Weight Watchers Q3 Results – Stock gets Hammered

Nov. 2, 2018 -- WW stock was tanking on Friday morning, down  as much as 28%, as the company beat earnings expectations but missed what analysts were calling for on the revenue front. The total subscribers fell again, from 4.5 million in the 1st quarter to 4.2 million by the 3rd quarter. Revenue was strong for Weight Watchers in one sense as it rose 13% from one year to the next, reaching $366 million. However, the figure failed to reach the $379 million that analysts who were polled by FactSet were calling for.

“Reflecting continued strong consumer response to WW FreestyleTM, we ended the quarter with 4.2 million subscribers, a record for the third quarter, and up 25% year-over-year,” said Mindy Grossman, the company’s President and CEO. “As we expand our mission from being the global leader in weight management to becoming the world’s partner in wellness, we marked a major milestone with our rebranding as WW."

“Our third quarter 2018 results reflect the continued momentum in our business, with strong growth year-over-year in subscribers and revenue, driving an impressive flow-through to profitability,” said Nick Hotchkin, the Company’s CFO.

  • End of Period Subscribers in Q3 2018 were up 24.9% versus the prior year period, driven by growth in all major geographic markets. Q3 2018 End of Period Digital Subscribers were up 36.5% and End of Period Digital + Studio Subscribers were up 7.5% versus the prior year period.
  • Total Paid Weeks in Q3 2018 were up 24.4% versus the prior year period, driven by growth in all major geographic markets. Q3 2018 Digital Paid Weeks increased 37.1% and Digital + Studio Paid Weeks increased 6.4% versus the prior year period.
  • Revenues in Q3 2018 were $365.8 million. On a constant currency basis, Q3 2018 revenues increased 14.0% versus the prior year period.
  • Net Income in Q3 2018 was $70.1 million compared to $44.7 million in the prior year period.
  • The company is updating its full year fiscal 2018 earnings guidance to between $3.15 and $3.25 per fully diluted share.
  • End of Period Subscribers in Q3 2018 up 25% year-over-year to 4.2 million
  • In Q3, North America revenue increased 15% on constant currency and end-of-period subscribers increased 25%. Continental Europe revenue increased 22% on constant currency and end-of-period subscribers increased 29%. And in the U.K., revenue was flat on constant currency and end-of-period subscribers increased 12%.
  • WW is now anticipating full year 2018 revenue to be approximately $1.53 billion.
  • Marketing expense in 2018 is now expected to be approximately $235 million or flat year-over-year as a percent of sales.

The complete press Release and financial tables can be found here:

https://corporate.ww.com/file/Index?KeyFile=395600337

 

Conference Call Highlights

WW is actively pursuing partnerships to help them reimagine third-party locations with the possibility of hosting WW workshops in other third-party properties, such as retailers, workspaces or hospitality partners... "that can offer a better member experience and our stronger representation of our brand and allow us another avenue for customer acquisition. In Canada, WW has a partnership with the retail chain, Loblaws, where it hosts WW workshops in the test kitchens of more than 60 locations.

WW recently acquired Kurbo, a family-based healthy lifestyle coaching program derived from Stanford University's pediatric weight control program. At this time, Kurbo will continue to service members as a standalone offering.

Average retention continues to be well over 9 months in both Digital and Digital + Studio.

Gross margin rate was 59%, up 420 basis points year-over-year on constant currency.

WW is further enhancing its fitness content through a new partnership with Aaptiv , a leading provider of premium digital health and wellness content. Aaptiv is developing a selection of exclusive audio base fitness classes to WW members. Later in November, this content will be integrated into the WW app for U.S. members.

In addition, "We previously discussed an initial pilot we did this summer with Headspace, a global in meditation and mindfulness. Following this successful pilot, we formed a broader partnership and we will be embedding Headspace content in our app exclusive content."

"Our WW Fresh quick-prep preportioned meal kits are now being pilotED and we look forward to a broader rollout beginning later this quarter and expanding in 2019."

WW is partnering with Blue Apron to introduce WW Freestyle-inspired dishes to Blue Apron menus beginning in January 2019.

Marketdata Commentary

Stock analysts still don't get it. It's NORMAL for business to be slower in the Summer months (Q3). It's the historical industry sales pattern.

"End-of-period subscribers to 4.2 million, up 800,000 subscribers or 25% from prior year driven by strong digital performance and supported by a great start to our Invite a Friend initiative. Similar to what we saw in the first half in the U.S., more than 40% of our member sign-ups in Q3 were new to WW."  -- THIS IS GOOD NEWS.

The CFO explained that..."Historically, approximately 40% of our annual member recruitments have occurred during Q1. Therefore, each year, Q1 is our peak for end-of-period subscribers, and each year-end is our low point. To illustrate, we went from 3.2 million at the end of 2017 to a record 4.6 million at the end of Q1, then move to 4.5 million and 4.2 million at the ends of Q2 and Q3, respectively, and we expect to end 2018 with up to 4 million subscribers. A 12% decline from the Q1 end level, but a 25% increase in level year-over-year."

The company has entered new partnerships with Headspace (meditation app), ClassPass (yoga and fitness studios classes), Aaptiv, and Blue Apron (meal kits). -- THIS IS GOOD NEWS -- The company is finally taking some action (as Marketdata has long recommended) to form partnerships with other retailers, to broaden its scope to attract new members.

The company is basically hitting on all cylinders while setting the foundation for future growth. It's just that Wall Street analysts are so short-term oriented, focused on THIS quarter, that they can't see the longer term potential. Typical. So, they bash the stock.

This not panic time guys. The company is posting strong results, still growing in double-digits, making partnerships in hot growth wellness and self-improvement market segments, beefing up its digital offerings, with no erosion of profitability--all within a strong economy. It's still the leader in the weight loss market, with more assets and a global footprint larger than anyone. So, what's the problem analysts? Must a company be PERFECT for you not to bash them?

At less than $50 per share, WTW is a screaming long-term buy in our opinion, with a realistic upside of 100%.

 

 

 

 

Comments are closed.