WW - WW International: The Interesting Strategy Pivot Masks The Bigger Picture

2023-03-08 10:43:26 ET

Summary

• For a company to consistently earn economic profits, competitive advantages are necessary.
• WW will acquire Sequence, a telehealth platform focused on GLP-1 medications, and I doubt this deal will help WW gain any competitive advantages in the foreseeable future.
• There are two main reasons behind my lackluster expectations for WW.

When a company changes its corporate name, it usually is a sign that the company is trying to reinvent its business model. When WeightWatchers rebranded itself as WW International, Inc. ( WW ) back in 2018, I initially thought WW stands for Weight Watchers, only to be clarified by the management that it does not. The name change came as an effort by the company to embrace body positivity but the company did not change its website URL, which came as a surprise at the time. Many marketers, at the time of the name change, thought it would be a disaster, and in hindsight, it seems fair to conclude that this name change has failed to turn things around for the company. Amid continued subscriber losses and deteriorating fundamentals, WW announced the acquisition of Sequence, a telehealth platform, yesterday (March 7). This new development sent WW shares through the roof (+79%) yesterday but I believe a troubled future awaits WW despite this renewed optimism in the market.

Sequence Will Open New Doors

Sequence is a telehealth platform focused on weight loss drugs, and the company's vision is to "address the biological factors" that prevent weight loss in many individuals. The company offers GLP-1 medications - a group of drugs that stimulate the body to produce extra insulin - to eligible users. Sequence provides a seamless, online sign-up process where users have to fill out a questionnaire to get started.

Sequence's weight loss program journey

The regular subscription is priced at $99/month but users can avail of a discounted price of $49 in the first month. Clinicians working with Sequence promote adding a prescription medication such as GLP-1s to boost the weight loss journey of an individual, but the company is not just about FDA-approved drugs. When a user enrolls in a weight loss program with Sequence, they will have access to an insurance coordinator, a personalized nutrition plan, and a Fitness Coach to design an appropriate fitness plan. Regular meet-ups with a clinician can also be arranged to monitor the progress and make the necessary changes.

WW currently offers weight loss programs centered around food science and behavioral changes, and the acquisition of Sequence will help the company to expand into the anti-obesity drugs market, which is expected to grow at a modest CAGR of 6.1% through 2027.

According to data published by WW, Sequence currently serves over 24,000 active members, generating annual recurring revenue of $25 million. WW will pay $132 million ($106 million net after accounting for $26 million in cash in Sequence's books) to acquire Sequence, so the company is paying just over 5 times the current revenue to acquire the company. The transaction is expected to be completed in the second quarter, and WW expects the deal to be accretive to its earnings starting from Q4 2023.

The Struggles Will Continue

When I invest in a company for growth, I look for competitive advantages enjoyed by a company - or at least the potential for enjoying such competitive advantages in the future - to predict future returns on invested capital. A company that consistently generates returns that exceed its economic costs should reward investors handsomely in the long run, when invested at the right price. The problem with WW, in my opinion, is that it operates in a fragmented industry where carving out competitive advantages seems impossible. There are two reasons behind this claim.

First, the health and wellness industry is evolving rapidly, making it difficult for WW or any of its competitors to remain in the game without pivoting to new business lines and spending millions of dollars on marketing. It is perfectly fine for a company to incur substantial marketing expenses to build a brand image and to lure customers, but in WW's case, the marketing dollars spent by the company do not result in a sticky customer base. The churn is high in the health and fitness industry because of the wide variety of options available to individuals today, and this will remain the same in the foreseeable future. A diet plan or a behavioral pattern that is relevant today might not be relevant tomorrow, which makes it difficult for a company to develop competitive advantages. A classic example is how WW lost subscribers between 2010-2015 with the rise of organic food-based diets that claimed the most important factor that aids in weight loss is sticking to a diet with non-processed foods (WW has historically claimed that members can eat whatever they want as long as they do not exceed a certain number of points). From over 4 million in 2013, WW's subscriber base dwindled to less than 2.5 million in 2015, before Oprah Winfrey invested in the company. Although this investment triggered a massive run in WW stock price, the company's struggles continued. WW has evolved over the years to offer meditation (in collaboration with Headspace), promote sleep quality, and offer on-demand fitness classes as well, but none of these initiatives reversed the steady decline in subscribers. The acquisition of Sequence might help the company's cause but I remain skeptical of the long-term returns of this investment because of the rapidly changing nature of the industry.

Second, the health and fitness market is flooded with various types of options for users to choose from, and this fragmented nature of the market makes it difficult - if not impossible - to carve out long-lasting competitive advantages. Some of the biggest names in the healthcare industry are offering free nutrition and fitness classes/programs on social media platforms such as YouTube, individuals have access to gyms and fitness studios, certain governments are investing in public health initiatives such as free access to public gyms to promote healthy lifestyles, and to top it all off, big tech giants such as Apple, Inc. ( AAPL ) are coming for market share. Many iPhone users are familiar with Apple Fitness+, a subscription that allows users to access a wide variety of fitness and meditation classes for less than $10/month in most regions of the world. What's more, Apple Fitness+ usually is offered free of charge for new device users for up to 3 months. In my opinion, it is just a matter of time until Fitness+ offers a plan that promotes behavioral changes similar to WW. In any case, the plethora of options available in the market makes it difficult for WW to gain a permanent edge over its competitors.

Takeaway

Sequence will open new doors for WW but I am not convinced that the company will find what it is looking for after opening these doors. For years, WW has failed to gain any traction in the health and fitness industry despite its weight loss program being one of the best - if not the best - programs in the market, endorsed by celebrities and nutritionists. This is not the company's fault, however. The dynamically changing health and wellness industry has a lot to do with WW's struggles, and I do not believe acquiring Sequence will help WW get past its struggles given that Sequence's revenues account for just over 2% of WW's 2022 revenue. The company may see some improvements in subscriber trends initially but that is not a guarantee of future success. Other than speculative investors betting on short-term market movements, I find it difficult to rationalize investing in a company with no prospects for long-term competitive advantages.

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