BSFFF - Basic-Fit Has A Long Runway Ahead

2023-08-08 10:37:58 ET

Summary

• BSFFF's recent financial performance is good, although the membership growth has slowed down.
• The success of transitioning to premium membership showed the pricing power of the model.
• BSFFF possesses a distinct cost advantage and the scale within Europe, positioning it for sustained growth.
• Germany will be the next big challenge moving forward.

Basic-Fit N.V. ( BSFFF ) stands as Europe's premier low-cost gym chain with operations spanning France, Belgium, Luxembourg, the Netherlands, and recent expansions into Germany and Spain. Despite enjoying a robust 70% surge at the outset of 2023, the stock has experienced a 24% decline recently. Given BSFFF's resilience and growth potential, I believe it presents a compelling addition to any portfolio and merits serious investment consideration.

Business update

In the first half of 2023 , BSFFF reported a substantial 41% growth in revenue, reaching 500M EUR. Concurrently, the underlying EBITDA saw an impressive 83% increase, totaling 110M EUR. The period witnessed the inauguration of 108 new clubs, offset by the closure of 5, bringing the total club count to 1,303-a 9% YoY increase. Notably, out of the new establishments, 71 are situated in France, where the company has now launched a grand total of 718 clubs. As for membership, there's been an addition of 250,000 members-an 8% rise. However, this growth rate is more tempered compared to the same period the previous year, which boasted a 700,000 member surge (23% increase). Churn rates have settled back to pre-pandemic levels at 4%. Among the 888 mature clubs, the average membership stands at 3,301.

Third-party data reveals a 30% decline in app downloads since January. However, the number of daily active users has consistently risen. This trend is particularly encouraging, considering that summer months typically see a dip in gym activity as families opt for vacations and other outdoor pursuits. A steady growth in daily active users for the Basic-Fit app serves as a positive barometer of the company's overall health.

Germany is still a wait and see

BSFFF has already demonstrated the effectiveness of its business model in countries like the Netherlands, Belgium, France, and Spain. Germany represents the next significant growth frontier for the company. In the first half of 2023 , only three clubs were inaugurated in Germany, bringing the total to six. With the addition of two more in July, this count increased to eight. There are already 65 clubs in the pipeline with contracts signed, slated to open within the next 18 months. However, the pace of expansion in Germany hasn't met expectations, especially considering its vast market of over 80 million residents. Even though competitors like CleverFit and MacFit have made considerable inroads in Germany, there remains substantial room for growth for BSFFF.

Basic-Fit has a huge cost advantage in Europe

In the first half of 2023, BSFFF made notable strides with its premium membership strategy, as the adoption rate surged to 55%. Presently, 41% of their customer base has embraced this premium offering. Additionally, they adjusted their pricing strategy by elevating the rate for their low-tier membership to 24.99 EUR per 4-week period. Notwithstanding these price augmentations, BSFFF remains more cost-effective compared to many competitors. This competitive edge is particularly evident when considering the amenities they offer, including top-tier equipment, diverse programs, virtual classes, and state-of-the-art digital applications.

Owing to its expansive scale, BSFFF wields considerable negotiating leverage with suppliers. On average, the expenditure for inaugurating a new club stands at 1.21M EUR, while the maintenance capital expenditure averages a modest 55k EUR in the medium term. Such financial agility affords BSFFF the flexibility to aggressively undercut competitors. For instance, they could extend offers like three months of complimentary membership for new enrollees or lock in a lifetime rate of 10 EUR or 15 EUR for the first 100 members at newly launched clubs. Such offers are nearly insurmountable for competing chains. As an increasing segment of the European populace gravitates towards fitness and well-being-not just the bodybuilding community-the allure of affordable gyms is set to intensify. This trend bodes well for BSFFF, positioning them to harness the long-term momentum in their favor.

Large scale and strong efficiency

Operating a gym is inherently straightforward. Unlike restaurants, which demand intricate supply chains and skilled chefs, a gym primarily needs a one-time setup of equipment. From there, its operations require minimal expertise. BSFFF, which owns all its gyms and does not operate on a franchise model, has diligently standardized every facet of its operations. Their robust marketing strategies, coupled with cutting-edge consumer technology, give them a distinct edge. BSFFF's unparalleled geospatial coverage ensures that members can easily access gyms while traveling. Additionally, the likelihood of acquaintances being co-members at Basic-Fit gyms enhances membership retention.

Furthermore, BSFFF is resolute in ensuring that all mature clubs boast a ROIC exceeding 30%, a commendable benchmark for shareholder returns. As of Q2 2023, while their equity stood at 436M, their operational cash flow reached an impressive 119M. This is very good to me, especially for a consumer-centric business reliant on capital investments.

Bottom line

BSFFF's management has set an ambitious target, projecting between 2,650 to 3,200 clubs across their current six countries of operation. Considering only 888 clubs have matured, the company has potential to triple its growth by adding clubs in the forthcoming years. Momentum in other nations seems promising. However, this projection hinges on the success of 600 clubs in Germany, which remains uncertain. For 2023, BSFFF anticipates expanding its club network by a minimum of 200 clubs, reaching a total of 1,400. This expansion is projected to drive revenues to at least 1B EUR, with underlying EBITDA potentially hitting 220M EUR. Membership is anticipated to grow to a minimum of 3.8 million by year-end, and the average revenue per member per month is expected to average at least 23.5 EUR for the year. All these indicators suggest a favorable trajectory.

In terms of valuation, BSFFF currently has an EV/Sale ratio of about 4x. Given the potential for a threefold increase in club numbers and significant potential for pricing hikes, future cash flows should expedite debt repayment as more clubs reach maturity. Additionally, when compared with Planet Fitness, it's evident that BSFFF offers competitive value and hasn't garnered the attention it rightfully merits.

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