Weight Watchers' Brand Has Come a Long Way
About the only concern we having coming out of the quarter is valuation.
We believe investors should walk away from Weight Watchers' (WTW) second-quarter update optimistic about the innovative ways to reach nontraditional consumers, including the Summer of Impact advertising campaign, WW Good festivals, and new digital capabilities, including fitness advice and bar code scanning. As in the last quarter, 40% of second-quarter member signups were new to Weight Watchers, but the more impressive statistic may be that 70% of individuals referred by a friend were converted to members, reinforcing how far the brand has come in recent years. This is also evident in Weight Watchers' marketing efficiency, as reported subscriber value to cost per member ratio remains north of 5 times, and incremental active members per marketing dollar trends continue to accelerate year over year, which should be aided by a shift to digital marketing away from TV in the back half of the year. Member duration also remains close to peak levels--nearing 10 months--reinforcing new platform engagement measures. We expect this trend to continue to grow in the near term with expanded health and wellness, loyalty program, FreshRealm, in-app sales potential, and partnerships/acquisitions yet to be announced.
About the only concern we having coming out of the quarter is valuation. On the surface, the market price/earnings multiple of 23 times our preliminary 2019 EPS outlook around $4.00 (which includes a $0.50 tailwind from new subscribers in the base) appears reasonable given the platform's increased optionality. We plan to raise our fair value estimate to $65 based new monetization opportunities, but we believe the company would need to post average annual revenue growth in the midteens and operating margins in the high 30s to justify the current market price. This isn't impossible--and we don't see many downside catalysis on the horizon--but still difficult in what is a rapidly evolving industry with nascent sources of competition, the rationale for our no-moat rating.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.