Weight Watchers’ Stock Looks Overvalued Despite Strong Revenue Growth Prospects

Weight Watchers International, Inc.  (NASDAQ:WW) is a global wellness company and a leader in the commercial weight management program segment. Weight Watchers has achieved robust revenue growth over the last few years, with its revenues of $1.5 billion in 2018 marking a y-o-y growth of 16% driven by steady growth across all operating divisions. Trefis captures trends in Weight Watchers’ Revenues over recent years in an interactive dashboard along with our forecast for the current year. WW is expected to witness a revenue decline of 6-7% in 2019 due to decreasing revenues from Studio + Digital memberships as well as lower product sales. While the impact of these headwinds on the top line should be mitigated by strong growth in the company’s Digital Subscriptions division in the long run, we believe that the digital-focused business model will result in a notably lower operating margin. Because of this, we maintain a $27 price estimate for Weight Watchers’ stock – well below the current level of ~$36.

You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance, and alter the assumptions to arrive at your own estimate for Weight Watchers’ Revenues.

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

How Has Weight Watchers’ Revenue Trended Historically? 

• WW has added approximately $350 million to total revenue since 2015 at an average annual rate of 9% led by steady growth across all operating segments.
• Digital Subscriptions has been the largest growth driver -accounting for more than 60% of total incremental revenues
• Going forward, we expect Weight Watchers’ revenues to decrease by 6.7% and reach $1.4 billion in FY 2019.

A Detailed Look At Weight Watchers’ segment performance and revenue change over the years:

Studio + Digital Is Weight Watchers’ Largest Operating Division

• Studio segment consistently contributes a majority of its revenues, with an average revenue share of 50% in the last 4 years.
• However, the segment’s share has declined from above 50% in 2015 to nearly 46% in 2018 due to faster growth in the Digital segment.
• The segment grew by 6% year-over-year in fiscal 2018, contributing more than $72 million to total incremental revenues.
• We project revenues to slide by 13.5% to roughly $610 million in 2019 as Studio + Digital fees are expected to decline due to lower member recruitment across major geographic markets.

Digital Subscriptions Is Weight Watchers’ Fastest-Growing Segment

• Digital business has been the company’s fastest-growing business over recent years, adding roughly $220 million in revenues since 2015 at an average annual rate of 17.5%
• The segment grew by a whopping 36% year-over-year in fiscal 2018, contributing more than $150 million to total incremental revenues This growth can be attributed to higher year-over-year recruitment growth and a higher number of End of Period Subscribers.
• We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 7.4% to $610 million in FY 2019 – making it Weight Watchers’ largest division by the end of this year.
• The segment’s contribution to total revenues has significantly increased over the years, which is expected to continue in the foreseeable future.

Product Sales & Other Business Will See A Sharp Decline In Revenues In 2019

• Revenues 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 half of 2019 with revenues plunging by 23% 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.
• Moreover, the segment’s contribution to total revenues has decreased over the years, which is expected to continue in the foreseeable future.

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 – roughly 25% lower than its current market price.

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