- Uneven start to trading in 2023, macro headwinds
- Lower pace of new site openings
- FY23 profit to be lower as cost inflation bites
Low cost, no contract gym operator The Gym Group (GYM:AIM) disappointed investors after giving a cautious outlook and reporting an ‘uneven’ start to trading in 2023.
The company said it expected a difficult macroeconomic environment to impact consumer demand throughout the year, while cost increases are anticipated to offset increased revenues.
The shares fell 18% to 97.2p and sit 50% below where they were trading a year ago and two thirds below pre-pandemic levels.
Chairman and co-founder John Treharne commented: ‘It is now clear that it will take a longer time to return to pre Covid-19 levels as a result of both the changes to customers’ everyday lives and lifestyles and the macroeconomic headwinds that we are all facing.
‘Therefore, it is right to manage the business tightly in 2023 and to focus on providing low cost, high quality, 24/7 gyms to our members.’
After more than seven years with the company CEO Richard Darwin will step down in July 2023. Meanwhile Treharne will become executive chair to assist with the transition until a replacement is found.
WHAT ARE THE FINANCIAL IMPLICATIONS?
After opening 28 new sites in 2022, its highest ever, the firm intends to take a more measured approach in 2023 targeting 12 new sites, fully funded from internal cash flow, down from 20 sites previously guided.
Numis has lowered its forecasts to reflect new guidance reducing 2023 revenues by 5% to £200 million and (earnings before interest, tax, depreciation and amortisation) EBITDA by 20% to £36 million.
This implies a 5% fall in EBIDTA compared with 2022 and is still 22% shy of the £48.5 million achieved in 2019 despite the group operating a third more sites.
Numis puts this down to higher utility costs and slower than expected recovery in memberships.
Gym group said it expected to remain within its leverage target of net debt to EBITDA between 1.5 and two times having ended the period at the upper end of the range.
OTHER VIEWS
Russ Mould, investment director at AJ Bell, commented: ‘The company may be pushing hard but it’s still proving difficult for The Gym Group to bear the weight of escalating costs.
‘Non-property net debt jumped in 2022 from £44.1 million to £76.1 million to fund the remainder of a site roll-out programme and to buy three sites from Fitness First.
‘With membership growth starting to slow and with the inflationary pressures the company is facing, The Gym Group is having to take a different approach.
‘It is a sign of the company’s caution that it is now pledging to only fund new sites from its own cash flow and while such prudence is no bad thing it does mean investors will have to face up to a slower pace of growth.
‘Whoever comes in to replace the departing CEO Richard Darwin will really have to flex their corporate muscles to help win the market over to the story once more.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (James Crux) own shares in AJ Bell.
