WW International, Inc. (WW) Earnings Call Transcript & Summary

Hi, good afternoon. This is Wendy Nicholson from Citi. It's my responsibility and my pleasure to cover Weight Watchers at Citi, and it's my pleasure to have Mindy Grossman, the CEO; and Nick Hotchkin, the outgoing CFO, here to talk to us this afternoon. I will be jumping in and asking a bunch of questions. But if you have any questions, please e-mail them to me. My e-mail address is wendy.nicholson@citi.com. So please send them to me, and I can sprinkle them in with the questions that I prepared. But first of all, welcome, Mindy and Nick, and thank you again for joining us.

Thank you so much for having us. But just one thing, he definitely is not leaving me, he's just becoming the COO.

Absolutely. Absolutely. We're happy to say…

I was wondering if that was announcing my retirement, but yes.

Definitely not, definitely not. But we're going to sprinkle in both COO questions and CFO questions today for me to take advantage of you being here and take advantage of your experience.

Anyway, I just wanted to start with today's news, I saw on a headline that you've announced Ciara as a new spokesperson, which is terrific. Congratulations. She's obviously very well liked. But that sort of kicks off the question of kind of who you think your target customer is today. I know you talked on the second quarter call a little bit about how the average age of your digital member is skewing younger and younger. Can you talk about kind of the positioning of the brand today and your decision to hire Ciara?

Yes. Absolutely, Wendy. We've been in the process of both a digital transformation and a brand transformation over the last number of years. And a big part of that was certainly never abdicating our authority and lead globally in healthy weight loss, but to truly build a complete ecosystem of wellness across a very technology-enabled platform built on community. And the work that we've done over those past number of years has also enabled us to focus on diversifying our member base. And when we think about diversity and the opportunity that we have to really help people, all people, it's age, gender, race, ethnicity, geography, life stage. And when you think about Ciara, young mom, just had her third child, incredible, incredible following, extremely authentic, very philanthropic. And one of the lenses we look at when we want to partner with someone is do they have the same objectives that we do, which is truly to inspire people to lead better, healthier lives. And if you saw her Instagram story post, that's basically what she wants to do. And yes, she wants to lose the baby weight. That comes with it. But she feels that our program being as holistic as it is and truly being able to be someone's partner in allowing them to learn the habits to have a sustainable, healthy life, no matter what part of the journey that we're on. And what we've seen with the speed at which our Digital membership is growing and as much as all of this was being done before COVID, but this has really allowed us to accelerate a lot of our efforts, which is why you're seeing the demographics across our Digital platforms and whether that's age, whether that's life stage, whether that's race and ethnicity, we are definitely seeing more diversity. And we're really seeing it in the communities. So in addition to building out the pillars of wellness, so nutrition, activity, mindset, hydration, we launched sleep tracking, built on community, which is our Connect platform. The power that we've seen in our Connect groups, which are affinity groups, we are now actually seeing as opportunities in our virtual workshops. So all of that has certainly contributed to what we've seen in the last quarters.

Got it. And how do you make sure with the push towards Digital that you don't lose on some of the long term, long-standing loyalists for whom the Studio business is still very important and has been a very important part of their lifestyle for a long time? Can you talk about kind of your level of commitment still to the Studio business, balancing that with your Digital emphasis?

Absolutely. We truly believe that we want to meet members where they are based on the needs they have. Now to remember, all of our members are Digital members, right? But we do have members who then choose to have a more community-based intimate experience outside of our Connect platform. Certainly, it was in person. But in March, when we saw what was coming with COVID, we were able to pivot because of the investments we've made in technology and product and talent. We were able to pivot, and in 6 days, train 12,000 coaches and guides and simultaneously launched all our workshops virtual in 12 countries, and they exist to this day. So where we see the opportunity, particularly going into 2021, is we will have our premium membership vertical that is our Digital assets, plus either in-person, coach-led workshops or virtual coach-led workshops. We have a new member vertical launching, which I'm very excited about, around virtual coaching communities, which is very content-driven with a whole new cohort of coaches that is really geared towards more of a millennial consumer. And then we have our Digital platform. And then also in 2021, where we're launching our one-on-one personal coaching platform. So we really have the ability, right, to service someone depending on what their needs are. But what we see in the new vertical is also the opportunity for our Digital members to upgrade to an experience that is a level up on accountability.

Fair enough. Fair enough. Maybe a question for -- Nick, for you, just on the Studio specifically. I know you called out on the last call the fact that the Studio count had dropped from 800 to 650, and that you had a whole bunch more leases coming up for renewal. Can you talk about, number one, sort of the current thinking? Do you think that 650 number is the right number? Do you think that drops significantly? Again, not immediately necessarily, but as we go into 2021 and beyond. And also just specifically, are there any costs to exiting those leases that we need to think about?

