Basic-Fit VIC Write-Up

Note: All numbers in EUR millions, except per share values and where otherwise noted

Summary

• Basic-Fit (BFIT NA / “BFIT”) is significantly undervalued relative to its future earnings power because investors do not believe the company can achieve its pre-COVID unit economics due to inflation. This is wrong.
• Based on increased adoption of the company’s Premium membership, recently announced pricing actions, and current European energy prices, BFIT can return to its pre-COVID unit economics at mature clubs.
• BFIT has added 416 clubs (+53%) since 2019, growing from 784 to 1,200. As clubs opened during the past few years mature, BFIT will see a significant positive inflection in earnings power.
• As the clear market leader, BFIT has a decade+ growth runway for organic reinvestment at high returns with the potential to expand to >3,000 clubs. Gym membership adoption in Europe is currently ~10% (vs. ~20% in the U.S.) and has been steadily increasing.
• Current price provides significant margin of safety at ~6x 2024 EBITDA for a business growing EBITDA at ~20%. Various ways to frame risk/reward, e.g.: current club footprint at maturity justifies current valuation; France alone likely to be worth current valuation over time.
• BFIT can generate >€5 in recurring FCF/share in 2026 compared to a current stock price of €33, creating an opportunity for upside of 150%+ and an IRR of ~40%.

BFIT was covered in prior writeups by althea (11/2020) and Va1ueJunkie (03/2022). These writeups (including the Q&A) provide useful context. Following an introduction, this writeup focuses on quantifying why BFIT is mispriced today.

