EUR 850.00 For Business Accounts Only

Morningstar | WW's Acquisition, Retention Adjustments Reinforce Our Medium-Term Growth, Profitability Assumptions

On the heels of WW's disappointing fourth quarter, our focus during the first-quarter update was how quickly the firm could adjust member acquisition and retention strategies to bounce back from winter marketing missteps, brand transition issues, and the lingering threat of competitive substitutes (keto diets). While there is room for improvement--particularly in WW's studio business--we believe the key takeaway was tactical marketing changes to stabilize member trends (total subscribers were up 1% to 4.6 million) while also keeping costs in check. This demonstrates an agility that we haven't seen from WW--in the past, it would've likely taken until the next winter marketing campaign to address issues--and gives us confidence in this management team and long-term assumptions.

While $1.4 billion still strikes us an appropriate revenue target for 2019, we continue to see low- to mid-single-digit growth over the medium term, something the market hasn’t priced in. Our top-line growth assumptions continue to be backed by four drivers. One, average duration still remains ahead of its historical nine-month average, suggesting efforts to make the brand a more holistic solution are resonating and can help to nullify some of the impact of substitutes. Two, new recruitment strategies like Invite a Friend and in-app purchases (which were collectively responsible for 15% of global recruits this quarter) are improving brand relevancy among nontraditional members. Three, we believe asset-light partnerships and sales channels (including third-party locations for meetings and direct-to-consumer solutions) are margin-accretive ways to build the brand. Four, efforts to optimize and modernize the in-person meeting experience should become apparent as the year progresses.

There is no change to our $35 fair value estimate or no-moat rating. We view WW as undervalued and expect improved market optimism as subscriber acquisition and retention trends improve as the year progresses.

While WW still faces questions about the impact of substitutes on near-term pricing, management's updated 2019 outlook strikes us as reasonable. This includes revenue of $1.4 billion (down 8% from 2018), negative member recruitment for the full year (but recruitment crossing into positive territory later in the back half of the year), gross margins declining 200 basis points to approximately 55%, $250 million apiece in marketing expense and general and administrative expense (which includes $6.3 million of organizational restructuring costs in the first quarter and implies full-year operating margins in the high teens versus 25.7% in 2018), and EPS of $1.35-$1.55 (down from $3.19 last year but up from earlier guidance of $1.25-$1.50).

In our view, the current price continues to assume no long-term revenue growth and margin expansion. However, we believe there is still a case to be made for low- to mid-single-digit growth and operating margins in the mid-20s in the next five years, which balances the margin-accretive nature of new partnership structures and the shift to online channel initiatives with evolving industry trends.