I think as Mindy said, for people who want to be in that weekly session with a coach either face-to-face or virtually, we've got such flexibility and convenience now being able to offer virtual workshops and face-to-face workshops too. The member acceptance of virtual workshops certainly gives us flexibility to optimize our studio footprint while continuing to offer a convenient face-to-face options, and we'll continue to do that. And in terms of the roughly 200 lease renewals we'll have next year, we can make those decisions on a case-by-case basis based on known network accessibility, studio network optimization and profitability also. We've got lots of ability to maintain a flexible stance and meet people where they are to enjoy WW. No planned write-offs for lease terminations at this time.

The opportunity that virtual workshops allows us is we can have much more of a robust cohort meeting because we're not bound by physicality. So we can bring people together and whether that's young moms, whether that's black women, whether that's men. I mean we have a lot of cohorts. And so we're really seeing cohort adoption in those virtual meetings.

Right. Can you talk about the Amazon Halo launch? I mean, obviously, very high profile, sounds very exciting. What was the thought process behind that? How much incremental marketing benefit do you think you'd get for the WW brand? Maybe sort of what makes that partnership special for you.

Yes. We're thrilled to expand our partnership with Amazon. And we have relationships with the technology companies across the board. But what we really felt about Halo to be integrated, it's really a benefit to our members. So for example, any of the activities that they do automatically convert to FitPoints. It's also an opportunity for us to attract new audience because our content is integrated into Halo in the form of what they're calling Labs, its content and challenges, et cetera. And it's also our ability to market and integrate it into our promotions. So it kind of checks the boxes on all things. And obviously, we worked very, very closely with them. This wasn't an overnight project, but we have a great relationship. And we just see it as an opportunity, like we have worked with other partners to extend our reach and our audience.

Perfect. And it sounds like terrific timing. I don't know about everybody else, but the COVID-20 (sic) [ COVID-19 ] has definitely settled in here in this house. So can you talk about the current environment, and I know you're not willing to give an update on the quarter per se, but maybe what you're seeing in terms of on interest in WW sort of as people kind of start to get back to work? Does it mean they've got less time to engage in the WW program? Or is it still a priority and something they're very much focused on?

Yes. One of the things we do see is human behavior in real time, both within our member base and when we see new members joining. And what I'd like to say is what's happened with COVID, it's made everyone have a complete reappraisal, really, of how they live, work, play, spend. And health and wellness is definitely at a greater forefront for people. And when we see newer people joining, for example, it's, "I need to do this, not just for me, but all of those around me." People know that the #1 factor in COVID-related deaths was obesity, as you know, the trickle down effect. And so I think everybody has different restart and reset times. But we do know that when people are ready, there's definitely a need for weight loss married to something that is sustainable, which is what we provide, and that's what we want to be here for. The other thing that it has really brought to light is the health disparities among different populations and groups. And so the idea for us that we had put a stake in the ground when we came out with our Impact Manifesto of inspiring healthy habits for real life, people, families, communities, the world, for everyone. And to be that brand that really is focused on democratizing wellness and be able to broaden who we can impact, and that's definitely been another focus for us. Hence, you've seen the diversity that we've talked about.

Do you think -- I know, obviously, given the number of variables, it's very hard to do any forecasting now. But in terms of the traditional seasonality of the business that we've seen in the past on the particular surge in activity coming out of the holidays' traditional heavy diet season, do you think there's going to be a change in that flow over the next few quarters or too hard to tell right now?

I think we still feel that winter just Pavlovian mentality and psychologically is still the reset, you're going into the new year. I think it's been interesting because there are some things that are different, right? Most people don't have back-to-school now, right? They don't have the same kind of ritualistic thought process and behavior. So what we try and do is really adjust our marketing communications to be relevant to what's happening now. And that's really been the focus of the team during these times. How can you be -- how can you do as much listening and as much qualitative and quantitative data that we can have to make sure our communications are as relevant as possible, given what is happening in the environment? And today, I think brands have to be really flexible, and they have to be able to pivot and they have to be able to be responsive because we're in an uncertain environment.

I have a flurry of questions coming in, which is great. The first one that I want to drop in is, what do you think is the least well-understood aspect of your business model that investors need to better understand?

So it has definitely been an interesting couple of years as it relate to that. I think there's a couple of things. I think that there are some people that actually are dwelling too much on the physical Studio business, and getting people to understand that 100% of our members are Digital members. Prior to COVID, about 30% or so also chose to do Studio. And obviously, that number has been affected. But the Digital member is a very valuable -- as valuable. I think everybody has seen our retention where it is. And it's also very profitable. So that is what people really have to understand. I think the second thing that people have to understand is we don't only have one avenue of growth. Certainly, recruitment and retention are critical and continue to be a big focus for us and the diversification of that recruitment. But for the first time, we've been talking about our WW Health Solutions business, our B2B business. We recently announced our integration into CVS Caremark and corporate entity. We built a whole new team. We built a tech hub in Toronto. We built a whole new technology platform to truly be able to grow the business across employers, providers, payers and physicians. And so we now have the runway to do that. We launched e-commerce in our app on March 23. We had huge work to do to build the team and the technology. And most of our business prior in products have been done in our Studios, which has limitations on what we can do in the assortments. So now our product expansion, which you all see as well as our opportunity in e-commerce, notwithstanding some of the short term where we weren't selling anything in Studios because they weren't open, but that's a whole new growth area. And then, content. When we did that tour with Oprah, still can't believe I was with 15,000 people in Denver on March 7. But -- and then we pivoted to a over 4-week virtual tour. That team that produced that was our team. So we have opportunities on the content platform side as well. So I think understanding the diversity of the business, the power of the Digital platform, the financial flow-through of that, that's what I think is important. And Nick may have a couple of things he may want to add to that.

