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

Good afternoon. This is Bill Reuter. I am the high-yield retail and kind of retail-related services analyst here at Bank of America. Thanks for joining us this afternoon. Very pleased to have the team from WW here, formerly known as Weight Watchers. We have Amy O'keefe, who's the Chief Financial Officer; and Nick Hotchkin, who's the Chief Operating Officer with us today. Amy and Nick, thank you for joining us.

Happy being here, Bill.

Thank you very much for having us.

Thank you.

Great. Well, I guess, starting things off, 2020 has been a year full of change, and WW has been very well positioned to pivot away from some of their business that traditionally was done in brick-and-mortar from the Studio business towards a lot more penetration in digital. Can you talk about what you believe that the role of Studio is going to be once the pandemic has passed?

Yes, absolutely. Look, I'll kick off on that. And look, I think you saw in our strong Q3 results what WW is becoming. We're a technology company. Look, having offered digital solutions to our members for nearly 2 decades with our digital platform and a fantastic digital wellness ecosystem and app. And -- but we grew digital subscribers by 23% and had terrific margins associated with digital subscription business, 60% gross margins for the second quarter in a row, showing that promise. So look, the shift to digital has been important for us. 90% of the people who joined us in Q3, joined us to do our program exclusively digitally. But we were a digital company before COVID. That same stat was probably 70% or so digital mix pre-COVID. But yes, look COVID certainly has accelerated our digital transformation and we think it's a great long-term growth business for us with margin upside potential. And importantly, as we enter our winter season, we're innovating even more. So look, coming to the second piece of your question, if you will, what does that mean for Studio once the pandemic has passed or subsided, and we believe it will. But we believe that face-to-face interaction is important. So if we look at our key differentiators, our science, of course, our ability to bring people and communities together, the heritage of WW has always been that face-to-face has been important, and it will be important going forward but in the midst of a smaller studio footprint. So one of the biggest things we did this year was in 6 days, shipped all of our workshops business virtual. We'll be relaunching that business this winter with marching cloud behind it. That enables us to rightsize our Studio footprint to demand. What we mean by that? We'll enter this winter with no more than 650 WW branded locations and up to about 250 more casual hotel locations to serve our members face-to-face. That footprint in the U.S. down by about 70% versus what it was pre-COVID, but still allows us to serve about 80% of our members within a 30-minute drive. So continued digital growth, rightsizing of our face-to-face Studio business and relaunching our virtual workshops business with other innovations in winter too that I'm sure we'll get to, bringing the immersive your coach, your community way of doing WW into the virtual world. So yes, bottom line, been a challenging year for all of us, but thrilled with how the team has worked through it, and you're really seeing what a growth and margin powerhouse this digital-first company can be.

That's a very useful commentary. And in terms of COVID's impact on the company in general, consumer behavior has changed in so many ways, what's important to consumers, how do you believe that COVID impacted this year in terms of engagement from consumers in general? And I guess the end of the pandemic, how do you believe that, that's going to change and to kind of demand for the entire category?

Sure. Nick, I can start this one-off and then you can add some color, if that's okay.

Of course.

Bill, obviously, COVID has changed every aspect of our lives personally, of our members, of our employees, the way we work, the way we live and the way we engage with our -- with WW. On the downside, it's had the obvious impact of impacting our members' ability to visit an in-person studio and have that face-to-face experience that Nick talked about. However, given the strength of the digital platform and the company's objectives and goals even before the pandemic, which were associated with growing our digital platform, making it more personalized, providing content to reach different cohorts of members. From my view, and Bill, we talked about this a little bit, I was watching -- I've been with the company now for 2 months and so I was watching the company's response to the pandemic really from the sidelines but the pivot that Nick talked about that the digital platform or technology platform enabled us to do really allowed the company to reach our members in a tremendously different environment. And so on the upside to all of this, COVID didn't really slow the team down. And that's what made me so excited when I was finally able to join the company at the beginning of October. It really just accelerated all the priorities that the company was working on with the myWW+ launch in quarter 4, with the Digital 360 product and innovation coming out shortly behind. So I think that we were really able to accelerate our progress on some of those key initiatives. And then you have the compounding effect that COVID has forced people to really focus on health and wellness more than they have before, and we really feel like the company was a bit of the right company at the right time with the right platform to be able to continue to support our members through this really challenging time.

