Launching Coverage Of Weight Watchers With A $25 Price Estimate
Trefis is launching coverage of Weight Watchers International, Inc. ( WW ), a global wellness company and a leader in the commercial weight management program, with a price estimate of $25 per share. The key factors behind our forecast for the company include its revenue growth potential, the company’s rapidly growing subscriber base (subscriber base has increased from 2.4 million in 2015 to about 4 million in 2018), and the company’s leading position in the global weight management market. Below, we break-down the outlook for the company’s three business segments and our valuation for the company based on projected FY’19 results.
Weight Watchers reported $1.5 billion in Total Revenues in fiscal 2018. This included 3 revenue streams:
Digital Subscriptions : $570 million in FY2018 ( 38% of Total Revenues ). This include subscriptions to digital product offerings, including Personal Coaching and Digital products based on the company’s approach to wellness and weight management.
Studio + Digital Memberships : $705 million in FY2018 ( 46% of Total Revenues ). This include subscriptions to digital product offerings as well as access to weekly in-person workshops to the company’s commitment-plan subscribers.
Product Sales & Other : $241 million in FY2019 ( 16% of Total Revenues ). This includes revenues generated by the company from sale of its consumer products as well as revenues from its franchise business
Digital Subscriptions is Weight Watchers’ Fastest Growing Division
Digital business has been the company’s fastest growing business over recent years, adding roughly $220 million in revenues since 2016 at an average annual rate of 17.5%
This growth can be attributed to higher year-over-year recruitment growth and a higher number of End of Period Subscribers. Weight Watchers’ digital subscribers have grown at an average annual rate 30% since 2016 and stood at 2.6 million at the end of 2018
Strong growth in digital subscribers as well as an increase in digital paid weeks has helped the contribution of digital business to total revenues increase from around 30% in 2016 to roughly 38% in 2018.
With the number of people looking to watch their weight growing worldwide, the demand for an effective, scalable and consumer-friendly weight management program will increase.
As a result, we forecast this division to add around $40 million to total revenues in 2019. Also, the company’s new initiative, WW Freestyle, and its aggressive marketing strategies will further provide a boost to revenues.
We expect the contribution of digital subscription to total revenues to cross 43% in 2019.
Studio + Digital Is Weight Watchers’ Largest Division
Studio + Digital is the company’s largest business, accounting for about 46% of revenues in 2018. Revenues for the division grew at an average rate of 8% from $605 million in FY’16 to about $706 million in FY’18.
Although, the company has witnessed strong growth in this division in the past, demand for the Studio + Digital business is declining as more people are moving towards digital-only subscriptions – primarily due to lower membership fees.
We project revenues to decline by 12.5% to roughly $617 million in 2019 as Studio + Digital Fees is expected to decline due to lower recruitment. However, the division’s retention rate is expected to remain high over the rest of the year.
Product Sales & Other Business Has Seen Steady Growth Over Recent Years
Revenues grew steadily between FY’16 and FY’18, to about $240 million driven by an increase in the number of our Studio + Digital subscribers. Moreover, the strong performance of the company’s franchisees further aided the growth during this period.
Despite strong performance over the last few years, we expect the revenues to steeply decline to about $180 million in 2019. This decline can be attributed to slow growth in the number of Studio + Digital subscribers, as well as stiff competition in the weight management products market.
However, as the global weight-loss supplement market is expected to expand, the demand for low-fat, low-calorie and reduced-sugar products is likely to rise. As a result, we expect this business to achieve sustainable growth in the long run.
Estimating Weight Watchers’ Fair Value
We are valuing the company at about 17x projected FY’19 EPS – higher than its current trading multiple of 8x, but significantly lower than the industry trading multiple of 55x.
Based on our forecast, WW’s adjusted EPS for fiscal 2019 is likely to be around $1.47. Using this figure with our estimated P/E ratio of 17x, this works out to a price estimate of $25 for Weight Watchers’ shares , which is around 30% ahead of the current market price-indicating that the shares are undervalued.
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