May 2, 2023
WW (formerly Weight Watchers) was founded in 1963 by then 39-year-old Jean Nidetch after the self-help group for weight loss she had organized grew from four to 400 people in just two years. The company continued to expand through franchising and had already reached one million members worldwide by 1968. The business model was based on two key success factors: first, the social dynamic of regular in-person meetings between members, and second, the WW points system. WW points represent the nutritional values of foods compressed into a single figure. Members receive a personalized daily point budget which they are not supposed to exceed in their diet.
In 2009, WW responded to the growing trend of digitalization by launching an app that allows members to easily calculate WW points for foods and track their daily intake. Today, digital subscriptions account for 63% of total revenue, while membership fees for in-person workshops run by franchisees make up 25%. An additional 12% comes from the sale of WW products and merchandise.
In Germany, the share of overweight men increased from 57% in 2005 to 63%, and obesity rose from 14% to 18%. In the U.S., 75% of people are now considered overweight. Despite a growing target market, WW’s revenue has declined steadily by an average of 13% per year over the past three years — from $1.6 billion in 2018 to $1.0 billion in 2022. This is particularly noteworthy because, due to the nature of weight loss, subscriptions are typically made for 12-month periods, and members often renew for several years.
Demand is increasingly being met by competitors. The digital transformation, accelerated by the pandemic, has led to a surge in competing apps, especially in the digital subscription segment. Their apps and services are nearly indistinguishable from WW’s: instead of using WW points, diets are simply tracked in calories (kcal). While the success factor of peer support was already lost in the digital segment, now the advantage of the WW point system is also disappearing. Moreover, a WW membership costs at least $23 per month, whereas competitors offer similar services for just $5–10. Declining revenues, therefore, come as no surprise, and we believe WW’s strongest segment will continue to lose market share.
Competitive pressure is lower in the more capital-intensive franchise segment. WW’s strong and well-known brand makes it difficult for regional providers to expand into neighboring markets where they are less recognized. On the other hand, this segment has low profit margins and contributes the least to WW’s bottom line. Franchisees cannot simply scale down in response to reduced demand — they must shut down entirely if operations fall below the break-even point. Moreover, it’s not feasible to consolidate demand to fewer franchisees because customers expect a local presence. This means that with continuously declining member numbers, the franchise system will eventually begin to collapse. Since WW does not disclose either its total member count or the number of franchisees, we can only speculate as to when this will happen.
WW is counteracting these negative developments by acquiring franchise systems from competitors — usually, but not always, in regions where WW has little or no existing presence. We find this approach questionable. Why would an expanded presence through newly acquired franchisees — who still need to be integrated into WW — not face the same challenges as existing franchise partners in other regions (let alone in areas where WW is already active)? These acquisitions were among the reasons for a reported accounting loss of $251 million in 2022 — equivalent to 24% of the year’s revenue (following already unimpressive profit margins of 5% in 2021 and 2020).
More promising, however, seems the expansion into new channels, such as the acquisition of the company Sequence, announced in March. Sequence is a platform where patients suffering from overweight and obesity can receive personalized medical advice and guidance for $99. Crucially, medications — especially so-called GLP-1 (glucagon-like peptide-1) drugs — can also be prescribed. These drugs stimulate insulin secretion and lead to lower blood sugar levels and reduced appetite. The idea behind acquiring Sequence was to encourage current and former WW members to switch to the much more expensive Sequence platform.
This strategy was enthusiastically welcomed by Goldman Sachs, who upgraded WW from “Hold” to “Buy” in a report published on April 10, 2023. However, the fact that while GLP-1 medications can be prescribed through the platform, U.S. health insurers do not cover the costs — which amount to $800–1200 per month — was overlooked.
Although our analysis suggests the optimism surrounding Sequence is unfounded, and the acquisition will have no positive impact on WW’s core business, WW’s stock price has skyrocketed from $4.12 to $8.38 since the Goldman Sachs report. This was our trigger to short the stock.
WW’s balance sheet also reveals further weaknesses:
WW has taken on $1.4 billion in long-term debt at variable interest rates — despite having total assets of only $1.0 billion. Since the debt is reported discounted under US GAAP, interest rate changes are not our primary concern. Rather, we worry that, given the relatively high level of debt, WW failed to meet the financial covenants agreed upon with its lender, Bank of America, on both December 31, 2022, and March 31, 2023. This limits WW’s additional borrowing capacity to just $61.8 million.
On the asset side, intangible assets from acquired franchise systems are listed at a value of $400 million — nearly 40% of the balance sheet total. These largely reflect transaction prices paid for acquiring competitors. There is a strong risk that future impairment tests — which are highly sensitive to changes in assumptions — will lead to substantial write-downs.
In sum, we expect the stock price to fall to $3 — or 36% of its current market value — by the end of this year.