Sima Sistani, CEO, WW International, August 16, 2023.
Scott Mlyn | CNBC
WeightWatchers CEO Sima Sistani has sent an internal memo to employees attempting to reassure them that the financial position of the company is solid and its new clinical business related to the threat of GLP-1 weight loss drugs is growing faster than expected.
The memo, shared with CNBC, comes after heavy selling in WW shares that has seen the stock market value of the iconic weight loss company fall to under $150 million amid concerns about the company’s debt load and its core weight loss business growth prospects at a time of new blockbuster drugs like Novo Nordisk‘s Ozempic and Wegovy, and Eli Lilly‘s Zepbound.
In the memo, Sistani told employees she wanted “to take a moment to address some of the breathless media coverage.”
While the news on Feb. 28, concurrent with its earnings, that Oprah Winfrey was planning to leave the company’s board and donate all of her shares in the company to a museum’s endowment had led to a 20%-plus drop on earnings day, shares stabilized later that week. But since then WW shares have suffered heavy selling, dropping to a new 52-week low on Thursday. Over the past one-month period, shares are down 58 percent. The stock, due to its debt load and short interest, as well as the general anxiety about the impact of the new weight loss drugs, is subject to heightened volatility.
Concerns about the company’s significant debt load have made new headlines in recent weeks, however, the issue is not a new one and much of the debt is not due for years.
“These headlines are often just speculation,” Sistani wrote to employees. “We have strong liquidity and are not in a cash crunch. We have very attractive, long-term debt agreements, with no maturities due until 2028 and 2029.”
Guggenheim Partners analysts wrote in a note on Thursday that they are “unconcerned” about WW’s ability to service its debt, which includes roughly $945 million outstanding on a non-amortizing term loan that matures in April of 2028, and $500 million of notes due in April of 2029.
The company ended 2023 with approximately $109 million in cash, according to Guggenheim.
At its current market cap, the near $1.5 billion in debt is roughly 10 times the publicly traded value of the company’s equity.
“Despite the high leverage, we believe WW will have no problem covering interest payments on the debt, and will ultimately be in a much better position to recapitalize the company in 2-3 years after the Clinical business scales. Moreover, we think any worries about a recapitalization or default this year are overblown,” the Guggenheim analysts wrote.
Guggenheim maintains a buy rating on the shares and $12 price target. WW shares closed at $1.87 on Thursday.
Last year, WW acquired Sequence, since rebranded as WeightWatchers Clinic, as a way to confront the threat of the GLP-1 drugs to its legacy business by having the ability to connect patients with clinicians who can prescribe the drugs and combine the drugs with a broader weight-loss program. The FDA mandates the drugs be used in conjunction with broader weight-loss diet and exercise methods.
Sistani said in the note to employees that since it reported on Feb. 28 and provided guidance for the year, its GLP-1 related clinicals business has grown quickly. “In fact, we are on track to beat our Q1 guidance for Clinic subscribers,” she wrote.
While any faster growth for the clinicals business is a plus, several analysts who cover the stock have told CNBC that the core weight-loss management business has to grow for investors to turn bullish on the stock, given the size of the legacy business relative to the new clinicals effort.
“WW is in a tough spot,” said one analyst consulted after the internal memo was shared, but who could not comment for attribution due to concerns about fair disclosure of the material information. “Sequence [the clinicals business now named WeightWatchers Clinic] should be the future. That’s the GLP-1 playbook, but at this point it’s still very small. If they are talking about upside to that small business in and of itself, it’s not meaningful. The bigger issue is the legacy business continues to suffer and the company is overly levered.”
When WW reported results on Feb. 28, the company said it had ended Q4 with 3.8 million subscribers, including 67,000 for clinical subscriptions, but its guidance for the full year 2024 was total subscriber growth in the range of 3.8 million to 4.0 million, including between 140,000 and 160,000 subscribers to WeightWatchers Clinic.
“Turning around and totally transforming a business is not for the faint of heart!” Sistani wrote to employees. “As we stay focused on delivering for our members, the stock price will take care of itself,” she stated. “I know clickbait stories and their predictable, albeit temporary, market impact don’t feel great. But take pride, because we will prove the naysayers wrong.”
Oprah Winfrey said in her statement announcing her intentions to leave the WW board this upcoming May and donate all of her shares to the National Museum of African American History and Culture that she would continue to work with the company to de-stigmatize obesity and focus on weight loss as management of a chronic condition (Oprah told People she started using weight loss drugs in December). Next Monday, Winfrey is scheduled to appear in a national primetime weight-loss special on ABC.
Guggenheim said in its note on Thursday “we would not be surprised if the special contains positive commentary about pairing GLP-1 drug therapies along with a clinically-guided behavior modification program.” It noted that WW was among companies from the weight loss industry involved in the TV event.
Sistani was named to the inaugural CNBC Changemakers list, revealed in February.
