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

We could not be more excited to introduce the team from WWW -- WW International today. With us from the company are Mindy Grossman, Amy O'keefe and Corey Kinger. Mindy really got the needed introduction. There is something called 6 degrees of separation from Mindy Grossman and much like there's 6 degrees separation from Kevin Bacon. She's so well-known across many circles. But just in case, she's been President and CEO of WW International since July 2017. Prior to that, she was CEO of Home Shopping Network and held executive positions with Nike and Ralph Lauren. Amy recently joined the company as CFO in October and she previously worked at several companies in the health care and consumer products arena. Corey Kinger leads the Investor Relations effort. Before we start, let me just offer a quick statement. Some of the statements that WW will make today might be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that WW makes are based on assumptions as of today, and WW undertakes no obligation to update them. Please refer to WW's SEC filings for a discussion of the risk factors that might affect its results. So with that, Mindy, Amy, Corey, thank you so much for joining us.

Mindy, where I want to start off, and we were talking about this just a little bit ago. There's not only been, in the past year, an enormous change in our society and the world around us, but there's been a considerable amount of change in WW, and it's quickly adapted. So what do you see some of the biggest changes in the business today versus where you were 1 year ago? And what have been the biggest learnings as a result?

Well, first of all, Michael, it's great to be here. As we were talking earlier, we've been on a multiyear transformation of WW from the world's leader in healthy weight loss to truly becoming the leading digital subscription weight loss and wellness brand and company with multiple membership verticals and revenue streams. What we really have experienced in 2020 as much as it's been a challenge for all of us, we were really able to accelerate that transformation at a faster pace than we ever thought imaginable. And certainly, that's an incredible credit to the team we've built, the investments we've made, particularly in technology, data, product and our digital transformation, and we were able to move nimbly and be agile. So if you think about what we accomplished this year, in January, we entered the year poised to have a record-breaking year in the company's history. We had just launched myWW, our newest food program, the first with an assessment that provided personalization. We had a 9-city WW presents Oprah's 2020 Vision Tour. And March 7, I was with 15,000 people in Denver celebrating the finality of the tour. And then on March 11, we had to make dramatic changes just like everyone else, certainly, for the safety and security of our employees and our members, but more importantly, we had a maniacal focus on keeping our community together. And when I call innovation #1, in 6 days, we were able to pivot our 30,000 workshops that we had every week to virtual workshops simultaneously in 12 countries. And those virtual workshops continue today and have very much been part of why our retention continues to be at an all-time high. But over the course of the year, as a result of that, we were able to completely reimagine our physical footprint around the world to create a more flexible and ultimately profitable model with our digital membership growing so significantly. We also launched 2 -- actually 3 new innovations this year. We had the launch of myWW+, which as I explained to people, traditionally, every 2 years, we'd have a food innovation, and that's what people would project in the cadence of our numbers. But why not innovate constantly? So myWW+ was a holistic innovation around personalization across our entire wellness ecosystem. And we've had great response and great engagement. And then we launched D360, which I know we'll talk about a little later, which is our first new membership vertical in kind of all recent history, which was really, as we say, built by millennials, for millennials and a whole new experience being built on top of the myWW+ digital platform, but really built on coaching, content and community. And then in addition to all the enhancements we made in the app, we launched e-commerce for the first time in our app on March 7. Prior to that, our products were primarily sold in our studios. And if you remember, we launched every product we had around the world in 2019. And so this was a significant opportunity for us. And so we've seen e-commerce sales increase over 300%, which obviously mitigated some of the product sales in our studios that had to close. So overall, we accelerated our progress. We really saw the benefits of being as agile and flexible and how we had rebuilt the organization to really responding to our member needs. And so today, as much as all our members have our digital assets, 90% of our members are one of our digital verticals with 10% also being our digital plus now unlimited workshops, virtual, and soon probably more physical. But that was really, I'd say, a testament to the team to end 2020 still with membership at an all-time high, with digital membership up 24% and revenue up 21%, gross margin expansion because of that digital growth and that really is because of all of that work.

