WW International (NASDAQ: WW) is scheduled to report its Q1 2021 earnings in the next few weeks. We expect Q1 2021 revenues to come in at about $335 million, slightly ahead of the consensus estimate of $332.6 million, with the company likely posting a loss per share of about -$0.23, compared to -$0.24 per the consensus. While revenues are likely to increase sequentially, driven by seasonality, they are likely to decline by about 16% year-over-year, driven by declines in the Studio business (subscriber base was down -42% in Q4 2020), with people staying at home and avoiding public places due to Covid-19. However, this should be partly offset by continued growth in the digital business. Over Q4 2020, WW’s Digital subscribers grew 24% year-over-year and digital subscriber adds actually helped total memberships grow 4% year-over-year.
While WW Stock rallied by over 50% since the beginning of the year to levels of around $36 in March, it has corrected since then to about $28 per share partly due to mixed commentary from brokerages. That said, we think WW Stock remains a relatively good value at current levels, trading at just over 18x our projected 2021 EPS for the company. The stock should see meaningful gains if the company beats expectations over Q1 and continues to make headway with its digital push. Our interactive dashboard analysis on WW International Pre-Earnings has additional details.
[12/30/2020] Why Has WW Stock Declined Despite Its Digital Transition?
WW International (formerly known as Weight Watchers International) stock remains down by about 30% year-to-date and has declined by close to 15% in December. While the company’s business has been impacted by Covid-19 (Revenue over first nine months of 2020 was down by about 3%) its Digital business has picked up much of the slack. As of Q3 2020, WW’s Digital Revenue was up 23%, with Digital helping the company’s total memberships actually grow 5% year-over-year. While the markets usually reward companies that digitalize and move to asset-light business models, WW International has been an exception, so far. Why is this?
This could potentially be due to concerns of higher competition. While the weight management market has always been quite fragmented, the trend of digital-first companies focused on helping people manage their health is growing. For example, the weight loss app Noom – which uses artificial intelligence tools and human coaches – has grown quickly. As of early 2020, it had over 50 million downloads (likely mostly non-paying), and its revenue nearly quadrupled over 2019 to $237 million. WW International, with its Studio and Digital business combined, had under 5 million subscribers as of the last quarter. Another digital health app, Lifesum, which has about 45 million users globally, has teamed up with Amazon to bring its coaching features to the new Amazon Halo fitness offering. Considering this, investors are likely skeptical whether WW International – which has been around for over fifty years – can compete in this space in the long-run.
[11/30/2020] Weight Watchers Digital Transformation
While WW International (formerly known as Weight Watchers International) has seen its stock recover significantly from lows seen in March, it remains down by about 15% year to date. This is in contrast with the broader S&P 500 which is up by about 13% over the same period. The decline is driven primarily by lower Revenues at the company’s Studio business (43% of total revenue mix in 2019), which was impacted as people stayed home and avoided public places due to Covid-19 lockdowns. Separately, a Q3 earnings miss has also impacted the stock to a certain extent. That said, WW International’s performance on the Digital front has been solid. Digital Revenues grew by about 23% in Q3 and were up by 18% over the nine months ended September 2020. In fact, total memberships rose to 4.66 million, an increase of more than 5% year-over-year led by growth in the digital space. As the company transitions from a brick and mortar business model to a more digital-first model, earnings should also improve. For instance, in Q3 gross margins expanded to 59.2%, up from about 55.8% last year, while Operating Margins also expanded by about 170 basis points.
See our analysis on What Drove 33% Decline WW International Stock Over The Last 3 Years? for more details on what’s driving the company’s performance and valuation.
While the markets have generally rewarded companies that have digitized and moved to more asset-light business models, WW International hasn’t benefited from this yet. The company’s valuation looks attractive, trading at about 18x consensus 2020 EPS and 14x consensus 2021 EPS. Considering this, we think the stock could have some upside in the near-to-medium-term. Sure, the weight management market is getting highly competitive given the slew of weight management apps and activity trackers, but considering WW International’s established brand, attractive valuations, and robust digital growth, the stock could offer upside with a reasonable margin of safety for investors.
[9/21/2020] Despite 75% Jump, Weight Watchers Stock Has Scope For More
Despite a 75% rise since the March lows of this year, at the current price of around $20 per share we believe Weight Watchers stock (NASDAQ: WW) has more room to go. Weight Watchers’ stock has rallied from $11 to $20 off the recent bottom compared to the S&P which moved 48% over the same time period. Strong growth in the digital business, with digital subscribers reaching an all-time high in June as well as gradual re-openings of studio locations, has led to the stock beating the overall market. However, the stock is down 55% from levels seen in early 2018, over two years ago. Additionally, the company’s stock is down nearly 48% to the figure it was at in February before the drop due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see an upswing in its studio business as the situation normalizes and its valuation implies it has further to go. Our dashboard ‘Why Weight Watchers Stock moved -55%?’ provides the key numbers behind our thinking, and we explain more below.
Some of the stock price decline over the last two years is justified given that the company’s earnings per share figure has shrunk nearly 30% due to a sharp reduction in margins. Moreover, a 4.4% increase in share outstanding further contributed to this share price decline. Notably, though, the company’s revenues have seen a healthy 8.1% growth between 2017 and 2019.
Finally, Weight Watchers’ P/E multiple expanded from 17x at the end of 2017 to 22x by the end of 2019. While the company’s P/E has decreased to 11x, it seems to be undervalued when the current P/E is compared to levels seen in the past years – P/E of 22x at the end of 2019 and 17x as recently as late 2017. We believe the stock is likely to witness a steady upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.
How Is Coronavirus Impacting Weight Watchers’ Stock?
The outbreak of Coronavirus has rattled the stock market and the broader economy. The 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. This was evident from the fact that the company saw a 27% decrease in the studio revenues while the company’s digital business remained robust, with digital revenues surging by more than 13% in Q2 2020 earnings (ending June). Further, the company’s digital member signup trends have remained upbeat, with digital subscribers reaching an all-time high of 3.9 million. Moreover, Weight Watchers has a strong retention rate, which is likely to mitigate the impact on the company’s top line. Despite a strong retention rate and a robust digital business, we expect Weight Watchers’ revenues to witness year-over-year declines in 2020 due to the steep fall in its studio business. To sum things up, although Weight Watchers’ revenues are likely to be lower in FY’20, Weight Watchers’ stock currently seems undervalued due to its upbeat digital business and a strong retention ratio.
Moreover, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.
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