Business Overview

• BFIT operates low-cost gyms.
  • Headquartered in Hoofddorp, Netherlands, BFIT is an operator of low-cost gyms with 1,200 clubs and 3.35MM members as of 12/31/2022.
  • BFIT has a presence in 6 European countries: the Netherlands, Belgium, Luxembourg, France, Spain, and Germany. The company started in the Benelux, but France is now its largest market: as of 09/30/2022, Benelux/France/Spain represented 39%/55%/6% of clubs (453/633/74).  
  • The company’s entry level membership price of €19.99 per 4-week period is priced ~50% below the European average of ~€40/month.
• BFIT is similar to U.S. low-cost chain Planet Fitness (PLNT) with some key differences.  
  • Planet is ~90% franchised while BFIT is 100% company owned. There are obviously pros & cons of each model.
  • Planet’s product is slightly different in that it aims to create an environment heavily tailored to members who might not feel comfortable in a typical gym (no free weight barbells, “Lunk Alarm”, pizza night). These changes make Planet’s product worse for diehard exercisers (the most frequent attendees), which also allows Planet to decrease utilization. BFIT obviously wants gymgoers to feel comfortable, but offers a product designed to appeal to all potential members (including heavy lifters).
• BFIT’s product is simple.  
  • BFIT standardizes everywhere possible which streamlines operations and reduces costs.
  • Each gym has 7 zones: strength, cardio, free weights, functional, stretch, virtual cycling, and group classes. Gyms also have a small social corner and a locker room with showers.
  • The gyms are designed to offer a self-serve workout experience (entry/exit automated) and are typically staffed with ~1 employee at a time (2-3 total FTEs per location). That employee is supported by a trainer (not a BFIT employee) that pays rent to BFIT for exclusive rights to train at a club.
• BFIT has grown quickly.
  • Clubs/members have both grown at a 22% CAGR (~6x in 9 years) from 200/0.55MM in 2013 to 1,200/3.35MM today. Consumers have found the company’ simplified product and low cost to be a better value proposition than legacy gym models in every country where it has been rolled out. Growth has come from market share gains and growing the market: ~50% of new BFIT members have never joined a gym before.
  • From 2013 to 2019, BFIT added 1.7MM members. Over that same time period, the Benelux, France, and Spain markets grew from 12.8MM to 15.1MM members, implying BFIT captured ~70% of industry growth.
  • Share gains continued through COVID: since 2019, BFIT’s member base has increased by 51% (+1.1MM members) while the overall industry has been ~flat.
  • In the Netherlands and Belgium, the company’s share of gym members is ~25% and ~2/3, respectively. In France, which the company entered in 2013, ~30% of all gym members belong to a Basic-Fit. The company’s share of low-cost gyms in the Netherlands and France is >50%. In Belgium, BFIT’s share of low-cost gyms is >90%.
• BFIT is the largest gym operator in Europe.
  • By number of locations, BFIT is ~2x the size of the next largest operator in Europe, PureGym. PureGym is currently focused on expanding in its core markets of the UK and Denmark, as well as in the Middle East. PureGym also opened its first locations in the U.S. in 01/2022. PureGym does not operate in any BFIT countries and currently has no plans to do so.
  • BFIT is ~5x the size of the largest competitor (Fitness Park) in its core geographies (excluding Germany) and is adding significantly more locations per year. (BFIT entered Germany in 10/2022 and currently has 5 clubs in the country.)
  • BFIT is the largest company-owned chain globally. Including franchised chains, Planet Fitness is the largest with 2,410 locations and 17MM members.
• BFIT has a simple revenue model.
  • BFIT generates ~97% of revenue from gym memberships and subscriptions to other ancillary products (e.g., unlimited flavored sports water). BFIT also earns a small amount of revenue from advertising, in-club product sales, and from the company’s web store.
  • BFIT offers 3 membership tiers: “Basic” (€19.99/4 weeks); “Premium” (€29.99/4 weeks); and “All-In” (€49.99/4 weeks). The company also recently introduced a “Comfort” membership in France (discussed later). As of 10/2022, Basic/Premium/All-In represented 68%/32%/<1% of memberships.
  • The key differences between the Premium and Basic memberships are that the Premium membership allows customers to use any gym in Europe (as opposed to a single location) and bring a friend when they work out. The All-In tier (introduced in late 2021) is essentially a Premium membership that also provides customers with an at-home exercise bike & customized workout content (think a simplified version of a Peloton). The bike was done as an experiment with the primary goal of increasing customer length-of-stay (by locking members into a multi-year contract) and does not represent a strategic departure from the company’s core gym business. All memberships provide unlimited access to the company’s mobile application which offers a library of content produced at BFIT’s studio in Hoofddorp.

History & Management

• BFIT’s CEO is the best operator in the industry and is aligned with shareholders.
  • BFIT, founded in the Netherlands, has a corporate history dating back almost 40 years. The predecessor business was started in 1984 by current CEO Rene Moos after he retired from professional tennis.
  • Moos spent ~20 years working on various gym concepts before merging his business into HealthCity in 2004. HealthCity was a mid-price chain, but the company introduced a low-cost concept in 2006. Based on his own experience and studying other markets (especially the U.S. / Germany), Moos recognized that low-cost was going to be the winning model and adapted.
  • He began pivoting the business towards the low-cost concept and acquired low-cost chain Basic-Fit in 2010. In 2013, Moos went all in on low-cost and divested the mid-price HealthCity business to focus on the low-cost concept exclusively. The company was re-named Basic-Fit and, also in 2013, Moos took expansion capital from 3i to grow faster (3i still owns 7%).
  • From 2013 to 2016, BFIT more than doubled in size from 200 to 419 clubs and in 2016 the company went public at €15/share. From the Netherlands, BFIT expanded to Belgium, Luxembourg, France, Spain, and, most recently in October 2022, Germany.
  • Today, Moos remains CEO and owns 14% of the company worth ~€300MM. If you ask industry participants who the best operator is, they will consistently say Moos. Even bitter competitors hold him in high regard and frequently admit to owning BFIT stock.
  • Moos has not sold any shares since the IPO (the 2018 sale on Bloomberg is misclassified and relates to Moos’ partner at HealthCity divesting his remaining stake through a holding company). He recently added to his position through an open market purchase in 11/2022.