That's awesome. And it's remarkable how much innovation WW has introduced in the last year. Is this the new run rate? Is now the consumer -- because it's changing so much, does it want that much innovation? And you've proven that the organization is capable of it, but you could now get into a more sequenced and more stable level of change. And then I want to dive into D360 a little bit more?

Yes. I think always-on innovation is important. Now they're not all going to be what I call mega innovations, like what we have launching at the end of this year, which is a dramatically new food innovation that we're very excited about. But I think this idea of using our data and using our analytics and using our technology to constantly improving the experience and giving our members more and more of what we think will make their journey that much more successful and sustainable. And so that's how we really think about it.

Got it. And D360 has been an exciting innovation. Can you help us understand the genesis behind this offering? In what area of the market do you think this is targeting that might not have been well served or overlooked in the past?

Yes. So when we came out with our new mission and vision, we inspire healthy habits for real life, people, families, communities, the world, for everyone. It was about democratizing wellness, but also broadening whose lives we could impact and make healthier? So diversifying our member base has been a significant focus for us over that time. And when I talk about diversity, I'm talking age, gender, race, ethnicity, life save, geography, et cetera. And we knew we wanted to reach a younger audience. And so what we like to say about D360 developed by millennials, built by millennials, for millennials. And certainly, our digital platform creates a lot of engagement. But what we knew is that the idea of having a 24/7 on-demand content, coaching and community vehicle was going to be very important to this consumer. So we brought on trained and developed an entirely new cohort of coaches from areas such as fitness, nutrition, mindset, who themselves created followings and influence. And a lot of people don't realize that the team that produced the entire Oprah tour, both the live tour and all our virtual tours, is a team we hired and built, led by Amy Weinblum. And that team really worked to develop the coaches, the curricula and the content within D360. So you can have an experience where every day you can be in coach lives, you can follow multiple coaches. You can decide what community you want to be part of. There's also daily inspirations. There's also a series called Walk Talk with -- conversations with Oprah, with Dr. Sanjay Gupta, with Matthew McConaughey and other people talking about elements of health and wellness. And we're very excited. We've already recruited over 110,000 D360 members pre really marketing the asset, and it's only in the U.S. and the U.K. today. It will be rolling out to rest of the world in our big markets in the first half. And you'll start to see more elevated marketing. But one of the exciting things is, yes, we're seeing recruitment of new members. But we've also seen 40% are digital members who were lapsed, who've now upgraded to this new format. So we think it can attract new members. We think it could be another tier that our lapsed and existing digital members will want to upgrade to. And in some cases, although that's not the primary some lapsed workshop members may want just a different experience. And it would happen mid-tier.

What's the plan to market it? It was -- should we expect TV campaigns, online campaigns? Is that...

So right now, we are actually, in addition to our myWW+ marketing, we have a vehicle out there in our social and digital and other channels that really showcases the coaches. Because really, what we want to get across is this new face, new experience of WW and that just started. But you'll see a lot, and in particular, in the targeted digital world, which is where that consumer is.

Got it. We had a question on how your business model is changing as you move to a digitally native business. And we've gotten some questions from the audience on the scene, so this seems to be an area of focus. I'm going to ask this on a couple of different ways. Number one, as your company shifts to a more digitally native business, how does your target demographic evolve? Does it enable you to reach a younger demographic? Any other ways it might evolve? And then I have a quick follow-up.

Yes, it definitely does. And part of that is because we've really built out a much more sophisticated data and marketing capabilities to specifically target, with the right content, a more diverse group of cohorts. And we're already seeing the impact of that. And it's everything from -- we launched free trial with our app for the first time mid this year. And what we're really seeing is one of the highest conversions that Apple has experienced at over 55%. But what we're also seeing, for example, is a higher penetration of men. So we have a lot of different vehicles to focus on new audience, and that is definitely part of our strategy.

