WW International, Inc. — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks). The filing also reports the fourth fiscal quarter ended December 28, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context
WW is a global wellness company whose main revenue sources are Digital subscriptions and Studio + Digital workshop subscriptions and fees. It operates through North America, Continental Europe, United Kingdom and Other segments. At year-end, WW reported approximately 4.2 million subscribers: 3.0 million Digital and 1.3 million Studio + Digital.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $1,413.3 | $1,514.1 |
| Gross profit / margin | $786.7 / 55.7% | $866.4 / 57.2% |
| Operating income / margin | $288.0 / 20.4% | $389.0 / 25.7% |
| Net income attributable to WW | $119.6 | $223.7 |
| Diluted EPS | $1.72 | $3.19 |
| Operating cash flow | $182.4 | $295.6 |
| Cash and cash equivalents at year-end | $182.7 | $237.0 |
| Total debt principal | $1,605.3 | $1,782.3 |
Interest expense was $135.3, down from $142.3, while the effective tax rate increased to 20.9% from 8.4%. Net debt was $1,393.4 and net debt/Adjusted EBITDAS was 4.0x. The company had $148.8 of available revolving-credit capacity and reported a $98.7 working-capital deficit, versus a $25.1 surplus a year earlier.
Fourth-quarter revenue was $332.6 versus $330.4 in the prior-year quarter. Operating income was $65.9 versus $80.3; net income attributable to WW was $29.4 versus $43.8; diluted EPS was $0.42 versus $0.63.
Material changes versus the prior comparable period
- Full-year revenue fell 6.7% (5.0% excluding foreign-exchange effects). Net income attributable to WW declined 46.5%; diluted EPS fell 46.1%.
- Gross margin decreased 1.6 percentage points and operating margin decreased 5.3 points. Management cited weaker operating leverage, higher marketing expense as a share of revenue, and higher SG&A as a share of revenue.
- Marketing expense rose 7.8% to $244.0, reflecting higher television and online media, production, agency and celebrity costs. Revenue weakness was driven primarily by North America and lower Studio + Digital fees.
- Digital subscription revenue increased 7.4% to $610.0; Studio + Digital fees declined 15.3% to $597.3. Year-end Digital subscribers rose 15.1% to 3.0 million, while Studio + Digital subscribers fell 5.8% to 1.26 million.
- Operating cash flow declined $113.2, primarily reflecting lower net income. WW used $183.0 in financing activities, including $100.0 of voluntary debt prepayments and $77.0 of scheduled repayments.
Outlook, risks and unusual items
- Management said cash from operations, year-end cash, available revolver capacity and continued cost focus were expected to provide sufficient liquidity for the next 12 months. The filing provides no specific forward-year revenue or earnings guidance.
- Recruitment was weak early in 2019, which management attributed to comparison with the prior WW Freestyle launch and ineffective first-quarter marketing. Trends improved during the year; after myWW launched in November, fourth-quarter year-over-year recruitment trends turned positive in North America and the UK. Seasonality makes first-quarter recruitment particularly important.
- Fiscal 2019 included $6.3 of organizational realignment charges ($4.7 after tax; $0.07 per diluted share). Management did not anticipate further charges for that realignment.
- Debt and liquidity are significant risks: $1,305.3 of debt was variable-rate, partly hedged by a $1.0 billion interest-rate swap. The company reported covenant compliance at year-end. Substantially all assets secure the credit facilities; debt covenants restrict certain actions. Management also identified LIBOR transition risk.
- Other stated risks include intense competition and changing consumer preferences, reliance on marketing and key partners, technology and cybersecurity/privacy, foreign-exchange exposure, international uncertainty, and events that could impede workshops or digital access. The filing specifically identified health epidemics, including coronavirus, as a potential disruption.
- Shareholder securities class actions and derivative matters were pending; the company said it believed the claims were without merit and intended to defend them. Damages sought in the class action were unspecified.
- The December 2019 Oprah Winfrey collaboration amendment and related option for 3,276,484 shares at $38.84 required shareholder approval by June 30, 2020; absent approval, the amendment would not become operative and Winfrey could terminate the collaboration agreement.
- Annual impairment tests found no impairment, but estimated fair value exceeded carrying value by only about 3% for Brazil goodwill and New Zealand franchise rights, making those valuations sensitive to assumptions. PwC issued an unqualified audit opinion and identified U.S. and Canada goodwill and franchise-right impairment assessments as a critical audit matter. Internal control over financial reporting was reported effective.
Important facts for investors to verify
- Whether improved recruitment after the myWW launch persisted, and whether Digital growth can offset declining Studio + Digital fees and subscriber counts.
- Whether operating cash flow and available liquidity support debt service, scheduled maturities and continued deleveraging; monitor the 4.0x net-debt/Adjusted-EBITDAS ratio and variable-rate exposure.
- Shareholder approval and subsequent status of the Winfrey option and collaboration amendment, including any potential dilution or change in promotional support.
- Developments in securities and derivative litigation, and the assumptions supporting Brazil goodwill and New Zealand franchise-right valuations.