Weight Watchers Soars, But These Analysts Remain Wary

Weight Watchers International, Inc. WW surged more than 18 percent Friday after reporting a first-quarter bottom-line beat. The company’s 16-cent loss per share far exceeded analyst expectations for a 27-cent loss. The $363 million sales figures was just under analysts estimates.

What Weight Watchers Achieved

Bank of America Merrill Lynch attributed the beat to favorable operating margins, which came in at 6 percent against estimates of 3.2 percent. The firm also notched 0.9-percent subscriber growth against expectations for a decline. Growth in digital app engagement helped.

But that was the extent of Weight Watchers’ celebrated metrics.

“Gross margin was +110bps as weakness was disproportionately driven by the lower-margin studio (meetings) business; high marketing and SG&A were anticipated,” Bank of America analysts wrote in a note.

Meanwhile, product sales fell 30 percent year over year — an issue Bank of America attributed to recruitment problems and KeyBanc attributed to poor studio attendance. Recruitment challenges remain from rebranding issues and pressure from diet competitors.

“The Studios business was challenged, but remains a critical component of the Business,” KeyBanc wrote. “[...] The Studios part of the business is a key competitive advantage as it allows for deeper engagement with members through interaction with coaches and other members to build a wellness community.”

Weight Watchers’ Target Weight

Bank of America suspects Weight Watchers may be conservative on 2019 bottom-line projections, but it sees little room for sales expansion. It expects promotional campaigns to drive recruitment during seasonal lulls and product sales declines to level off with the consumables relaunch. However, soft sales may stunt near-term recovery.

With slightly more optimism, KeyBanc anticipates retention gains from the WellnessWins loyalty program and app engagement.

“Improving retention will be critical for WW this year after a soft start to recruitment trends since about 40% of annual recruits join in 1Q,” KeyBanc wrote.

The Ratings

KeyBanc Capital Markets maintained a Sector Weight rating, while Bank of America Merrill Lynch maintained an Underperform rating with a $21 price target.

“While we expect shares to rally off of very low expectations, in our view, questions remain as to WW’s ability to return to a sustainable, consistent growth trajectory,” Bank of America wrote.

The stock traded around $24.20 per share Friday morning, up 19.1 percent.

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