Gym stocks get fit for the New Year rush

During the summer, Planet Fitness (US:PLNT) released a promotional video jokingly comparing a 75-pound (lb) dumbbell from one of its gyms with a 75lb weight from a fancier operator. The point being: why pay more? The ad was released after the $8.6bn (£6.8bn) gym giant raised prices, a move that alongside a share buyback programme announced earlier in the month and stronger Q3 earnings lifted its share price to an all-time high. 

The industry’s momentum both in Planet Fitness’s home US market and the UK, where budget operator Gym Group’s (GYM) shares are up almost 60 per cent this year, comes despite a new survey showing most gym-goers are trying to cut back spending. Private-equity-owned Pure Gym said last week almost 50 per cent of the respondents to a survey say ”they've decreased their spending on exercise because they can no longer afford it”. 

At the same time, even budget chains such as Planet Fitness and Gym Group are putting prices up. This is both to help cover costs and contribute to higher growth spending. There is some nuance to the price rises, however, which also helps explain why investors have backed the shares so heavily this year. 

When Planet Fitness raised prices in the spring from $10 a month to $15, it was the first rise in over 25 years. Gym Group also pushed prices up by 9 per cent in its first half, but also now offers cheaper off-peak memberships. 

RBC Capital Markets analyst Ross Broadfoot said almost 80 per cent of new Gym Group members in the first half chose the time-limited option. The company may have pushed prices down too much on this front, however. 

“We continue to watch the mix of the membership base, being mindful of the risk of cannibalisation should more members continue to choose the lowest-priced membership,” Broadfoot said. The company reported that standard memberships, which make up an estimated 61 per cent of the group’s base, declined in the first half of the year, emphasising the shift towards the cheaper option. 

This presents potential problems for its business model, which focuses on increasing average membership revenue month by month and was up 9 per cent to £20.44 in the first half from £18.81 last year. While this may just be “teething problems” soon after the off-peak membership rollout, as Broadfoot puts it, Gym Group still plans to shift the proportion of members on the cheaper rate to a mid-teens levels percentage, up from high single digits. 

Consensus forecasts see profit growth continuing to slow after Ebitda doubled between 2021 and 2022 to £71mn. Analysts see Ebitda climbing 4 per cent this year to £79mn.  

In September, Gym Group reported a 6 per cent increase in memberships to more than 900,000 since the previous year's end, led by New Year’s resolution joiners. Visits by members also increased 5 per cent compared to the prior year.  

The company will have to maintain the balance between holding up margins and continuing to sign up new members. It could be quite a workout.