2023-08-16 18:02:36 ET
Summary
- Weight Watchers, now known as WW International, has transitioned from a weight loss program to a health and wellness technology company.
- The company's financial health is concerning, with a market capitalization of $813 million and a debt of $1.4 billion.
- WW International is facing challenges from competitors in the health and wellness industry and struggles with decreasing revenues.
Founded in 1963, Weight Watchers, now rebranded as WW International (WW), transitioned from being a conventional weight loss program to a comprehensive health and wellness technology company. While the company has significantly evolved over the decades, it's currently facing pressing challenges and intense scrutiny from the investor community.
A Historical Overview
Weight Watchers' primary value proposition has always been to foster healthy habits, with weight loss as a welcome side effect. This unique selling point enabled the company to expand its reach, building a global community of loyalists. Offering guidance, digital tools, and an ecosystem for member interactions, the company transformed itself to serve the ever-evolving wellness needs of consumers. Regular events and workshops further bolstered the community feeling, instilling a sense of belonging among its members.
Acquiring Sequence
In March, Weight Watchers made headlines by announcing its acquisition of a telehealth platform that prescribes weight-loss drugs, including the much-talked-about Ozempic. This news provided a significant boost to WW's valuation, pushing its stock price up by a remarkable 167% year-to-date.
However, beneath this surge, the financial health of the company paints a more intricate picture. At a share price hovering just above $10, the market capitalization stands at 813 million dollars. When we sift through the balance sheet, the company boasts a cash reserve of 91 million, but this is overshadowed by its debt, which towers at 1.4 billion dollars. As a result, the enterprise value balloons to 2.1 billion.
In terms of performance metrics over the past year, WW has recorded revenues of 942 million and adjusted EBITDA of 168 million. Net income is negative 306 million and free cash flow remains constrained at only 20 million. Yearly trends don't paint a pretty picture:
Revenue Breakdown
The bulk of WW International's current revenues come from subscriptions, with a 90% contribution. This split is further divided into:
- Digital Subscription Revenues: 63%- Workshops + Digital Fees: 26%- Clinical Subscription Revenues: 1%
With the remaining 10% being sourced from product sales, licensing, franchise royalties, and other miscellaneous revenues.
Historically, subscription-based models are viewed favorably by investors due to the predictable and recurring nature of the revenue stream. However, the quality of revenue depends not just on its type but its consistency and growth potential. The decrease in digital subscription revenues, dropping -17.4% in the first half of 2023, has put this viewpoint under a microscope.
Indeed, revenues have been sagging for a long time. From 2018's high of $1.51 billion, the company's revenue diminished steadily, standing at $942 million at the end of July 2023 on a trailing twelve month basis. While this gloomy revenue picture paints a challenging situation, some analysts are predicting a potential rebound, expecting the company to touch $1.13 billion by 2025.
The Debt Quandary
A troubling aspect of WW International's financial health is its steep debt. The $1.4 billion of debt, glaringly higher than its market cap, casts doubts over its future financial viability. Such a debt profile is concerning for both investors and stakeholders, especially in the backdrop of shrinking revenues. At 7.7 times EBITDA it's a worrying burden and seems likely to get worse over the next six months at least.
Navigating Choppy Competitive Waters
The health and wellness industry has seen a massive influx of competitors in recent years. New entrants, equipped with catchy marketing campaigns, digital innovations, and fresh branding, have posed stiff challenges to stalwarts like WW. The company's six-decade presence, while impressive, doesn't necessarily translate into a sustainable competitive advantage in this dynamic landscape.
The modern consumer is fickle, with low brand loyalty and an appetite for novelty. In such an environment, retaining customers, especially when faced with competitors' aggressive marketing strategies, becomes arduous.
The 167% Stock Rally
So, what's driving the 167% surge in stock price this year?
A significant part of this upward movement can be attributed to WW International's acquisition of Sequence , a telehealth platform that prescribes weight loss drugs, prominently Ozempic. With the weight loss drug market expected to soar to a staggering $14 billion next year, this move was strategically timed.
Sequence itself has demonstrated tremendous growth potential. Its sales in the first quarter soared to $6.5 million from only $28,000 a year earlier. That's a sales boost of over 20,000%.
However, challenges loom. Novo Nordisk, the manufacturer of Ozempic, faces supply constraints, causing WW to revise its revenue outlook downwards. On the conference call, WW management spoke of uncertainty surrounding when enough Ozempic is going to make its way to Sequence. As a result, WW's guidance for Ozempic revenue was cut from $45 million to $30 million spanning the next two quarters. This news, in part, sent the stock down 20%.
The Road Ahead
While there's no denying that the acquisition of Sequence presents vast potential, the company's broader challenges remain. The outdated brand perception coupled with the massive debt burden, means that time is of the essence for WW International.
The new CEO, despite showing promise, has an uphill battle to steer the ship in the right direction. A modest uptick in subscribers in the recent quarter is a small silver lining in the prevailing cloud of uncertainties, especially with the unresolved Ozempic supply issue.
If Ozempic supply works itself out and WW stock is able to continue its rally that could give the company some breathing room. A market cap over $1 billion would give the company more options to raise capital. In that scenario, WW could potentially extend loan maturities and begin to fix its balance sheet.
On the other hand, there is no shortage of companies vying to take advantage of the boom in weight loss drugs. WW International, because of its heavy debt simply doesn't have much time to assert itself.
In conclusion, WW International stands at a pivotal juncture. Good news on Ozempic could spur another sharp rally. But optimism needs to be tempered by the fact the company's legacy business and its balance sheet are still heading in the wrong direction.
For further details see:
WW International's Ozempic Gamble