No, I think that's all well said, Mindy. And look, right now, in our footprint transition, there's a little bit of noise in our quarterly numbers now. So I'd encourage folks to focus on a fast-growing Digital subscription business. The Digital subscription gross margin rate is about 80%. It's a very profitable business as we switch our mix towards Digital.

And maybe this is -- in talking about some of the new things you're layering into the company, the execution of these strategies has really been terrific. So congratulations for that. But Mindy, broader question about your management team. With the transition of Nick's role, do you think now you have the right people in the right place? Are there gaps in terms of talent or headcount that you're still looking to fill?

So I would say that the team we have today, and it's been reinforced dramatically in going through the last 6 months, is a fantastic team. Amy O'Keefe is joining us as CFO on October 1, but have already been engaged. We have talent that really has been at the company, like Nick, and then we've added a lot of great talent in the last few years in areas such as brand or digital technology, content, human resources. I mean -- so I feel that we've built talent around the world that is really not only capable, but has been able to accelerate our efforts. And what we've seen in the way people are working together, it's not just the talent at the executive team level, it's the culture and the ability and how people are working together nimbly, focused, innovative, those are the things that are really important. And I think a great example that I'll give you is certainly the pivot to virtual. But what was already underway prior to this happening, traditionally, there was this mentality that we do a new food innovation every other year. So people are like, well, in the second year, you're not going to see the same kind of growth. And my feeling is that there is absolutely our ability to innovate in a nonfood program year and really launch new, but in a different way. And so this winter our launch, which we're excited about, is really taking our personalization to another level and is really new news, but we've not traditionally had that. And that's because of how the teams are working, how they're thinking about innovation differently and how they're really, really focused on the experience.

Perfect. I have a question specifically that just came in on innovation, and it's with regard to the new iced coffee product. And Nick, I know you have a show and tell for us. But it says, it seems that the new iced coffee product has been out of stock twice so far. Are you testing the market and therefore, low on inventory? Or is this a really popular product?

It's a really popular product. Nick, why don't…

[indiscernible] you're absolutely right. I mean it's -- like it's -- coffee is the #1 tracked beverage in our app. And so with the popularity of ready-to-drink coffee, so being able to bring a incredibly good taste but low points alternative is a mockup of our café latte. I wish I could sell this one. I'd put this one on the website. But it's -- yes, look, I think a terrific response to a new launch. But it gets to that innovation in an important area like consumer products, where we've got the right team in place building the right products to bring to the market. And that's really what's helping drive our very strong e-commerce growth right now.

And Wendy, what I'm excited about, my background is a product background. And I just felt that there are so many categories of opportunities for our brand, not just for our members but for our brand to give people healthier options for products. So if you look at Healthy Eats, which is our food and -- programs. If you look at Healthy Kitchen, which is how can people eat healthier and what tools do they need, and then look at healthy lifestyle. So I think what you're going to see over the course of the next years is a continuous flow of product introductions in key areas where we feel we can differentiate.

We only launched in-app shopping in March. And so just scratching the surface in terms of the growth we can see as our Digital members start to buy WW consumables.

Got it. So the temporary out of stock on the coffee will be fixed, and everyone can get -- can buy…

Yes. They're trying to speed up production, for sure.

Fabulous. So this actually is a good follow-on to the next question. Broadly thinking, how does Mindy think about the competitive set? Who is their toughest competitor? How do platforms like Noom impact the category? And does that type of platform adjust how you view your competitive landscape?

Yes. We're very focused on competition, but much more broadly than just narrow within, let's call it, the weight space or even the wellness space. Traditionally, we've always said, our biggest competition is people trying to get healthy themselves. So that is still the case. Second to that is, yes, there are other options out there. And our key is to keep developing and giving people what they need and what they value. And our goal is to be with them throughout their journey. So very focused not only on bringing people in, but the retention. But then the third bucket of competition, which I think is still important to note, and this is not just for us but for any brand, your competition is the last great experience that someone had. And if that experience was seamless and personalized, and that is their expectation, that's what you are also going to have to deliver on. Hence, why we've been so focused on the experience as well as personalization.

Got it. And how do you prioritize with the sort of increasing mix of your business a little bit more on the product side, but still focusing the experience, and you've got so many things going on with the Digital coaching or personalized coaching becoming a bigger thing, how do you prioritize your marketing message when you spend money for TV ads, for example? I mean you've got 30 seconds to put forth a message, how do you prioritize what it is you want to show? Is it the new coffee product? Or is it the new coaching app?