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Questor: Gym Group is looking fitter but has yet to regain tip-top condition. Buy
Questor share tip: the no-frills gym chain’s low-cost model should protect it from any slowing in the economy
Making money from the fitness industry is not as simple as piling on the pounds.
Gym chains have expanded and contracted like exercise fads, with the likes of Fitness First carved up by private equity owners and forced through debt restructurings because membership waned and keeping up with rent payments became too much of a stretch.
And then there is the competition. Some would say heading to a draughty shed to sweat it out on a variety of fitness machines once or twice a week is becoming as old hat as pacing the aisles of a supermarket.
Today the emphasis is on participation, such as personal training in the park with Be Military Fit, spinning at SoulCycle or Barry’s Bootcamp, a Californian import that mixes cardio workouts with weight training to devastating effect.
Or convenience: fitness has latterly been hit by a technological revolution with start-ups such as Zwift and Peloton – valued at $4bn (£3.2bn) in a fundraising last year – marrying exercise bikes with computer games.
All of this makes what The Gym Group has to offer look rather basic, which is precisely the point. The company, which doesn’t tie members in to an onerous contract but does throw in free workout sessions, is the second-largest of the low-cost gym operators that have pushed gym membership in Britain to a high of 15.6pc of the population from 12.9pc five years ago, according to industry analyst LDC.
The top two nearly became one, but a 2014 merger of Gym Group with Pure Gym when both were in private equity ownership was dropped because competition regulators launched an inquiry. A year later Gym Group floated at 195p a share.
It wasn’t faring badly until last November. But by March the shares had slid by more than 40pc, the outcome of a slower gym openings programme, changes to the chain’s personal trainer model and some promotional activity that looked suspiciously like a price war.
Shareholders who were puffing and panting then are relieved that the firm looks in better shape now. In the past six months it counted an average of 797,000 members, a rise of 20pc, with average revenue per member per month rising by 5.6pc to £15.47 – still a world away from the amount charged by full-frills gyms that sustain spas and other little-used paraphernalia.
Much of this increase in income has come from more members taking Gym Group’s premium Live It package, which costs £17.98 per month in some parts of the country instead of the plain vanilla £12.99. At 16.9pc of membership, Live It’s popularity has already surpassed the forecasts made by house broker Numis for the year. Analysts there think penetration could exceed 30pc in time.
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The Gym Group has doubled its estate over the past three years. In the last financial year it grew to 158 outlets, a 23pc rise, including some sites that were acquired from easyGym. In a trading update earlier this month it reported 165 sites.
Over the medium to long term, analysts at Berenberg, the bank, think the chain can grow to about 250 gyms. The trial of a smaller-format site gives it more options, especially in city centres.
The company is led by chief executive Richard Darwin, a numbers man whose leisure credentials include roles at Chez Gerard, the French restaurant chain, and Essenden, the ten-pin bowling group. Still involved is the founder, John Treharne, a former England squash player and accountant who started out with a single site in west London.
The chairman is Penny Hughes, who must be grateful that Gym Group has performed better on the stock market than Aston Martin Lagonda, another company she is chairman of.
Gym popularity could wane with the economy but with its budget prices Gym Group should not. However, it must be careful not to overreach itself again. A reassuring sign is that some smaller competitors are either selling up or closing down.
Trading on 22 times this year’s forecast earnings and 18 times next year’s, Gym Group is beginning to flex its share price. However, the stock has yet to regain tip-top condition so its prospects still look promising.
Questor says: buy
Ticker: GYM
Share price at close: 261.5p
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