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Why Weight Watchers Has Recovery Appeal

- By Robert Stephens, CFA

An improved digital offering could catalyze the Weight Watchers (WTW) stock price. A number of partnerships are set to broaden its customer offering as it rebrands itself as a wellness-focused operation under the name WW.

Its loyalty program has experienced high engagement levels, which could help to retain customers. A referral program has allowed it to target individuals who may otherwise not have become members, while improved personalization could further enhance customer loyalty.


Although evolving customer tastes could reduce the popularity of products and services aimed at dieting, WW's evolving features may allow it to capitalize on new growth areas. Having fallen 21% in the last year versus a decline of 8% for the S&P 500, the stock seems to have investment appeal.

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Strategy change

Investment in its digital offering could catalyze the company's financial performance. Two-thirds of its subscribers are now rigital only, while its rigital end-of-period subscribers increased 37% year-over-year in the most recent quarter. It plans to further evolve its WW mobile app in order for it to offer a diverse range of wellness opportunities for subscribers, as opposed to solely focusing on weight loss. The company also plans to make its new product lines more broadly available through the launch of its first own WW branded marketplace on Amazon (AMZN).

Partnerships could enhance the company's customer offering. WW is working with Aaptiv, which is a provider of premium digital health and wellness content. The collaboration is focused on developing a selection of exclusive audio-based fitness classes, with the content expected to be integrated into the WW app internationally by the end of the first quarter.

Following a successful partnership with Headspace, meditation and mindfulness content will be rolled out across the company's international operations. A partnership with Blue Apron will provide a line of meal kit recipes which can be delivered directly to customers' homes. This could expand the reach of WW to customers beyond its traditional subscriber base.

Growth potential

WW recently launched its first loyalty program. WellnessWins seeks to reward members with products and experiences for everyday behaviors that are scientifically proven to lead to healthier habits. For example, members earn rewards for tracking meals, activity levels and for attending Wellness Workshops. Member engagement has improved since the launch of the loyalty program, with activity tracking up 80%. Strong engagement levels could lead to improved customer retention and higher repeat sales.

The company's "Invite a Friend" referral program has driven 130,000 signups since its recent launch. Around two-thirds of the signups are first-time members, which the company believes it would not otherwise have been able to reach. The company has also launched Connect Groups, which help subscribers to find other members in a similar situation to them, such as college students and brides-to-be. A focus on personalization and community may improve customer loyalty, with evolving algorithms allowing members to tailor their app based on factors such as age, weight and height.

Relaunch

The decision to rebrand as a wellness-focused company may fail to fully address evolving consumer tastes. Customers are increasingly demanding a holistic approach to health, of which diet is one consideration alongside other areas such as community and mental wellbeing. Although it has added a number of new member features, WW remains focused on dieting. For example, its points-based weight-loss program is still a core part of its offering. Consumers may continue to associate it with dieting, rather than as a provider of a broader range of wellness opportunities.

Diet, though, remains a central part of the wider wellness sector. In the U.S., 40% of the population is obese, with it costing up to $147 billion per year in medical costs. WW's continued focus on dieting and weight loss may allow it to maintain a strong position in an area that is likely to remain relevant in the long run. Its diversification into new areas, which together make up the wider wellness category, could mean that it is also able to capitalize on the growing popularity of broader trends.

Outlook

Investment in its digital offering could catalyze growth in subscriber numbers. Improved availability of its product lines may also boost its financial performance. Various partnerships are set to broaden WW's offering and allow it to capitalize on growing demand for wellness features, such as meditation and mindfulness.

The company's loyalty program has proved popular, and may encourage improved customer retention. The referral program has allowed it to access a broader customer base, while increasing personalization could provide a higher degree of customer loyalty.

Although the company will remain focused on dieting and weight loss at a time when consumer tastes are evolving, obesity remains a major challenge facing the U.S. and many other countries. Having underperformed the S&P 500 in the last year, the stock could offer recovery potential.

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This article first appeared on GuruFocus.