trading day earlier this month after the company revised its guidance for the year after achieving better-than-expected Q2 results. Trefis summarizes trends in Weight Watchers’ earnings over recent quarters along with our expectations for the year in an interactive dashboard. Based on our forecasts for the company’s key metrics, we believe Weight Watchers’ valuation to be $27 a share, which is slightly below the current market price. You can modify our key forecasts to arrive at your own price estimate for the company. In addition, you will find more Healthcare and Personal Service company data here.

What Helped Weight Watchers’ Stock Price Jump On Earnings Announcement?

  • Weight Watchers reported strong second-quarter earnings that beat expectations. Following the results, the company also raised its earnings guidance for 2019 and now expects an EPS in the range of $1.55-$1.70.
  • Moreover, Weight Watchers ended the second quarter with 4.6 million subscribers – up 1.5% from the previous year and the highest-ever level for a second quarter.
  • The company’s revival has been supported by strong subscriber growth, celebrity endorsements, new technology, and expansion in global market.
  • However, it is important to note that the company’s stock price is still down 30% year-to-date.

A Quick Look at Weight Watchers’ Revenues

Weight Watchers reported $1.5 billion in Total Revenues in fiscal 2018. This included 3 revenue streams:

  • Digital Subscriptions: $570 million in FY2018 (38% of Total Revenues). This include subscriptions to digital product offerings, including Personal Coaching and Digital products based on the company’s approach to wellness and weight management.
  • Studio + Digital Memberships: $705 million in FY2018 (46% of Total Revenues). This include subscriptions to digital product offerings as well as access to weekly in-person workshops to the company’s commitment-plan subscribers.
  • Product Sales & Other: $241 million in FY2018 (16% of Total Revenues). This includes revenues generated by the company from sale of its consumer products as well as revenues from its franchise business

Key Trends Over Recent Quarters, And Our Forecast For Full-Year 2019

Digital Subscriptions’ Momentum Continues

  • Digital business has been the company’s fastest growing business over recent years, adding roughly $220 million in revenues since 2016 at an average annual rate of 17.5%. Digital subscription continued its momentum in Q2 2019, with revenues increasing 6% year-over-year to $157 million led by a higher level of incoming subscribers.
  • End of period digital subscribers were up 8.3% year-over-year to 3.2 million led by momentum across all our geographic markets with particular strength in continental Europe.
  • With the number of people looking to watch their weight growing worldwide, the demand for an effective, scalable and consumer-friendly weight management program will increase.
  • As a result, we forecast this division to add more than $40 million to total revenues in 2019. Also, the company’s new initiative, WW Freestyle, and its aggressive marketing strategies will provide a boost to revenues.

Studio + Digital Struggles To Attract New Customers

  • Studio + Digital is the company’s largest business, accounting for about 46% of revenues in 2018. Revenues for the division grew at an average rate of 8% from $605 million in FY’16 to about $706 million in FY’18.
  • Although, the company has witnessed strong growth in this division in the past, demand for the Studio + Digital business is declining as more people are moving towards digital-only subscriptions – primarily due to lower membership fees. This division had a difficult Q2, with revenues sliding by roughly 17% (y-o-y) to $157 million.
  • Moreover, end of period studio subscribers were down 11.1% year-over-year to 1.4 million.
  • We expect Studio + Digital segment’ revenue to decline in the low double-digits range in FY 2019 primarily due to lower member recruitment across major geographic markets. However, the division’s retention rate is expected to remain high over the rest of the year.

Product Sales & Other Business Faces Challenging Road Ahead

  • Revenue for the division have grown steadily between FY’16 and FY’18, to about $240 million driven by an increase in the number of Studio + Digital subscribers. Moreover, the strong performance of the company’s franchisees further aided the growth during this period.
  • Despite strong performance over the last few years, this segment has struggled in the first two quarters of 2019. In Q2 2019, revenues slid by almost 17% (y-o-y) to $55 million mainly due to slow growth in the number of Studio + Digital subscribers, as well as stiff competition in the weight management products market.
  • We expect revenues to continue to decline in FY’19 mainly due to lower recruitment in Studio + Digital segment.

Per Trefis estimates, Weight Watchers’ EPS for fiscal 2019 is likely to be $1.56. Taken together with a P/E of 17.4x, this works to be a fair value of $27 for Weight Watchers’ stock.

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