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.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.