Competitive Advantage

• BFIT’s competitive advantage has evolved over time.
  • Moos largely succeeded through superior execution at HealthCity and also benefitted from the immaturity of the European gym market which offered significant white space to expand.
  • The pivot to low-cost gave the company a model that had superior baseline economics to other formats and better product-market fit.
  • In the early 2010s, when BFIT pivoted, low-cost gyms were a very small portion of the market. BFIT was primarily competing with two competitors: mid-price gyms (~€40/month); and no gym at all.
• BFIT took share from mid-price gyms because its value proposition was (and is) better.
  • Most mid-price gyms offer amenities like pools, saunas, and sports facilities which are expensive to operate. Most also employ dozens of staff members per location. This expanded cost structure means these operators have to charge more to earn adequate returns. (For context, 24 Hour Fitness, LA Fitness, and the YMCA are examples of “mid-price” operators in the U.S.)
  • Legacy gyms thus optimize for selection and service. The issue with the selection/service model is that it’s very difficult to charge adequately for these features of the product in the middle part of the market. Only a small portion of members use most amenities or are willing to pay for them; most consumers just want equipment and space to work out.
  • BFIT, in contrast, optimizes for price and convenience (proximity / lots of locations). Eliminating amenities and a high-touch service model reduces costs dramatically and allows low-cost gyms to charge less. Most consumers prefer this.
  • Due to these baseline consumer preferences, over time, the industry is bifurcating into low-cost gyms at the bottom of the market and premium gyms at the top, with the middle being hollowed out. In addition to Europe, the share shift away from the mid-market is clearly observable in the U.S. and other regions.
• BFIT attracted new members to the industry.
  • Surveys show that the primary reasons consumers don’t sign up for the gym are proximity and price. Consequently, as more low-cost gyms open, consumers for which proximity/price were the barrier sign up, and the market grows.
  • With ~50% of new members having never previously held a gym membership, BFIT grew the market by bringing a product consumers wanted to areas that either did not have a gym or where the local gym was too expensive, capturing the majority of industry growth in its core markets.
• The competitive dynamic has evolved: BFIT has developed significant structural advantages.
  • Today, the situation is very different from a decade ago. BFIT has numerous advantages that are unlikely to ever be duplicated by competitors. Many of these advantages relate to scale.
  • Scale manifests in a superior cost position, but also differentiates BFIT (e.g., access to multiple locations) often making BFIT’s product both cheaper AND better for a potential customer than that of competing gyms.
• Cost Advantages
  • BFIT achieves significant discounts of as much as 50% (sometimes more) on equipment. This is meaningful as the cost of equipment runs ~€300K or ~25% of the cost of opening a club and represents the majority of ongoing maintenance capex over a club’s life. Scale advantages in purchasing equipment do appear to tail off somewhat after a chain gets to 50-100 clubs; however, BFIT, as the most important customer of Matrix (1736 TT) and a very important customer of Technogym (TGYM IM), is in a strong position to dictate terms.
  • Even compared to other large low-cost operators, BFIT achieves lower build costs. BFIT’s build costs per square foot are ~25% below U.K. operators PureGym / The Gym Group (GYM LN) and ~50% below Planet Fitness.
  • Scale also aids other aspects of operations. Local density allows certain aspects of club operations to be centralized, and BFIT has the resources to invest in national marketing campaigns and membership benefits like its mobile application.
  • Some cost advantages, while only possible at sufficient scale, also required deliberate choices from management. BFIT has invested more into automation than other low-cost chains like Planet Fitness, despite Planet being much larger (the company-owned model also incentivizes more innovation).
  • For example, investments in remote monitoring cameras/software have further reduced the labor required to operate a club (FTEs Per Club decreased from 3.2 in 2015 to 2.5 in 2019). This compares to ~14 FTEs per club for Planet and Crunch (another U.S.-based low-cost fitness chain).
  • BFIT’s operating costs per square foot are ~1/3 lower than PureGym/GYM and ~50% lower than Planet.