And the other angle of this question. The investment community had always viewed WW as a somewhat seasonal business. The diving season is going to happen right after the first of the year, and then that's going to influence the organization over the course of the year. I think the question that we got is, as digital becomes 90% of the business in a post-pandemic world, do you foresee the potential for the historic seasonality of the business to become a bit less pronounced? How do you think about that?

But that's also been a focus. And you did see that, for example, in 2019, you saw a flattening of the curve. Obviously, 2020 was a completely different scenario because of the Q1 versus balance of year, particularly with the pressure on the studio business. And 2021 is going to look at the flip side because we're comping Q1 and then we're going to build. But let's say, moving forward, the goal is to also be able to have a more consistent growth vehicle. Now I do believe, however, that there are certain times of the year where just based on consumer behavior, you may see some peaks. But overall, not just with our consumer subscription business, but the growth of our Health Solutions business, the growth of our commerce business and other revenue streams and new verticals like D360, the goal is to have more of an always-on recruitment.

Got it. And another question that what we had and folks from the field have is, can you describe the total addressable market for WW? Has it changed significantly because of the COVID situation? I mentioned to you that Sydney Lasser, my daughter, has become quite a COVID baker. So I had fallen a bit into the need of some wellness services. So I imagine the addressable market has changed a bit. Can you give us a sense for how you see that? And how has the competitive landscape also evolving?

Yes. Well, those 2 things come together. So I would say that at one point in our existence, we limited the total addressable market to comparisons with just weight loss. Today, the addressable market is across the plethora of health and wellness. And what we've seen, particularly over the past year, is kind of an explosion in everything from connected fitness to really people thinking about health and wellness in a very different way. And I use the expression that people have really done a radical appraisal of what they need in their lives. And wellness has really gone from what at one point was considered a luxury to a necessity. So I think, yes, it's broadened in terms of addressable market because of where the consumer mindset is going. But clearly, it's a competitive set. But what we've always said, and we are hyperaware of anything that's happening in the marketplace. But the #1 competition is still people thinking that they can lose weight and get healthy themselves. And we want to be that trusted partner that's not only going to help them in that aspect of their journey, but the science behind what we do is about the efficacy and the sustainability and that's what we are definitely focused on. I think the second thing that we think of when we think of competition and I think every company needs to be thinking about this, your competition is the last great experience someone had. And if it's hyper-personalized and seamless and you perceive it as having great value for yourself, that's what they expect from every other, whether it's an app experience or a brand experience. And that's why we've put personalization really at the top of our investment and focus strategy.

And do you think about your legacy competitors being Jenny Craig or, sorry if this is an abrasive question, whoever it might be? But now your competitors are Peloton and Headspace and anyone who's really focused on improving the health and well-being of a consumer?

I think that you have to look at it in 2 ways. Yes, on one hand, you can think of it competitively because where are people going to spend dollars or whatever. But what we've taken the approach on as we've built this entire ecosystem of wellness across fitness, mindset, headspace is actually a partner of ours. Last year, in 2020, we launched our sleep tracking that syncs with all other devices. We partnered with Amazon Halo. We'll be talking about our Zoom partnership going forward. So I do believe that there are certain areas which I call coopetition, right, where we can utilize partnerships to be able to provide our members with more support, in addition to everything we build ourselves. We're always going to be the leader in nutrition and the science space. We make -- we don't have a device for sleep, but there's a lot of devices, but what people need is what you now do with the information. We're going to provide you with the tools to improve your sleep once you have the information. So that's how we're looking at it.

You're so good at bringing not only your friends aboard, but your friend who needs a Board, too. So one of the interesting angles from the pandemic is the consumer behavior changed quite a bit. You've moved from, as we talked about, a business that was balanced between the digital and the physical and moved sharply to the digital. How do you think about the shift going back? What does the business look like? How much demand might have been pulled forward from someone who would have gone to an in-person meeting to now going just simply to a digital meeting? And how do you get back to having a balance between both?

