WW - WW International: Previewing A Pivotal Q2 Earnings Report

2023-07-21 17:37:49 ET

Summary

• WW International is set to report its Q2 earnings on August 3.
• The stock has been a big winner this year, with the acquisition of weight management telehealth provider "Sequence" adding a boost to its growth outlook.
• The company has a lot of work to do, but a positive Q2 result can go a long way in adding further momentum to the stock.

WW International Inc ( WW ) has emerged as one of the more surprising turnaround stories in the market with shares more than doubling in value thus far year to date. Following a disastrous 2022, the company is benefiting from its acquisition of startup weight management telehealth provider "Sequence" which has worked to reinvigorate the growth outlook through a compelling strategy pivot.

Indeed, that was our bullish thesis for the stock when we last covered WW back in March. Our update today highlights key developments and trends to watch ahead of the upcoming Q2.

Importantly, this will be the first report since the Sequence deal closed providing the market with a first look into the financials while setting the tone for the second half of the year. Overall, the company has some challenges including managing a high debt level, but we maintain a bullish outlook and see room for shares to push higher going forward.

WW Q2 Earnings Preview

WW is set to report its Q2 earnings on Thursday, August 3, after the market close. The consensus EPS of $0.10 represents a decline of -69% compared to the period last year, while the market also sees revenues declining by -15% to $230 million this quarter. Earnings remain pressured by soft subscriber numbers while ongoing restructuring charges have limited the profitability.

While the headline numbers at face value are objectively poor, the understanding is that there is an ongoing stabilization of core operating metrics. WW ended Q1 with 4 million subscribers between its digital platform and in-person workshop clients which came in ahead of guidance.

Even as the total number of members fell by 12% y/y, the company added 500k net subscribers in Q1 compared to 400k in Q1 2022 in what is recognized as the strongest seasonal period of the year.

What's impressive is this result was achieved even as the company posted an -18% decline in marketing spend, moving away from the more expensive traditional TV advertising with some alternative campaigns.

During the last earnings conference call , management noted the member "activation rate", reflecting a member's engagement on the platforms has been trending up between 4% to 8% year-over-year. This is important because it suggests customers are finding success in the Weight Watchers solutions early on in their journey, meaning they historically exhibit lower churn as long-term subscribers.

By this measure, we'll look toward the Q2 report to see a continuation of this early stage in newfound subscriber momentum and total weeks paid as the key monitoring points.

From there, the company expects to end 2023 with 100k more net subscribers over 2022, or flat excluding the Sequence business impact, as the first year of a non-negative number since 2020.

In terms of financials, the strong point is that operating income remains positive even while materially reduced from levels just a few years ago. On the other hand, WW ended Q1 with $140 million in cash against $1.4 billion in long-term debt, with the levered balance sheet a weak point in its investment profile. That said, there is a path for stronger results going forward.

All Eyes on Sequence

The main takeaway here is that the trends from the core Weight Watchers program are moving in the right direction while the attention turns to the Sequence business. As mentioned, the deal is officially closed in April with results now consolidated into WW earnings starting this quarter.

As a recap, Sequence is a digital health platform specializing in clinical weight management. While Weight Watchers has traditionally focused on dieting and lifestyle choices for members to lose weight, Sequence takes a prescription approach starting with a virtual consultation through a board-certified Doctor.

The idea here is to simplify the process potential patients take to access new FDA-approved Glucagon-like peptide-1 ((GLP-1)) medications like "Wegovy" and "Saxenda". These have been found to suppress appetite with strong signs of success for losing weight, particularly for the clinically obese segment of the population.

New members pay a $49 consultation fee which converts into a $99 per-month subscription that includes a custom treatment plan. The value proposition of Sequence is that the platform also makes it easy for patients to coordinate with health insurance coverage and streamline the documentation process.

WW last confirmed Sequence had approximately 27k customers which translates into an annual revenue run rate of $32 million, expected to climb going forward, protecting a figure closer to 100k subscribers by year-end.

The way we see it, the opportunity for WW is to leverage its existing Weight Watchers membership base and build an integrated ecosystem for a more complete suite of weight loss solutions. Similarly, new Sequence subscribers could find value in incorporating Weight Watcher's lifestyle and behavioral program.

In other words, bundling synergies over the next few years highlights a path to unlock value for the overall business. We expect to get an update from management on long-term plans to scale the Sequence platform which should be accretive to firm-wide financials.

What's Next For WW?

There's a lot to like about WW with the new Sequence dynamic, but it's also clear to us that this remains a "show me" story. We were very bullish on the stock when the deal was first announced, but the 100% rally over the period has likely already incorporated much of that enthusiasm.

The bullish case here is that the Sequence trends exhibit exceptional subscriber growth, confirming the demand for clinical weight loss management via prescription medications. WW needs to find a way to translate that momentum into firming profitability and stronger cash flow.

According to the consensus, 2023 is set to be something of a transitional year, as earnings are still pressured by the restructuring costs, while the top-line decline at least moderates compared to weaker trends in 2022. By this measure, the bigger wave is expected to come in 2024 where WW is expected to reclaim double-digit revenue growth and the market forecast for EPS to reach $0.63 implies a 1-year forward P/E of 12x.

There is uncertainty to those figures, but the potential that WW emerges stronger into next year could be enough to work as a catalyst for the stock to reprice even higher. The upcoming Q2 results will provide some needed clarity on current trends.

Final Thoughts

The setup here for shares of WW is simple. Big earnings and top-line beat should be enough for shares to run higher as the market incorporates a stronger outlook. One reason for that could be that the company simply benefited from the news coverage surrounding the Sequence deal and interest in weight loss medications, helping to drive subscriber growth.

On the other hand, disappointing trends meaning WW was unable to convert that "hype" would open the door for a leg lower in the stock by forcing a reassessment of the outlook.

What we can say for certain is that WW remains highly speculative, given its high debt load and lack of positive free cash flow which should keep shares volatile. That being said, we are bullish here and will take the over into the Q2 report.

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