Weight Watchers, a weight management company that has become a household name worldwide, especially after its partnership with Oprah. Weight Watchers has recently rebranded to WW International and is trading a very attractive price for its future growth prospects. Its digital transformation has put it in a great position to grow in the long term, and this coupled with its international first-mover advantages and unique WW community makes a company to keep an eye on in the near future.
Founded in 1963, WW International (NASDAQ: WW) is a global leader in the weight management services industry. It offers consumers a range of nutritional, activity, behavioral, and lifestyle products and services. The company’s goal is to help clients achieve their weight loss goals as efficiently as possible. Services are available globally although North America makes up around 70% of its total revenue.
The company was originally known as Weight Watchers but rebranded to WW in 2018. The company traditionally offered coaching and studio services but has recently begun transitioning into the digital health solutions space.
The company has three main business segments and operates internationally. Its international operations are segmented into North America (USA and Canada), Continental Europe (Germany, France, Belgium, etc), the United Kingdom, and ROTW (Australia, New Zealand, and Brazil)
Studio + Digital
Experienced management, strong partnerships, and a proven brand name are key parts of WW’s foundation.
Mindy Grossman was appointed as CEO in 2017, she has experience working for consumer brands such as Nike and Tommy Hilfiger. She envisions WW as a brand that builds long-lasting relationships rather than a diet-based seasonal business. She is compensated with an option package and thus her goals align directly with those of shareholders in the business.
In regards to partnerships, WW launched a multi-year partnership with talk-show host James Corden early in 2021 to promote myWW+. The company has had a great track record with such partnerships, as evidenced by their partnership with Oprah Winfrey, whose Oprah’s Your Life in Focus presentation generated over 5 billion media impressions. Oprah renewed her partnership into 2025 and has been a board member since 2015. 
From a brand name perspective, based on an IQVIA survey of weight-loss program recommendations from 14,000 doctors, WW was ranked #1. In addition, WW has been ranked #1 Best Diet for Weight Loss for 11 years in a row by the U.S. News & World Report and was voted as the most trusted weight-loss program by American consumers based on the 2021 BrandSpark American Trust Study. As shown in figure 1, its subscribers have steadily grown year over year, with more and more using the digital offerings of WW. 
Changing demographic and health trends are favorable to sustaining WW’s strong market position
WW and The Vitamin Shoppe's survey results indicate positive health trends amongst consumers, with
81% saying that they plan on making healthier choices, 49% believing in science-backed health approaches, and 77% taking a more proactive role in health and wellness decisions. In addition, WW has historically served a demographic that averages 38-48 years old. The population above 60 years old is expected to double in the United States by 2050. This group requires more medical solutions and is at greater health risk, generating demand for healthy lifestyle services and creating more opportunities for WW.
From a competitive standpoint, WW has the largest market share of 33% in the United States, with Medifast and Nutrisystem trailing behind at 26% and 24% respectively.  This market share is important given that as obesity rates continue to grow in North America the need for wellness programs is going to increase and brand name is very important in this industry. The obesity trends are shown in figure 2. 
WW’s fundamentals have assisted the company in effectively taking on and repaying debt. As of January 2, 2021, the company had a cash balance of $156.9 million. It has debt in the form of outstanding term loans and notes, interest, and debt repayments for which were made as scheduled throughout 2020. WW also has a $175M revolving credit facility which has remained undrawn. Overall, the company has a Debt/EBITDA of 4.9x which is higher than peers, however, it’s been able to consistently retained an interest coverage ratio above 2.5x and repay all its debt which provides confidence for all claim holders in the business. Given the low CAPEX, EBITDA is a great proxy for cash for the company. 
WW’s recurring revenue model provides strong levels of cash flow throughout the year. Its total paid weeks have been steadily increasing YoY, with an 8.2% increase witnessed from 2019 to 2020. In addition, despite a high leverage ratio, WW’s commitment to meeting all obligations using the consistent cash flows provided through operations is a positive sign.
Investment Thesis 1: Digital Transformation
While lost studio revenue has depressed valuation, WW’s digital transformation positions them for long-term growth. In the chart shown at the bottom, their digital subscription revenue has been constantly increasing over the past 5 years. In spite of this their EV/Rev ratio has still fallen.
COVID-19 dropped product sales down 66% and meeting fees down 35%, however, WW boasts a retention rate of 10 months and loyal customers have stayed with the company. As demand shifts, WW intends on scaling back its studio business and has already made efforts to reduce retail locations and begin its digital transformation long before COVID-19 first appeared.
The efficacy of this digital transformation can be seen through a 23% increase in their online subscriptions in 2020 despite total revenues falling by 3%. The total subscriber count of WW increased by 5%. Their new product lineup for FY21 has contributed to increased subscriber growth as was evidenced through the positive Q1 results. Moreover, virtual workshops facilitated by WW have been well-received by standing members and have a 97% satisfaction rate according to company filings. Overall, the shift to digital programming alongside reduced brick and mortar operations has improved WW’s margins. The company’s LTM gross margin currently stands at 60.2% which is an improvement from pre-covid levels when the margin sat at 55.8%. The fact that margins improved in spite of decreased sales volume is a great sign and signal that the digital transformation positions them for long-term growth.
The launch of the Digital 360 offering was very positive, with WW achieving over 100K sign-ups before any marketing in the UK and US alone. Following FY 2020 results, 90% of the WW business is through digital offerings and this is poised to increase over time. With a free trial conversion rate of 55% and 30% of the new members joining being newer and younger than older customers, the future is very bright for WW
Investment Thesis 2: International First Mover Advantage
WW holds an intentional first-mover advantage over its North American competitors. Nutrisystem, Jenny Craig, and Medifast have business models focused on product sales and are faced with import and export restrictions. WW has already penetrated international markets and faces fewer barriers when expanding elsewhere due to its digital service-focused model.
This is particularly beneficial when considering continental Europe. The wellness industry here is poised to grow at a CAGR of 8.45%. WW holds the largest market share in Continental Europe and witnessed a 12.5% increase in paid weeks during 2020. With no large competitors in CE, WW can price its services at a premium relative to the more saturated markets it operates in as evidenced by the relative pricing shown in figure 3. 
Investment Thesis 3: Community creates a Competitive Advantage
WW’s focus on community differentiates it from its competitors, creating a loyal consumer base and boosting retention. While its competitors focus on product sales and expert guidance, they lack established interaction platforms as WW has. The development of community and social interactions between members has helped WW international build a strong and loyal customer base.
They have built their community and brand over the past 50 years and provide unmatched human connection and inspiration which makes activities more fulfilling. Competition can replicate platforms and workshops, but can’t replicate the community that WW has created over time.
From a relative valuation perspective, WW is trading at a discount to its peers in the industry. The median EV/EBITDA multiple is 14.7x, while WW is trading at 12.6x. This should not be the case as WW has the largest US market share and largest international footprint of any of its competitors.
From an intrinsic perspective, after factoring in growth in revenues from the Continental Europe segment and accounting for improved margins due to the digital transformation, an implied share price of $49.50 was calculated, indicating an implied upside of 34% at its current price of $37.
Valuation highlights are shown in the accompanying figures.
Risk, Mitigations, and Catalysts
WW faces potential risks but proactive mitigation efforts alongside catalysts can create significant upside.
Risks and Mitigations
Overall, WW International is a company on the rise. It has stayed a leader in global weight management for the past few decades and is poised to continue expanding its market share. Let me know what you think in the comments!