Description

Why Basic Fit? Basic-Fit (BFIT) presents the opportunity to invest in a best-in-class owner led company that has become the leading gym operator in the fitness industry in Europe by using a ‘scale economics shared’ approach to improve the customer value proposition while also ensuring the business improves with scale. This approach allows BFIT to take share in their markets while also growing the market itself by increasing fitness penetration and increasing the total addressable market (TAM) available. Should BFIT reach the club growth that management guided to at their recent CMD then revenue would grow at a >15% CAGR over the next decade with ‘mature’ owner earnings per share growing at a rate closer to 25% p.a.. Basic Fit currently trades at c.11x my estimate of this year’s mature owner earnings and I think the stock could compound at a c.25% + annual rate over the coming decade to 2030.

I. Background: BFIT is the largest fitness operator in Europe, currently operating over 1,100 gyms. The company has guided to tripling the store count over the coming decade and operating up to 3,500 gyms by 2030. BFIT are now active across six markets. Basic Fit is run by René Moos, a former professional tennis player from the Netherlands. When René’s tennis career finished he started running health clubs in the Netherlands which he turned in to a larger business before pivoting to the low-cost gym model in the 2000s when he observed what was happening in the US market where Planet Fitness, the largest low-cost gym franchise in the US, was growing the overall fitness market and taking outsized incremental market share by pioneering a low-cost value proposition to attract customers who previously hadn’t used a gym and now had access to a low-cost gym near them. René and the management at BFIT bet heavily on the low-cost gym model working in Europe, first scaling in the Benelux area and later in France and Spain. Basic-Fit was brought public in 2013 at a price of €15 per share. The largest shareholders at the time the private equity group 3i and René/ management. René owns c. €400mn of stock at current prices, or c.14% of the shares outstanding. 3i have gradually sold down their stake and now own less than 7%. 

II. Industry: Why low-cost/ value fitness is winning: The three main criteria customers care about in relation to gyms are (a) price, (b) convenience and (c) quality. Most people care about the first two, and this is why the low-cost gyms that are opening increasingly close to potential customers and which are available at a low price are winning share. Over the last 20 years, the gym industry has undergone similar shifts that other industries have seen. We see this low-cost model winning across many industries. In Europe for example, Ryanair and other low-cost carriers have been the big winners in the airline industry while low-cost German retailers like Aldi & Lidl have taken share in retail. The gym industry is proving to be no different with Europe following the path of what has already happened in the United States. Over 80% of the net new member growth in the US, the UK and Europe has been taken by low-cost fitness chains over the last 10+ years, with the vast majority of this going to the top chain(s) in those markets. 

We are now seeing an emerging ‘Premier League’ of operators emerging in different geographies who are sharing their growing economies of scale with customers by opening more gyms at low prices. These low-cost gym chains have the dual advantage of (a) higher EBITDA per gym (operating tech-enabled gyms with a lower labour requirement, lower running costs and operating leverage on their overhead/ marketing costs) as well as (b) lower initial investment requirements to open a new unit (due to standardized layout/ equipment as well as centralized planning/ purchasing for new units) which combine to produce much higher returns on capital for these scaled operators.

(Source: PureGym Investor Presentation)

While gyms historically catered for the wealthier members of society, the advent of low-cost fitness chains, first pioneered by Planet Fitness in the US has led to a massive increase in the number of potential gym members available as well as an increase in the share of the total market that low-cost gyms have taken. Low-cost gyms unlocked huge untapped latent demand, much like Ryanair did for airline travel, by offering consumers a basic, no-frills experience at a price point that was attractive. Members of scaled low-cost gyms also got access to other clubs in the network which increased the value of the customers membership.