Sure. Michael, the way we think about it is we're agnostic to where the member feels they are going to have the greatest success based on what they need, what they know about themselves and what gives them a level of accountability and support, okay? I just want to give you some context on what we've done with the digital plus workshop business and why we have ultimate flexibility going forward, whatever the demand curve looks like. So we've gone from having about 16,000 coaches and guides at the beginning of 2020 to 7,000 around the globe. We've gone from 1,100 branded studios to 700. And we've gone from 10,000 kind of leased studio apts to 2,000. So our flexibility to be able to manage, whether it's the ability based on regulations to have more people in the workshops or people that want more face-to-face interactions. However, that new vertical is digital plus unlimited workshops, both studio and virtual. So in the U.S., for example, we operate virtual workshops about 16 hours a day, 7 days a week. So now people aren't just bound by geography. They can follow their coach. They could find the cohort that they want. They could find the time they want. And as much as we definitely saw pressure on the studio recruitment, we had significant retention because of that flexibility of virtual. So we're obviously monitoring in real time what is happening with people wanting to go back. We still believe that digital growth, including D360, is going to outpace whatever growth we have. But we just want to be there for what our members want. But the key is to give ourselves significant flexibility because as everyone has seen throughout this year, the gross margin implications of the digital growth are significant, and we want to continue to see gross margin expansion over the next number of years.

And do you have the flexibility to adjust the physical footprint in both ways? Do you see that demand come back, you can scale up the capacity for physical meetings? And if we're in this permanent move to digital, you can continue to scale it down?

Yes. Absolutely. And Amy could speak a bit as to kind of that ability to shrink that footprint intentionally to be able to give us. That's why we've taken -- we took a charge in Q4 and forward. But where we are today, we think we're at a right balance for now, but we're going to continue to monitor it.

Amy, anything to add?

Yes. Michael, I would just add. Mindy said it best, as usual, but the team has done a phenomenal job managing the real estate footprint and the fixed cost structure prudently over the course of 2020. And it provided a bit of opportunity for us to be able to take our fixed cost structure on the workshop side of the business and make it more variable. So to your point, as demand flexes up or down, our cost structure will be able to flex with that demand. And I think that makes us more nimble and flexible to really manage the business and the financials in what is still a pretty dynamic environment.

And WW has evolved the manner in which it distributes products. It was very focused on the physical meetings before, now it's moved to an e-commerce model. So one of the questions that we've gotten is, why keep the product business? Margins are dilutive. Could you license it to a third-party for a higher margin, lower revenue, but less distraction?

Well, I think that's absolutely the wrong way to look at it. And that's my background. I come from a product merchant managing background. And I think WW as a brand has a lot of opportunity to really build what I call a health and wellness marketplace. As I said before, we didn't launch e-commerce in our app until March 7. We have expanded our product portfolio just in the past year by over 30%. We've enhanced our capabilities relative to not just the experience, but our supply chain and our ability to onboard new products. We've also expanded our products through partnerships. So a great example of that is our partnership with The Vitamin Shoppe. We've launched our WW supplement packs, and we're working on new products, which not only is an opportunity for us and them in e-commerce, but all our products are now distributed through The Vitamin Shoppe stores, including our snap products, tech products, et cetera. So the way to think about what we're building out in this, what I'm calling, health and wellness marketplace, there's 3 categories that we're focused on: Healthy Eats, which is our food products; Healthy Kitchen, which is everything to help you cook, eat and be healthier; and then health tech and healthy lifestyle. We have products that are branded WW. We source. We have partners, and we manufacture. We have co-branded products, like what we're doing with Dash and small electrics and what we're doing with Vitamin Shoppe. And then we have products that we believe are good for you. So think of it as WW-approved healthy products. We are so at the nascent stages of what we can build in e-commerce that I would think about it as an opportunity versus a drag and think of it as a new business.

And how big could this get? This is -- like you said, this is near and dear to your heart and the experience that you have. So can we see...

Yes. I think it's one of our more significant revenue growth vehicles over the next number of years as we continue to use the platform, use the marketing. And again, it's only been 1 year. And prior, we had very few of our digital members even aware that we had the product assortments that we had. So we have seen greater engagement because what we measure is what percent of members, but there's significant upside to that.