#The Ratings Game: Weight Watchers shares sink nearly 25% as consumers put health goals on hold to enjoy the summer

WW
WW,
-24.56%
ended the quarter with 4.9 million subscribers, down from 5.0 million last year. Digital subscribers grew to 4.1 million from 3.9 million last year. Subscribers to both workshops and digital access fell 29.6% to 700,000.

“[T]he strong digital year-over-year growth momentum in Q1 slowed in the second quarter as we cycled against a strong digital performance in 2020,” said Chief Executive Mindy Grossman on the earnings call, according to FactSet.

“Therefore, our results did not meet our revenue and operating income expectations.”

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As more people ventured out of their homes, Grossman said watching what they eat became less of a priority.

“While people are acknowledging their need for recommitting to weight loss and wellness, our recent consumer research shows that, at the moment, they’re also asking for a pause to enjoy social reconnection,” she said.

“With both traffic and search under pressure, this sentiment shift appears to be across the weight loss and wellness category.”

The company says it can’t assume that consumers will get back on track after Labor Day and the back-to-school season. WW is now guiding for full-year revenue to approach $1.3 billion and EPS in the range of $1.10 and $1.25. The FactSet consensus is for revenue of $1.663 billion and EPS of $2.33.

“The new outlook left many questions unanswered, suggesting mid-year churn and higher costs to retain alongside heightened investment spend,” wrote Jefferies analysts led by Stephanie Wissink.

“We now assume a more typical seasonal arc in memberships. We’re pausing our thesis and look to revisit once potential catalysts return to the narrative including new food platform in Q4 & Q1 customer acquisition marketing tied to the kick-start of the diet season.”

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Jefferies downgraded WW shares to hold from buy and cut its price target to $30 from $41.

“Looking ahead, WW should benefit from the launch of a new food innovation in 2022, as well as a steady return of in-person studio workshops,” wrote UBS analysts.

“However, we think the unexpected deceleration in digital growth will raise questions around the long-term trajectory for the digital business as well as whether WW may be ceding share.”

UBS rates WW stock neutral with a $26 price target.

And KeyBanc Capital Markets is taking a wait-and-see approach to the company’s innovation plans, including further integration into the app and a broader merchandise assortment.

“Updated revenue guidance of $1.3 billion was below our previous $1.38 billion revenue estimate, but we remain more optimistic on profitability as digital provides a higher gross margin profile and WW reaps benefits from rationalizing the studio base,” analysts led by Edward Yruma said.

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The company closed 64 U.S. studios in the second quarter, 127 in the first quarter and about 150 in 2020.

KeyBanc rates WW stock sector weight.

WW stock has fallen 0.2% for the year to date while the benchmark S&P 500 index
SPX,
+0.25%
has gained 18.4% for the period.