Sector financial performance:

This company, which primarily owns and operates fitness clubs in Northeast regions earning revenue primarily from membership fees and personal training/programs, has been grouped into gyms, fitness, and spa center sector in sport centers industry.

It seems that the demand for fitness clubs/centers of those companies in this sector has become strong in the past three years as indicated by the largely increased revenue in their same store sale (average 6% annually in 2017 and 2018) during the same period. The increase seems to be due to higher average monthly dues per member and, to less extent, to increase in members. The initiative and processing fees decreased due to companies’ business strategy. Companies, benefited from increased same store sales, expand its new store fast (13% annual growth in number of stores in 2017 and 2018).

The increase in demand and thus the increase in revenue (dues) and cost cutting helped largely improved companies’ gross margin. The typical gross margin of companies (including operating costs and depreciation) is about 29% with a large range of 10-50%) in 2018, SG&A as percentage of sales is about 10%, and operating margin is about 20% in 2018.

The typical enterprise price/EBI (adjusted with tax field) ratio is 50.

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Company performance:

It seems that the demand for fitness clubs of this company has been increasing fast between 2017 and the first quarter of 2018 as indicated by the increased same store sales and expansion of its stores. The increase in same store sales was due primarily to increased average dues per membership and benefiting from higher annual fees, and, to less extent, to increased number of members. Initiative fees and processing fees have continuingly decreased. However, it seems that comparable revenue growth creased and decreased in second and third quarters as increase in membership due ceased and clubs lost members.

The first nine months of fiscal 2018 compared with the same period of 2017 (ended April 1, 2018)

Net revenue increased 10.7%.

Same store sales increased 1.7% due to increased average dues per membership and increased personal training revenue. Membership counts have decreased.

Number of stores increased 10%.

The first three months of fiscal 2018 compared with the same period of 2017 (ended April 1, 2018)

Net revenue increased 8%.

Same store sales increased 1.7% due to increased average dues per membership and increased personal training revenue. New membership still grows but the pace gets slow.

Number of stores increased 11%.

Fiscal 2017 compared with fiscal 2016

Net revenue increased 1.5%.

Same store sales increased 1.6% due to increased average dues per membership and increased members offset by decrease in initiation fees.

Number of stores increased 10%.

Fiscal 2016 compared with fiscal 2015

Net revenue decreased 6.5%.

Same store sales decreased 4% due to lower average dues per membership and decrease in initiation fees.

Number of stores was flat.

Its gross margin (including direct operating costs and depreciation) has been significantly improved in the past three years from about 1% to about 10% due to increased revenue (dues mainly) and cost cutting (including operating expenses and closure of stores). With an improved SG&A as percentage of sales (down to 6% in 2018), we have seen much improved operating margin during this period (about 4.5% in 2018). 

Stock price

This company is having an enterprise price/EBI ratio of 32.  We think that its stock was relatively overvalued considering limited space to raise membership fees and continuing decrease in member counts.