WW International, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. The filing also reports the six months ended June 27, 2020. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
WW operates Digital subscription and Studio + Digital businesses, alongside product sales and other revenue. COVID-19 led to suspension of in-person workshops beginning in March 2020; workshops shifted to virtual delivery, and limited studio reopenings began in June. Results reflect a material shift toward Digital and reduced Studio + Digital activity.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $333.6 million | $369.0 million | $734.0 million | $732.2 million |
| Gross profit / margin | $194.7 million / 58.3% | $215.8 million / 58.5% | $405.7 million / 55.3% | $416.8 million / 56.9% |
| Operating income | $51.0 million | $105.5 million | $75.9 million | $127.4 million |
| Net income attributable to WW | $14.0 million | $53.8 million | $7.9 million | $43.1 million |
| Diluted EPS | $0.20 | $0.78 | $0.11 | $0.62 |
| Interest expense | $31.0 million | $34.7 million | $62.5 million | $69.9 million |
- Q2 revenue declined 9.6% year over year (8.7% at constant currency); Digital subscription revenue increased 13.3%, while Studio + Digital fees fell 26.6%. For the first half, revenue increased 0.2% reported and 1.2% at constant currency.
- Reported Q2 operating income fell 51.7%; management said it would have declined 10.0% excluding the $32.7 million Winfrey stock-compensation charge and $11.2 million of restructuring charges. First-half adjusted operating income, also excluding $3.7 million of Brazil goodwill impairment, was $123.4 million versus reported $75.9 million.
- First-half operating cash flow was $47.5 million, down from $79.8 million. Investing cash outflow was $39.2 million, including a $5.0 million investment in ClassPass; financing cash outflow was $41.0 million, primarily scheduled debt repayments of $38.5 million.
- Cash was $150.4 million at June 27, 2020, versus $182.7 million at year-end 2019. Total debt principal was $1.567 billion, including $1.267 billion of term loans and $300 million of senior notes; revolver borrowings were zero, with $173.8 million available. Net debt was $1.390 billion and net debt/Adjusted EBITDAS was 4.0x.
- Total liabilities were $2.115 billion and total deficit was $649.2 million. Management reported a $93.7 million working capital deficit and said cash, revolver availability, operating cash generation and cost savings were expected to cover obligations for the next 12 months.
Material changes versus the prior comparable period
- Q2 operating performance weakened as studio closures reduced Studio + Digital fees and in-studio product sales. Digital growth partly offset those declines; digital revenue rose 13.3% in Q2.
- At quarter-end, subscribers in company-owned operations totaled approximately 5.0 million, up 9% year over year: 3.9 million Digital and 1.1 million Studio + Digital. Digital recruitment returned to weekly growth from mid-April; Studio + Digital recruitment remained substantially lower.
- SG&A increased $41.4 million in Q2, primarily reflecting the $32.7 million fully vested Oprah Winfrey option expense and restructuring charges. Marketing expense declined 16.2%.
- Interest expense declined as debt was repaid and effective borrowing rates fell. The company repaid a $148 million revolver draw on June 5 after drawing it in March as a precaution.
Outlook, commentary, risks and unusual items
- Management expected COVID-19 to significantly affect Q3 results and potentially later periods, but stated that the duration and financial impact could not be reasonably estimated. Studio + Digital recruitment weakness was expected to continue through Q3 and possibly beyond.
- The company targeted $100 million of cost savings, while cautioning that it might not realize all savings or that the initiative might be insufficient. A global workforce reduction of approximately 27% was implemented. Restructuring charges were estimated at $14 million in total; $11.2 million had been recorded, with approximately $2.8 million of additional expense anticipated.
- WW was accelerating its digital transformation, including development of a digitally enabled, community-focused, coach-led offering. It expected fewer studio locations than before the pandemic and anticipated real-estate realignment costs and possible additional costs associated with studio reopenings.
- In Q1, WW shifted its Brazil operation to an exclusively Digital model and recorded a $3.7 million goodwill impairment. Annual testing found franchise-rights fair value headroom was narrower in Canada (16.5%) and New Zealand (9.8%); management identified potential impairment sensitivity in New Zealand.
- Debt and liquidity risks remain important. The June credit amendment increased revolver commitments to $175 million and relaxed the leverage covenant during a relief period through Q2 2022, subject to conditions. WW reported a 3.03x first-lien leverage ratio and compliance with applicable covenants at quarter-end.
- Pending matters include securities and derivative litigation and two member class actions concerning Studio + Digital fees charged while workshops were virtual. The company considers the cases without merit; outcomes and potential financial effects are uncertain.
- The filing reports no quantified full-year earnings or revenue guidance. Management said the CARES Act and new GILTI regulations were expected to benefit the fiscal 2020 effective tax rate, while the impact was still being assessed.
Most important facts for investors to verify
- Whether Digital subscriber and recruitment growth can offset ongoing Studio + Digital declines, and how reopenings affect retention, revenue and costs.
- Progress against the $100 million savings target, actual restructuring and studio realignment costs, and cash flow generation.
- Debt repayment capacity, revolver availability, covenant conditions and the sustainability of the 4.0x net debt/Adjusted EBITDAS ratio.
- Whether franchise-rights valuations—particularly New Zealand—and COVID-sensitive cash flow assumptions lead to further impairment charges.
- Developments in the member class actions and securities litigation, including any material change in exposure.