WW International Stock: 2022 To Be A Make Or Break Year (NASDAQ:WW) (2024)

WW International, Inc. (NYSE:NASDAQ:WW) operates the leading weight management program known as "Weight Watchers" with over 4.5 million subscribers. Going back to a corporate rebranding in 2018, the focus has been on its digital platform including mobile apps compared to the legacy model of in-person workshops. The company got a boost during the early stages of the pandemic with a trend of people staying at home focusing on fitness, although the operating momentum has waned resulted in disappointing earnings more recently. Indeed, shares of WW are down by more than 60% from the high of last year with the market likely focusing on what is intense competition from new forms of dieting and fitness advice representing a more uncertain long-term outlook. The company enters 2022 with a new marketing push highlighting "personalized plans" although we are skeptical it can overcome what are several headwinds.

WW International Q3 Earnings Results Recap

The company last reported its Q3 results in early November with EPS of $0.65, which was $0.03 below the consensus. Revenue of $294 million, down by 8.5% year-over-year, was a bigger miss compared to the market estimate closer to $315 million. The gross margin was up slightly considering a changing mix between subscriber categories towards digital which helped the adjusted operating income margin reach 30.1%, up from 29.6% in the period last year. Nevertheless, net income was 15% lower from Q3 2020 which included some restructuring costs this quarter.

The overall weakness stems from disappointing subscriber numbers with the total at 4.5 million, down 4.3% y/y. That said, part of the dynamic considers what was a more difficult comparison period in 2020 which saw the platform get a boost during the pandemic into a wave of wellness enthusiasm. Nevertheless, the underlying momentum has slowed compared to recent years.

Digital subscribers fell -2.8% y/y balancing a -10.6% decline in the workshop+digital segment which includes people visiting in-person meetings that also get access to the online platform. The segment has been particularly challenged by the pandemic although the shift has been ongoing over the past decade.

While the core metric for the company in "total paid weeks" reflecting commitments for weeks of meal plans and advice services declined by 3.2%, the measure just within digital paid weeks managed to stay positive at 0.8% compared to Q3 2020 as a silver lining reflecting some higher average pricing. The trends here have generally matched global themes for the company by region. For context, about 64% of the business is based in North America while WW is also big in Central Europe where it represents about 19% of total revenue.

WW is guiding for full-year revenue "modestly above $1.2 billion", which if confirmed, represents a decline of 13% compared to $1.378 in 2020. The company is also targeting EPS between $0.80 and $0.90 which includes about $0.51 in debt repayment and restructuring charges. On an adjusted basis, the non-GAAP EPS target of $1.36 represents a decline of 9% compared to $1.50 in 2020.

WW Stock Forecast

Weight Watchers enters 2022 with a new program known as "PersonalPoints" within the digital platform. The innovation is a more advanced algorithm tailored to each subscriber's budget and food preferences while making adjustments to nutritional points value compared to the old system. Longtime WW brand ambassador and investor, celebrity Oprah Winfrey, has led a TV commercial campaign with an effort to drive new signups.

Taking a more cynical view, we don't see anything groundbreaking here. The challenge for the company is to reach a new pool of customers that have not tried the program. The reality is that the weight management, dieting, and fitness segment is becoming ever-increasingly crowded in what is an evolving landscape.

Anecdotally, anyone on social media platforms like "Instagram" from Meta Platforms Inc (FB) or even "YouTube" from Alphabet Inc (GOOGL)(GOOG) will be familiar with the growing cottage industry of independent health gurus, fitness trainers, and nutritional experts that now represents direct competition for WW as a "legacy" player. We can even include Peloton Interactive Inc (PTON) with its line of fitness products and subscription model as drawing users away from WW as a weight management alternative.

Another fundamental weakness for WW is what we believe to be a high balance sheet debt position and with climbing leverage. The company ended the last quarter with $188 million in cash against $1.5 billion in debt. Considering adjusted EBITDAS (which excludes restructuring charges) over the last twelve months at $297 million, the net debt to adjusted EBITDAS at 4.3x has climbed from 3.7x at the end of 2020. The be clear, the financial position and liquidity appear stable in the near term, but the leverage ratio is high by most measures and going in the wrong direction.

Looking ahead, we can expect another soft quarterly result for the yet-to-be-reported Q4 earnings expected in late February although guidance for 2022 and comments from management regarding the early success of the PersonalPoints program will be the key to watch. According to consensus, the forecast for the full-year 2021 revenue and earnings are in line with the management guidance. The market sees revenue growth averaging 6.5% between 2022 and 2023, while EPS is expected to rebound high presumably driven by firming margins operating margins and upside to the digital pricing.

So when we look at valuation, the forward P/E of 8x based on the 2022 EPS estimate reflects a deep discount compared to an average multiple closer to 20x over the past 5-years. Our take is that poor subscriber trends and operating momentum uncertainty justify what appears to be a depressed valuation. What we are describing here has the potential to evolve into a classic "value trap" if the company fails to regain subscriber growth or sees increasing levels of customer churn compared to recent years which would result in revisions lower to forward estimates and downside for the stock.

Is WW Stock a Buy, Sell, or Hold?

WW and the WeightWatchers program are not going away anytime soon, but the real question is if the company's best days are in its past. WW can end up presenting solid Q1 2022 guidance in the upcoming earnings releases with a boost from the new PersonalPoints marketing push which could provide a bid for the stock, but will remain exposed to uncertain quarterly trends going forward.

We rate shares of WW as a hold balancing our general bearishness against what has already been a deep selloff in the stock. In our view, it's probably too late to aggressive short for a bet on more downside, but at the same time, we see the upside as limited in the stock. Since around 2017, WW has gone through these cycles of posting a strong quarter adding momentum to stock only to disappoint in the following quarters. We can expect this same volatility to continue.