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WW International's Digital Memberships Surge, Studios Reopen

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The coronavirus-led social distancing has accelerated digital engagement among customers as stores, restaurants, salons, studios and other public places were temporarily closed from mid-March to contain the spread. Though places are reopening gradually, many customers still prefer staying confined and making digital transactions, given the rising number of cases. As a result, companies like WW International, Inc. (WW - Free Report) are witnessing solid digital trends.

This provider of weight management products and services issued an update on its second-quarter fiscal 2020 trends to date, which reflects a robust Digital business, courtesy of the social distancing and the company’s focus on digital transformation. Notably, the company is witnessing robust momentum in member signups for its Digital offerings. This has brought Digital membership to an all-time high. We note that shares of the company have more than doubled in the past three months compared with the industry’s growth of 51.6%.

Meanwhile, WW International also notified that it has started reopening Studio locations in a phased manner and anticipates reopening about 400 U.S. locations by June-end. Though initial trends have been impressive, given the fact that Studios were closed for a while since mid-March, management expects second-quarter Studio member signups, fees and product sales to be soft and much lower than prior levels. Nonetheless, WW International enjoys a healthy financial position, thanks to its robust cash status as well as an unused revolving credit facility. This is likely to help the company stay firm and focus on growth objectives amid tough times.

Digital Strength & Quarter-to-Date Numbers

As of Jun 6, 2020, WW International had 4.9 subscribers, reflecting a 7% rise from Jun 8, 2019. This includes 3.8 million and 1.1 million digital and Studio + Digital subscribers, respectively. Notably, weekly Digital recruitment trends reverted to growth starting mid-April and have been accelerating since then. In fact, the weekly recruitment growth rate is now moving ahead of the pre-pandemic level of first-quarter fiscal 2020.

Thanks to the rise in digital recruitments, total global recruitments also reverted to growth (on a weekly basis) from mid-May. The shift in recruitment mix shows strength in the Digital business, including about 90% of recruits since mid-March. Meanwhile, the Studio + Digital business is still seeing significant recruitment declines (on a weekly basis) in comparison with the year-ago period. Management notified that member retention rate presently remains more than ten months.

Given the aforementioned factors, management expects to see a year-over-year jump in Digital Subscription revenues, as a percentage of the revenue mix, in the second quarter. Revenues coming from Studio subscriptions and in-Studio products remain under pressure in the second quarter due to a halt in in-person workshops and lower Studio-related revenues, partly made up by solid Digital subscriptions and e-commerce product sales.

We note that WW International is committed to enhancing digital transformation by allocating its resources to improve member experience. To this end, its recent Oprah's Your Life in Focus: A Vision Forward – Live Virtual Experience has resulted in more than 3 million views. Further, the company has been focused on ensuring the health and safety of its Studio members and coaches since mid-March. In this regard, the company shifted from in-person workshops to providing a completely virtual experience, which generated favorable responses. In fact, WW International is also preparing to introduce Virtual Group Coaching later this year.

Elevated Revolving Credit Facility  

WW International has altered its revolving credit facility and increased commitments from $150 million to $175 million. Further, the company has raised the consolidated first lien net debt leverage ratio as needed by the financial maintenance covenant. These actions offer greater financial flexibility and access to liquidity. We further note that, on Jun 5, the company paid out all loans outstanding under its revolver facility, which was drawn as a precaution amid the coronavirus-led crisis. Following this, WW International had a solid cash balance of $127 million as of Jun 5.

Clearly, this Zacks Rank #3 (Hold) company is well placed to evolve with the changing business environment, thanks to its financial flexibility and focus on efficient cost management.

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