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The Gym Group reveals profit forecast, buys clubs from Fitness First

CEO, Richard Darwin, said The Gym Group sees a 'clear path to 300 sites'.
Executive pay is being linked to social value.
Working with pricing experts, the company has identified a £4 'value gap' against the competition.
The Gym Group is cashflow positive and expects to return to profit in 2023.
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The Gym Group has published its full-year results for 2021 and announced plans to open 28 new sites in 2022, including three gyms acquired this month from Fitness First in Haringey, Leytonstone and Romford, strengthening its clusters of properties in this part of the UK.

The Gym Group broke the 200-club barrier at the end of 2021, opening 15 clubs in the second half of the year alone, all of which are trading well, according to CEO, Richard Darwin. He said roll-out plans are accelerating as recovery continues and that he sees a “clear path to 300 sites over the next two to three years.”

Twenty leases are already signed for 2022 and The Gym Group has a rollout target of 25-30 clubs a year for 2023 and 2024.

These will range in size from 7,000sq ft to 21,000sq ft, with an average of 12,000sq ft, while 20 per cent of sites will be developed using the company’s small box concept.

The Gym Group reported a strong recovery in membership numbers to 718,000 at the end of 2021, up from 547,000 at the end of February 2021.

Darwin said 14.9 per cent membership growth in the first two months of 2022 lifted this number to 825,000 at 28 February in spite of the impact of Omicron in January – a 50 per cent improvement on February 2021.

Revenues were £106m, 30 per cent below 2019, due to lost trading during lockdowns, leading to losses of £28.5m for the year, although trading in the second half of 2021 was broadly in line with pre-COVID levels at £77m versus £79m for 2019.

Darwin told HCM he expects to be back in profit by 2023, with House Broker Numis forecasting EBITDA after rent of £63m and PBT of £9m in that year, as the company rebuilds from the shock of the pandemic. “This recovery will be critical to enable fast growth,” he said.

Trading continues to normalise, with a return to routines gradually happening among members. Gym visit frequencies are back to pre-COVID levels and member satisfaction levels are at record highs, said Darwin.

Trading in the north of the UK is already back to pre-pandemic levels of revenue, but the south has had a slower recovery in revenue, partly as a result of the imposition of work from home guidance [‘Plan B measures’] during the omicron wave.

As expected, clubs in residential areas are trading better than those in city centres, although Darwin points out that there are not many city clubs in The Gym Group portfolio.

The company funded much of its growth from cashflow in the early years, but this stalled in 2020 during the enforced closures, however, Darwin said the business returned to generating free cashflow in 2021 and so will fund expansion from this going forward.

The Gym Group is thought to be one of the best-capitalised gym operators, with financing facilities of £95m available until October 2024, including an option to take on finance leasing. Net debt at Dec 2021 shows at £44.1m in the year-end statement.

Darwin is confident the company is well-positioned when compared with a number of other operators, identifying a ‘weakened competitor set’ – those who have not been paying rent and are now also being hit by a ‘utility shock’.

He expects some competitor sites to close once the government’s rent moratorium

expires at the end of March or for landlords to repossess sites which will then come back onto the market as new leases.

More than 30 per cent of The Gym Group’s estate is in areas where residents are within the bottom 20 per cent of the population in terms of wealth and the company is committed to driving the social value of its operations.

A study by 4Globalin 2021 established social value delivered by The Gym Group between 2016 and 2021 as £1.8bn. Now in 2022, Darwin says executive pay will be linked to social value going forward, as a sign of a commitment to this mission.

The Gym Group has been working with pricing experts at Simon Kucher and Partners to optimise membership rates, identifying a £4 ‘value gap’ against its competitors and intends to selectively raise prices where consumers indicate they still consider the offer to be value-for-money at the higher rate.

This £4 margin gives room to offset any cost increases, such as energy-related price rises which may occur, while still coming out ahead, said Darwin, although the company has capped its energy prices and any increases in salaries would be offset by PT rent increases. “We expect some price increases,” he said, “but not in a way that changes the fundamental economics of our business model and we intend to continue to be a high-quality offer at a very affordable price.”

When assessing price rise threats, Darwin said the majority of leases are on small fixed uplifts or capped at 4 per cent with few linked to inflation and wages only represent 13 per cent of revenue at site level.

The company’s memberships rates have increased in the past year, with standard membership rising 2.4 per cent to £19.27 in 2021 and Live it premium membership penetration growing from 22.5 per cent in 2020 to 27.1 per cent in 2021.

The Live it package gives access to all gyms in the portfolio, so the company expects increased demand for this option as the number of sites increases, especially among members looking for a club near home and also one near work.

Plans for 2022 include a £7m rebrand which will see the company moving from being called The Gym to The Gym Group. This investment has included £2m of rebranding work and an additional £5m set by for ongoing club investment and new signage.

Marketing using The Gym Group name in January and February has already led to a 28 per cent increase in web traffic for this domain name, said Darwin.

Upgrades to the app in 2021 have made it “as good or better than any current competitor app based on app store and android ratings”, he said, while app usage has doubled in the last year and the use of the website by members has fallen as a proportion of overall tech usage.

Also in the works is a new software setup that will launch in April 2022. The new platform will offer deeper data insight into the business and also enable more pages of content, better SEO and conversion. There will also be an increased focus on retailing. Around 3 per cent of revenue is being spent on tech.

Also new is an expanded agreement with Fiit, the tech platform that has been powering The Gym Group’s hybrid offering, as well as serving up content for its pilot club-in-club studios which have been installed in Oxford Circus, Altrincham and Tottenham White Hart Lane.

Darwin said the extended partnership with Fiit will see 200 workouts being available on the app, although members still really enjoy in-person group exercise.

The company is also working with data analyst Merkle and investing more in performance marketing and says it’s growing its market share as the overall market develops.

The Gym Group says it’s the first carbon-neutral gym chain with an offsetting programme of projects in Africa and has targeted, getting to net zero in 2035 when the grid decarbonises. In 2022, it will continue to phase out gas-fired boilers in favour of heat pumps.

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The Gym Group has published its full-year results for 2021 and announced plans to open 28 new sites in 2022, including three gyms acquired this month from Fitness First in Haringey, Leytonstone and Romford, strengthening its clusters of properties in this part of the UK.
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