Look, I think that's so right, Amy. You'll never hear me say that I'm thrilled with 2020 absolute results for WW because, of course, coming into this year, we had such a fantastic start with myWW, and we were well on the way to growing revenue and profitability nicely in 2020 until COVID struck. And obviously, we look forward to getting back to growth. What I'm thrilled within that context though that getting to the point where in Q3, operating income matched last year, just shows how well the team has responded. And then also, at the start of COVID, if you told me that we'd be launching myWW+ launching Digital 360 and virtual workshops, new ways to show up and do WW, I've been pleased that the innovation engine has continued a pace, and we got a strong platform going into this winter.

It's as if we had just worked on that handoff, but those were my next question. So Digital 360, can you explain a little bit more about this new product that's launching next year? I guess, I think it's priced in between the traditional digital and the Digital + Studio, but closer to Digital. Can you talk about like who the program is targeting? How quickly you think it may be adopted? How meaningful it is in terms of an opportunity? And then just the functional differences.

Nick, do you want to lead off on that one?

Yes, okay. Yes, yes. So look, it's a big step forward for us. And bear in mind, look, the overarching program news this year is myWW+ that every member gets with new features and benefits across the wellness pillars of food, activity, mindset and sleep. So everybody is getting an innovation -- probably our biggest non-food plan innovation ever myWW+. Now within that, yes, we're very excited about Digital 360. Because in terms of broadening our appeal and reach to newer and diverse audiences, Digital 360 is an important strategy. We've been aging down this year. Last Q3 '19, something like mid-40s, 46% or so of the people who joined us were under 45, it was, I think, 52% this Q3. So good progress, but we knew, as part of our strategy, we needed to launch what we call essentially looks as a program designed by millennials for millennials. And so Digital 360, priced in between digital and workshops. We'll be doing some price testing here in the next few weeks. It's a coach, community and content-centric experience with a mixture of live and on-demand content, led by an entirely new cohort of coaches who are experts at different aspects of wellness and that will appeal to different members. And we see -- envisage members following multiple coaches on their journey. And it really shows how we learned and expanded on the success of both the Oprah-led Vision Tour and the virtual tour that we did afterwards, it's kind of taking -- which, by the way, was produced internally by our team is taking those talented people and having them turn their skills towards community and contact-centric experience for this new audience. So we're launching it in the U.S. and the U.K. to start with, with other markets being rolled out I'm sure later in 2021.

That's helpful. The -- I guess a couple of questions, a couple of financial questions for the fixed income investors who would like to focus on details. The first is, you do have these 650 branded studios, 250 hotels. What are the terms of the leases here? I guess investors would just be interested in learning what are the abilities to reduce those in the event that demand may have permanently shifted away from studio.

It's a lot better footprint than when I was managing network at a big box retailer, but I'll let Amy describe it.

So I agree with that, Nick. Overall, we've got a relatively flexible footprint to start with. The leased space that we do have are not long-term leases. There are ranges, but on average, for the 650 branded studio locations that we have, the average lease term's around 2 years. And so we've got a lot of flexibility even with the spaces that we lease. And obviously, we -- as the company has demonstrated with the cost-savings plan, we've got a lot of flexibility to get cost out fairly quickly. So for example, the 650 branded studios, Bill, that you mentioned, we started the year 18% higher than that. So that number is already down pretty substantially. Worth noting also that these hotel locations have been replacing that traditional, what I would call, flexible variable model. Historically, there would be meetings in places like churches, it was a pay-as-you-go type of flexible arrangement. Those locations are down almost 90% since pre-pandemic. And what I really like about that structure, sort of bringing down the fixed cost of the lease model to a more flexible model is that it really transforms our cost base into more variable versus fixed. And so as we rightsize our cost structure to meet the demand of our members in this really uncertain environment, we can make sure that we're flexing our cost base at the same time. And so I would expect for the company to continue to have a laser focus on sizing the cost structure to demand and trying to improve the mix of fixed and variable costs over time.

Yes. That brings me to my next question, which -- there was an announcement of a relatively large $100 million of expenses that had been taken out of the P&L due to COVID, but the company has been able to operate so well through the environment. Were any of these cost reductions permanent? Or have the majority been returned to the P&L at this point?