Short: WW International Inc (NYSE: WW) Helen Huang and Antares Tobelem COMPANY OVERVIEW Engage Undergraduate Investment Conference 2 Company Overview Business Overview Stock History 120 • WW provides weight management services and products Beats revenue + EPS • Operates mainly through its digital app and in-person workshops expectations, misses on 100 subscribers • Known for its points system when evaluating users’ eating habits Sales + subscriber declines w/ rise of Popular PointsPlus 80 free apps Key Company Highlights program Mindy Revenue by Market Revenue Mix 60 Grossman CEO Price Price ($) Oprah UK 40 7% Product Spokeswoman 15% CE Studio + 20 21% Digital US 42% 0 69% Digital 43% Key Board Members 3500 -14% (Total EOP) 3000 2500 -10% (Total EOP) 2000 1500 1000 500 0 Mindy Grossman, CEO Nicholas Hotchkin, CFO Oprah Winfrey - Director '17 Q1 Q2 Q3 Q4 '18 Q1 Q2 Q3 Q4 '19 Q1 Q2 Former CEO of HSN Veteran WW executive WW Spokeswoman Total Digital Subscribers Total Studio+Digital Subscribers Joined in 2017 Previously Staples 8% Shareholder Engage Undergraduate Investment Conference 3 Services and Products SERVICES THE APP WORKSHOPS Digital Studio + Digital Coaching PRODUCTS Snacks Kitchen Goods Lifestyle Products ENGAGEMENT Dance Parties Cruises New Workshop Locations Engage Undergraduate Investment Conference 4 INDUSTRY OVERVIEW Engage Undergraduate Investment Conference 5 Industry Overview Weight Loss Industry Trends Industry Statistics Highly fragmented – many internal and external • Expected annual growth rate of .5% over next four years competitors with free apps and fitness programs • US is largest global market at around $17B • America has greatest need and the most means (WHO 12) • Women and older individuals (55+) are usual consumers Relies on marketing to cater to constantly • But there may be untapped markets in men and YAs changing customer tastes Stock Price Trends Growing TAM because of obesity trends, aging population, opportunities for expansion Rise in health consciousness and increased focus on “lifestyle” services Generally seasonal and volatile Engage Undergraduate Investment Conference 6 Industry Overview Industry Tailwinds • Celebrity influence and viral stories can strongly influence company growth • Increased health consciousness means customers may view these services more as “lifestyle” products to use consistently • Increasing obesity rates and aging populations increase the industry’s TAM • Popularity of digital/app-based services allows for easy entrance to the space Industry Headwinds • Industry seasonality and marketing uncertainty • Reimagined fitness Classes (active vs passive fitness) can take advantage of in-person benefits • Home fitness equipment gaining popularity • Many free, effective health and wellness apps • Weight loss procedures are becoming cheaper and safer Engage Undergraduate Investment Conference 7 INVESTMENT THESIS Engage Undergraduate Investment Conference 8 Risky Transition to Digital – Increasing Digital Subscribers Q2 2017 Q2 2018 Q2 2019 Product Product Product 17% 16% 15% Decreasing growth in WW’s EOP Studio Studio + Studio + Studio + Digital Digital + Digital segment harms its important Digital 47% 42% Digital 50% Digital Digital 33% weight loss community. 37% 43% • Digital subscriptions gained an additional 10% of revenue mix in the past 2 years • Studio + Digital is struggling • YoY digital growth has been positive for every market • YoY S+D growth has been negative for every market • True for both subscriber numbers AND paid weeks Engage Undergraduate Investment Conference 9 Risky Transition to Digital – More Expensive Growth • The market really only cares about 2 things: Next, let’s discuss subscriber growth 1. Revenue Growth • To maintain revenue growth, WW needs large 2. Subscriber Growth digital subscriber growth First, let’s discuss revenue growth • Digital growth depends on: $19.95/month Digital – access to the app • Marketing – inform target audience of potentially more convenient weight-loss method (WW app) $44.95/month Studio + Digital – workshops & app • R&D – sustain interest in the platform $54.95/month Coaching – personal coach & app • In a word: expensive But this leads to some complications… 70.0% 60.0% • Debt limitations 50.0% • Under WW’s 2017 Credit Agreement, a substantial percent of 40.0% FCF must be used to pay down $1.5B term loan 30.0% • This limits WW’s ability to pay for the projects necessary to 20.0% drive growth (described above) 10.0% • Margin compression 0.0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 • Increased CAC expected to compress margins Gross Margin Operating Margin Engage Undergraduate Investment Conference 10 Risky Transition to Digital – Undifferentiated Product A transition to digital exposes WW to significant