  • Because consumers care so much about proximity/travel time, BFIT’s industry-low operating costs are a key differentiator for the company and allow the company access to white space not available to other operators (a la Dollar General vs. Walmart). BFIT regularly opens clubs serving catchment areas of ~30K inhabitants, while Planet typically needs ~75K and leading German operator McFit (RSG Group) typically requires a population of ~100K. Smaller locations / lower operating costs also allow BFIT to open multiple clubs in a given region (discussed below with respect to clustering).
• BFIT is now a well-known brand.
  • Given BFIT’s market share in its core geographies, the brand is often what consumers first think of when they go to sign up for a gym. This will continue to be reinforced by the company’s substantial marketing budget (currently ~€50MM/year). Customer acquisition is easier and cheaper for BFIT. Relatedly, customer length-of-stay is double the industry average, and members who churn often return later.
  • As an example, the BFIT backpack is widely known throughout Europe:
    • Is Basic-fit a gym or just a backpack brand that also happens to run a gym?
    • “I have been asked for several”: the astonishing success of the Basic-Fit bag
• Future competitors will struggle to expand given BFIT’s incumbent advantages.
  • Although it’s relatively easy to open 1 gym or a handful (low barriers to entry), building a new profitable scaled chain in one of BFIT’s markets would be incredibly difficult (high barriers to success).
  • Future competitors face much higher barriers to growth than did BFIT given BFIT was able to expand before there was significant low-cost competition.
  • First-mover advantages are classically thought of as less important in market contexts where something about the product or its delivery can change dramatically (often technology), rendering the old advantage obsolete.
  • Gyms are not changing much. And good locations are a scarce resource. Not only do upstarts face BFIT in a battle for members, but BFIT is in the process of locking up the best locations in key markets throughout Europe.
  • A good location is typically the most important driver of whether a given gym is successful. Because BFIT is the best tenant (from the landlord’s perspective) and opens more gyms than competitors each year, the company is likely to continue to get access to the best locations in the future. The differential in location access is very real and corroborated by industry participants (it is frequently described as the most important benefit of scale).
  • BFIT has further preempted competition by choosing to self-cannibalize and open clubs in clusters, making it very difficult for competition to open nearby. (If interested, see Hotelling’s Law for further discussion.)
• Observed industry developments validate the strength of BFIT’s market position.
  • The most compelling means of understanding how BFIT is pulling away from the rest of the industry is to study specific markets and competitors.
  • Netherlands: #2 operator Fit For Free / Sport City (112 clubs) is in the process of re-branding all of its low-cost “Fit For Free” clubs to mid-price “SportCity” clubs and is transitioning to a mid-price chain to avoid competition with BFIT (https://zaanstad.nieuws.nl/bedrijvigheid/105866/fit-for-free-verder-onder-nieuwe-naam-sportcity/). FFF/SC has opened only 5 clubs in the past 5 years. Meanwhile, BFIT has added 76 in the Netherlands over that same time period including acquiring the #3 operator Fitland (37 clubs) in 2019. With 228 clubs in the Netherlands, BFIT is now ~2x the size of FFF/SC.  
  • Belgium: With 215 clubs in Belgium, BFIT is now ~8x the size of #2 JIMS (27 clubs). Prior to selling to retailer Colruyt Group (COLR BB) in 2021, JIMS had only opened 3 clubs in the past 5 years (vs. 48 new Belgium clubs for BFIT). Like Fit For Free, JIMS has been moving its product up market to avoid BFIT.
  • France: BFIT has added 473 clubs in France in the past 5 years compared to 75 for #2 Fitness Park Group. BFIT is now ~3x the size of Fitness Park. From a standing start, BFIT became the market leader within 5 years of entering the country.
  • Spain: #1 (until very recently) operator AltaFit (80 clubs) is looking to sell: https://www.eleconomista.es/capital-riesgo/noticias/12000567/10/22/MCH-prepara-la-venta-de-los-gimnasios-Altafit-por-150-millones-de-euros.html. Based on the company’s website, BFIT recently passed AltaFit by location count and accelerated expansion in Spain in late 2022/early 2023. AltaFit is struggling and the company’s PE-owner is motivated by maximizing value in a sale prior further expansion in the country by BFIT.

