BSFFF - Basic-Fit Continues To Deliver Profitable Growth

2023-12-12 23:56:49 ET

Summary

• Basic-Fit's 2023 Capital Markets Day highlights solid growth and rapid expansion across Europe.
• The company's cost control measures, such as the "Smart Refurbishing" program, strengthen its cost advantage and operational efficiency.
• BSFFF's convenience-focused approach, simple layout, and potential for acquisitions and franchising contribute to its growth outlook.

Basic-Fit (BSFFF), Europe's premier affordable fitness chain, recently held a 2023 Capital Markets Day highlighting solid growth. Its rapid expansion across Europe - signaling continued momentum for its affordable approach. I think this is a very high quality business with true earnings power. Keep my buy rati ng .

Business update

At its recent 2023 Capital Markets Day event, Basic-Fit affirmed it remains solidly on track for continued growth and profitability expansion. The company has added 202 net new clubs year-to-date, including 12 German locations. A rebounding membership base is expected to reach ~3.6 million by year's end as churn stabilizes at 4%. Early results from a new premium pricing model seem promising too, with over 44% penetration that is projected to top 50%. Propelled by these drivers, Basic-Fit's 9-month 2023 revenue increased 36% year-over-year to €765 million, keeping it on pace to generate over €1 billion total this year - a doubling in just four years despite COVID. Remarkably, free cash flow now exceeds €300 million as well, highlighting operational efficiency gains.

The cost advantage is further strengthened

During its investor meeting , Basic-Fit's management team stressed their focus on keeping costs down even as the chain grows quickly. This helps new clubs make money faster. One way they do this is a program called "Smart Refurbishing" to make gym equipment last longer. This lowers how much needs to be spent on maintenance at each location. Smart Refurbishing is good for the environment too since equipment gets replaced less often. Thanks to the program, Basic-Fit expects the yearly equipment maintenance spending per club to stay around €55,000 at least through 2030.

Basic-Fit's plan to control costs allows each site to be profitable with just 1,500 members. Other gym chains often need 2 times more members. New Basic-Fit clubs opened in 2022 and 2023 are making money quicker than older ones too.

What's really impressive is Basic-Fit's marketing budget stays under 6% of total sales. Plus headquarters spending is only about 7%. This shows how efficiently the chain runs even with over 200 new gyms opened last year alone.

The Club opening machine

Basic-Fit believes convenience is key for attracting new gym members. People want a location close by. So when the chain enters a moderately sized city of 50,000 or more, Basic-Fit will open 2 clubs at once to provide more coverage. They want their clubs to be close together to form geographic clusters so you may have family members and friends in the club.

Keeping each gym simple in layout also aids quick scaling. With limited equipment and minimal on-site staffing, new sites can open rapidly while controlling buildout and labor costs. Most Basic-Fit clubs operate with only 3 full-time employees. This efficiency enables profitable unit economics from even a small member base.

Beyond growing its physical footprint, Basic-Fit may soon look to acquisition opportunities as well. Management indicated that at the right price and return profile, they are open to deals for regional gym chains with 20-50 locations or possibly up to 150 clubs. Rather than issuing new shares, Basic-Fit would fund buys from existing cash flows or additional borrowing.

Basic-Fit management also indicated they are beginning to explore franchise opportunities. This is exciting news as it would involve licensing the Basic-Fit brand, operating systems, and technology stack for partners to open gyms in new geographies. Given the proven business model, detailed expansion playbook, strong brand recognition, and operational infrastructure already established, selling franchises could aid international scale. This may turn Basic-Fit into a fitness platform company which elevates the business entirely.

Evaluation and Risk

Basic-Fit has confirmed 2023 guidance calling for at least €1 billion in total revenue and mature club returns on invested capital remaining above 30% - metrics outlined during 3Q results. The fitness chain grew locations by 202 this year to-date and projects ending 2023 with 1,402 gyms after targeting 200+ net openings. Membership is expected to rise by 13% annually to 3.8 million members, generating over €23.50 in monthly fee revenue per member. This top-line expansion should drive a 28% increase in underlying EBITDA profits compared to 2022, reaching approximately €260 million.

When analyzing the growth outlook, Basic-Fit seems well-positioned to achieve the long-term goal of doubling revenue to €2 billion highlighted by management. A conservative scenario of 2,650 total clubs could reasonably produce €400 million-plus in bottom line earnings based on achieving 20% returns on investment at maturity. Applying a 15x profit multiple, Basic-Fit's enterprise value ((EV)) could reach €6 billion in coming years - a meaningful upside from today's €4.1 billion ((EV)).

However, competitive and execution risks to the expansion strategy cannot be ignored. As the budget gym formula gains notoriety, new entrants attempt to replicate Basic-Fit's playbook. Differentiating on customer experience and maintaining operational discipline become critical to fend off copycats. Additionally, since each new club requires real estate and equipment capital, a recession could strain cash flows and endanger debt payments. If Basic-Fit chooses to pursue acquisitions more aggressively in the future, failed deal uncertainty presents another risk factor to consider. Basic-Fit may overpay for targets and fail to integrate business models.

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