competition from free health apps. • Digital health applications - saturated space • WW’s app is largely undifferentiated • User frustrations: • WW users need to use multiple apps to track points, calories, macros • Problems with undifferentiated app model 1. The main barrier weight-loss consumers face is self-motivation 2. Price is the most influential when buying health and wellness products All for a potentially less valuable digital customer… 1) As fewer people show up to 3) Workshops also serve as another 2) Workshops introduce a social factor workshops, the workshop experience selling platform for product sales, so that can retain and recruit customers may become less impactful fewer workshop who have many and workshops may eventually be attendees will adversely impact friends who attend workshops. discontinued. product sales. Engage Undergraduate Investment Conference 11 Limited Growth Opportunities – Suffering Brand Loyalty Brand loyalty is suffering • Alienation of their core customer market by introducing new, non-traditional spokespeople • E.g. Kate Hudson • Searches for “keto” diets have soared as one of many potential substitutes for WW programs • Online message boards have created independent spinoff communities similar to Connect • Digital lacks the loyalty created by in-person experiences • Changes and additions to their systems every 1-2 years has bred confusion, exhaustion, and predictability • Frustrated users • WW removed “weight” officially from their name, but many still feel like the programs are weight-obsessed rather than body positive • Unsuccessful rebranding in 2018 Engage Undergraduate Investment Conference 12 Limited Growth Opportunities – 2019 Q1 Invalidated Innovation Innovative programs failed during 2019 recruitment… may happen again WW MSC Cruises WW Fitness Classes/Parties Workshop Engagement Adjusted Marketing • Limits audience to wealthy • Limits audience to prime- • Only reaches the highly • Always a hit or miss customers aged women enthusiastic • Kohl’s partnership may be • Purchased too infrequently • Only reaches the • Invite a friend, Open Houses, an expensive capital drain intrinsically motivated Attendance Challenges, tying WW to another • Class Pass Studio Revamps, yet still a declining brand studio + digital decline Engage Undergraduate Investment Conference 13 Limited Growth Opportunities – Ineffective Partnerships/Acquisitions Kurbo, Kohl’s Partnership, and Blue Apron have seen limited growth • Kurbo • Digital app acquired for $3M for children • Encourages better eating and lifestyle habits to tackle childhood obesity • Stoplight methods instead of calorie counting • Huge backlash from public, recommended with physician guidance • Kohl’s • Opening studios in Kohl’s locations • News generated barely any move in stock price • Kohl’s is not a brand investors seem willing to stand behind • Blue Apron • Again, a declining brand struggling to stay relevant Engage Undergraduate Investment Conference 14 Risks and Catalysts Risks to Short Recommendation Successful Rollout of 2020 Innovation Plan 1 • 2020 Innovation Plan focused on personalized and on-demand platform improvements may drive user retention and recruitment. Turnaround by Capable Management Team 2 • CEO Mindy Grossman has a history of being able to dramatically improve brand image and sales (HSN, Ralph Lauren- Chaps, Nike, etc.) • Since she became CEO in 2017, she has been able to drive short-term growth (reflected in 2018) but the industry as a whole was doing well in 2018 as well and the WW stock has since struggled High Levels of Stock Volatility 3 • Previous Q2 performance triggered a ~30% surge in the stock price • In the low possibility that WW beats expectations, the stock could rise significantly Engage Undergraduate Investment Conference 15 Risks and Catalysts Catalysts for Investment 2019 Q3 Earnings Release 1 • Value Already Realized: In the past 3 months, WW stock has surged almost 70% due to strong investor optimism after Q2. • High Uncertainty and Volatility: Investors are already skeptical of WW’s long-term sustainability for user growth. • Disappointing the Street’s expectations will result in a drastic negative price reaction. Poor 2020 Recruitment Cycle (2020 Q1) 2 • Hit to Market Confidence: In the likelihood of a poor 2020 recruitment cycle, the results could significantly plummet the volatile stock and reaffirm market’s uncertainty in WW. • Health Fads and Changing Consumer Tastes: Without a decent moat, WW can be severely hurt by new substitutes and the heated competition. Economic Downturn Vulnerability • Weight-management services are discretionary expenses, so WW 3 is highly exposed to economic slowdowns. • WW is increasingly capital intensive to educate and engage, so limited profits