It has been almost a decade since the financial crisis wrought havoc on the listed gym sector, forcing several names to go private. As consumers found their incomes squeezed, they quickly relinquished gym memberships, which put pressure on the likes of LA Fitness and Fitness First.
But last year the listed gym sector started to beef up again with the flotation of The Gym (GYM), followed by Pure Gym, which snapped up LA Fitness in 2015 and announced its planned entry to the stock market last month. The former, led by ex-England squash player John Treharne, is the second-largest player in the low-cost gym market, behind its soon-to-be-listed rival.
But does the return of the listed gym sector herald a more solid investment than in the past and will the companies' perceived defensive qualities shield them should tough economic times return?
The general reception to The Gym's listing has been extremely positive. Several brokers believe future growth opportunities lie in the fact that low-cost gyms only account for 450 out of the 6,400-odd fitness centres in the UK and capture just a third of all existing gym members.
There's also the fact that low-cost gyms tend to 'mature' - hitting a certain number of members and raising prices marginally from initial introductory offers - pretty quickly, meaning margins soon expand. Broker Berenberg says 28 percentage points of The Gym's 34 percentage point 2016-18 earnings per share (EPS) compound annual growth rate is "driven purely by the maturation of sites", which it considers "highly visible" or, in other words, predictable.
Not only this, but several brokers view the value-led end of the sector as relatively recession-proof, given that any members lost in a downturn could be replaced by others trading down from more expensive clubs. The companies might also be able to secure more favourable lease terms if a weaker economy sees landlords having to entice tenants.
Easy lift?
But Andrew Jones, chief operating officer of Nuffield Gyms, speaking at an event hosted by broker Liberum, said that if GDP and discretionary spending "are in trouble" gym operators will tend to find themselves "working quite hard". He added that, while the early movers in the value space - The Gym and Pure being among them - had thought hard about their early locations and been successful in securing profitable sites, growth might not be as simple as some make it sound. Gradually, he says, as you need to find more sites "you get further away from the 'bullseye' sites you began with".
Mr Jones acknowledged he wouldn't have predicted the rate of growth in the value end of the market if he'd been asked five years ago, but highlighted one factor that could hamper low-cost operators: churn.
With The Gym and Pure operating via rolling contracts, allowing members to stop paying whenever they wish, there's a danger that in tough economic conditions this would be an easy expense for members to jettison. Churn rate is the industry's "number one focus", he says. "I don't know what the churn of the low-cost operators is but, traditionally, high-end operators want to be keeping roughly 70 per cent of their membership and for the middle market it should be north of 50 per cent.
"If you take a linear line down from that, that's the kind of churn I'd expect [for the low-cost market]. The mid-market LA Fitness was in the low 30s when it got into difficulties."
Regardless of whether that's the right ballpark figure, brokers are confident these new models can stand the test of time. Not only does their pricing potentially create some protection for when times get tough, but they have been key in getting people who haven't joined gyms before to do so - 30 per cent of The Gym's members have never belonged to a fitness club before - and are catering to a much wider clientele due to their 24-hour opening hours.
There are other benefits as these businesses scale up, too. Berenberg said The Gym's scale had helped it reduce the cost of fitting out each new gym from £1.5m to £1.35m since 2014. This increased scale has also helped it negotiate cheaper utility bills and maintenance contract fees. Berenberg says a £1m saving would have provided a 110 basis point cash profit margin uplift to the mature portfolio based on 2015 numbers.
Mighty mergers?
With two leaders emerging, investors might think the prospect of a megamerger is on the cards. But in July 2014, The Gym and Pure Gym's merger plans were scrapped just months after being announced following a decision by the UK Competition and Markets Authority to refer the transaction to a second-phase competition review.
A megadeal might not be necessary given that The Gym's management predicts scope for more than 1,000 low-cost sites across the UK, with hopes it will make up roughly 250 of these from fewer than 100 now.
It's perhaps more likely that smaller deals could feature as part of the sector's bulking up. Former JJB Sports owner Dave Whelan and his DW Sports business acquired Fitness First UK earlier this year as part of a £70m deal. All 62 sites, mainly in London and the south-east, were snapped up - although DW is expected to keep only 48 of these and sell the rest, including some to Gym Group.
David Minton, founder of health and fitness consultancy Leisure Database Company, said that while the low-cost end was in rude health, it still faced competition. David Lloyd has spent £80m refurbishing its estate and it now has its highest ever number of members at 500,000, according to Mr Minton.
He added that there were also boutique entrants to market, which had the capacity to chip away at market share. He highlighted Boom Cycle in London, which runs indoor cycle fitness and spinning classes and is busy raising money for expansion; 1 Rebel, which offers high-intensity group fitness; and fitness boutique Heartcore, which currently has eight sites.
These types of businesses appeal to the market that wants more of an experience than just a normal gym routine, says Mr Minton. The fitness business used to be 'here's the product, take it or leave it', but it is now becoming consumer-centric.
Favourite:
We're reserving judgment for now seeing as The Gym is the only listed player at the time of writing. There's also the prospect, if some reports are to be believed, that the ranks of the listed sector could swell as other companies size up the recent flotations. The Gym's share price was below its November 2015 price at the start of October, showing that these are volatile investments. We think it might make sense to see if more rivals come to market and assess them together. Investors eyeing the sector should also fully acknowledge the impact the burgeoning boutique fitness industry could have on these more conventional names.
