Investors in Weight Watchers (NASDAQ: WW) have been on a roller-coaster ride in recent years. The company, traditionally focused on helping people lose weight, has seen its stock price shed over 80% since last July. Driving this steep decline is the falling number of paying members for its in-person meetings, which has caused revenue growth to flatline.
Last year, Weight Watchers rebranded its business to "WW" with a wider offering of new products aimed at providing more holistic health services for improving wellness. Will the company's new approach help reverse its trajectory?
Rebranding the company
The "WW" rebranding signaled the company's shift from weight loss to the broader goal of helping customers manage all aspects of a healthy life. This is the company's response to changing consumer preferences. In recent years, mobile apps such as MyFitnessPal have grown in popularity by offering free features to help people track their calorie intake and physical activity.
The new WW still has its legacy member workshops but now also provides access to perks such as meditation from the Headspace app, Blue Apron meal plans, and fitness classes from ClassPass. A central piece of the new business model has been the launch of Connect, an online community where subscribers can meet each other and offer tips and support for adhering to a healthy lifestyle.
Of WW's current 4.6 million subscribers, roughly 1.5 million attend the old-fashioned in-person meetings for a price of $45 per month, while the remaining 3.1 million are online-only subscribers paying just $20 monthly. All subscribers have access to the digital apps and new wellness offerings -- the key difference in the membership tiers is access to those meetings where members weigh in and get personalized instruction from coaches.
The shift to a focus on wellness is a good step toward attracting new customers, because the concept resonates with current consumer preferences. However, providing wellness through digital apps doesn't appear to be a panacea, and most subscribers have opted for the online-only model, which carries a lower monthly price. At the same time, the rebranding risks confusing people already familiar with the legacy Weight Watchers brand, which has been built over several decades.
Battling subscriber churn
In addition to offering a compelling product that can attract new members, the pivot to a wellness focus has a lot to do with improving subscriber retention.
The weight loss and fitness industry is highly seasonal. As with membership patterns at gyms and fitness studios, people tend to sign up with WW at the beginning of the year (hello, New Years' resolutions) to work toward a health goal, and they usually fall out at some point during the year. When subscribers cancel their plans, that's subscriber churn. The chart below shows that subscriber churn follows very clear seasonal patterns.
In additional to seasonal subscriber churn, weight loss products have choppy demand patterns. People tend to cycle in and out of a need for such services. For example, if you lose a significant amount of weight, you won't necessarily want to stay subscribed to WW unless you gain the weight back.
While people are typically more concerned with weight management only when they want to lose weight, everyone wants to be healthy all the time. Therefore, the core thinking behind a wellness focus is to keep members subscribed throughout their personal health journey. Essentially, people would have a reason to stay subscribed to WW before, during, and after weight loss, improving subscriber retention and reducing churn in the process.
Revenue will continue to face downward pressure
The strategy appears to be working, at least in part. Current subscriber levels are at all-time highs, and subscriber churn is at one of the lowest levels in years. However, the total subscriber numbers mask the underlying trend of a decline in average revenue per subscriber.
The average revenue per subscriber has fallen due to the popularity of the cheaper, online-only plans. At the same time, the company is losing members of its in-person plans. In the first quarter of 2019, online-only subscribers grew by 7.2% year over year, while in-person subscribers fell 10.4%. As a result, total revenue in the quarter was down 11%. This trend will continue to put downward pressure on revenue in the foreseeable future.
The company has defended its strategy by noting that while online-only memberships carry lower subscription prices, they feature higher margins since the company doesn't have to hire in-person coaches to attend meetings and provide advice. It's true that margins have risen since 2015, when the online-only product was launched, but margins actually fell in the most recent quarter because of the degree to which overall revenues declined.
Even though the online-only product has more than twice as many subscribers as the in-person plan, the in-person segment still generates more total revenue. This means that the underlying trend in the in-person product will continue to drive company fundamentals.
A core principle in the business world is that at some point, companies mature. This is particularly true in the consumer products space, where customer preferences will change over time. The legacy in-person offering may no longer be in vogue. However, to the company's credit, WW has built a successful, online-based offering.
In the near term, there may be a deterioration in the top line, but in the long term, WW's digital product will eventually eclipse its legacy business and drive the story.
This presents an interesting opportunity for investors considering the stock. Although the market is well aware of the pressure the company is facing with its legacy business, it doesn't seem to be pricing in much upside for the part of the company that's actually showing healthy growth. If the online-only product begins to lead the company back to revenue growth, investors should have a much rosier outlook.
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