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WW's (NASDAQ:WW) Q4 Earnings Results: Revenue In Line With Expectations But Stock Drops 22.8%


Full Report / February 28, 2024

Personal wellness company WW (NASDAQ:WW) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 8% year on year to $206 million. On the other hand, the company's full-year revenue guidance of $845 million at the midpoint came in 8.6% below analysts' estimates. It made a GAAP loss of $1.11 per share, down from its profit of $0.05 per share in the same quarter last year.

WW (WW) Q4 FY2023 Highlights:

  • Revenue: $206 million vs analyst estimates of $206.9 million (small miss)
  • EPS: -$1.11 vs analyst estimates of -$0.16 (-$0.95 miss)
  • Management's revenue guidance for the upcoming financial year 2024 is $845 million at the midpoint, missing analyst estimates by 8.6% and implying -5% growth (vs -14.1% in FY2023)
  • Free Cash Flow was -$26.32 million, down from $25.51 million in the previous quarter
  • Gross Margin (GAAP): 60.6%, up from 58.1% in the same quarter last year
  • Digital Subscribers: 3.1 million
  • Market Capitalization: $288.6 million

Formerly known as Weight Watchers, WW (NASDAQ:WW) is a wellness company offering a range of products and services promoting weight loss and healthy habits.

WW began as a weight loss-focused organization with Weight Watchers and has since rebranded into a comprehensive wellness brand. The company originally gained traction through its approach to weight management, combining dietary advice with group support meetings. This approach provided a community and accountability that differentiated it from other diet programs.

Initially, WW's member growth was fueled by in-person group meetings and public speaking events, enticing members to join. The company then expanded by franchising the Weight Watcher program to its graduates.

Today, WW's products include cookbooks, prepared food lines, and more, catering to a broader range of consumers. Its offerings are primarily subscription-based, and customers can participate both digitally and in person, receiving individualized support and coaching. WW also generates income from branded services and products, such as magazines, food guides, and licensing fees.

Specialized Consumer Services

Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.

WW's fitness and wellness peers include BODi (NYSE:BODY), MyFitnessPal, Noom, Cult.fit, and Trainerize.

Sales Growth

A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. WW's revenue declined over the last five years, dropping 10.1% annually. WW Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. WW's recent history shows its demand has decreased even further as its revenue has shown annualized declines of 14.3% over the last two years.

We can dig even further into the company's revenue dynamics by analyzing its number of digital subscribers, which reached 3.1 million in the latest quarter. Over the last two years, WW's digital subscribers averaged 7.8% year-on-year declines. Because this number is higher than its revenue growth during the same period, we can see the company's monetization has fallen. WW Digital Subscribers

This quarter, WW reported a rather uninspiring 8% year-on-year revenue decline to $206 million of revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3.9% over the next 12 months, an acceleration from this quarter.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, WW's high expenses have contributed to an average operating margin of negative 13.5%. WW Operating Margin (GAAP)

This quarter, WW generated an operating profit margin of negative 2.9%, up 19.7 percentage points year on year.

Over the next 12 months, Wall Street expects WW to become more profitable. Analysts are expecting the company’s LTM operating margin of 2.5% to rise to 13.1%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. WW EPS (GAAP)

Over the last five years, WW's EPS dropped 135%, translating into 18.7% annualized declines. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends or consumer preferences. Consumer discretionary companies are particularly exposed to this, leaving a low margin of safety around the company (making the stock susceptible to large downward swings).

In Q4, WW reported EPS at negative $1.11, down from $0.05 in the same quarter a year ago. This print unfortunately missed analysts' estimates. Over the next 12 months, Wall Street expects WW to improve its earnings losses. Analysts are projecting its LTM EPS of negative $1.22 to advance to negative $0.04.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Over the last two years, WW has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 2.3%, subpar for a consumer discretionary business.

WW Free Cash Flow Margin

WW burned through $26.32 million of cash in Q4, equivalent to a negative 12.8% margin, reducing its cash burn by 525% year on year. Over the next year, analysts predict WW's cash profitability will improve to break even. Their consensus estimates imply its LTM free cash flow margin of negative 3.3% will increase by 3.6 percentage points.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

WW's five-year average return on invested capital was 13.4%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, WW's ROIC over the last two years averaged 48.2 percentage point decreases each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Key Takeaways from WW's Q4 Results

We struggled to find many strong positives in these results. Its gross margin, operating margin, and EPS fell short of Wall Street's expectations. Furthermore, WW's full-year revenue and operating income guidance missed analysts' estimates as the company decided to wind down its low-margin consumer products business. Overall, this was a bad quarter for WW. The company is down 22.8% on the results and currently trades at $2.94 per share.

Is Now The Time?

WW may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of WW, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its number of digital subscribers has been disappointing. On top of that, its declining EPS over the last five years makes it hard to trust.

WW's price-to-earnings ratio based on the next 12 months is 25.2x. While we've no doubt one can find things to like about WW, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $10.36 per share right before these results (compared to the current share price of $2.94).

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