Growth Potential

• Management believes there is room for the company to grow to 3,000+ clubs over time in its current countries.
  • This is reasonable based on the market opportunity. BFIT represents ~2% of 60K+ total gyms in Europe. There are ~65MM gym members of which BFIT represents 3.4MM or ~5%. Independents (< 5 clubs) represent ~2/3 of the market.  
  • In BFIT’s current countries, there are ~230MM inhabitants of which ~11% or ~25MM belong to a gym. This level of adoption is much lower than the U.S. at 20%+ and ranges from ~8% in Belgium to ~17% in the Netherlands. BFIT’s share of members in these countries is ~13% today (low 20s % excluding Germany).
  • Based on an increase in gym adoption to ~15%, at 3,000 clubs BFIT would have ~30% market share in its 6 countries compared to Planet Fitness at ~25% in the U.S. today. Planet plans to dramatically increase its share of the U.S. market from this base, with a target of expanding to 4,000 clubs in the U.S. alone (vs. 2,410 total clubs today). Per management, Planet has ~50% market share of gym members in New Hampshire, its oldest market.
  • As previously discussed, gym membership adoption increases as low-cost gyms grow the market. This has occurred historically in the U.S. and Europe. Adoption was only ~5% in the U.S. in the 1980s and has increased ~45bps/year since 2000. From 2013 to 2019, gym membership adoption in Europe increased from ~7% to ~9% or ~35bps/year. ~50% of new BFIT members have never belonged to a gym before.
• BFIT’s expansion plans are (at the midpoint) based on country targets of: Netherlands 325 (vs. 228 today); Belux 300 (vs. 225 today); France 1,150 (vs. 633 today); Spain 550 (vs. 74 today); and Germany 600 (vs. 5* today). (*Based on company website.)
  • Over the next few years, France will contribute the most to consolidated growth, followed by Spain.
  • There is likely potential to expand to additional countries over time.
• Germany represents a significant long-term opportunity but is not required for the investment to work.
  • Despite stronger incumbent competition in Germany (e.g., McFit/Clever Fit), BFIT has significant scope to expand, in part by targeting smaller catchment areas and new-to-industry members. A full analysis of why Germany is an interesting opportunity is beyond the scope of this writeup, but those interested in digging deeper will find that McFit and Clever Fit are not particularly well-managed businesses. As an example, McFit did not open a single net new location in Germany from 2013 to 2018, while capital was largely diverted to vanity projects of the (sadly, now deceased) founder. McFit’s attempts to expand outside of Germany have largely been unsuccessful.

Current Situation & Why the Opportunity Exists

• 2021
  • BFIT outperformed in 2021 on anticipation of accelerated growth and an improved competitive position after COVID lockdowns weakened smaller competitors.
• 2022
  • In 2022, the company grew its member base by 50% as customers returned following the lifting of the last significant COVID restrictions. However, a guidance cut and delay in club openings coincided with underperformance in the stock.
• Timeline
  • Capital Markets Day (11/2021)
    • At the company’s Capital Markets Day on 11/03/2021, BFIT provided 2022 guidance of €800-850MM of revenue, EBITDA of ~€240MM, and membership growth of ~1MM. The company announced that it would accelerate its pace of club openings to 200-300 per year (vs. 100-150 over the prior 5 years) and planned to end 2022 with 1,250 clubs.
  • Omicron
    • The Omicron wave which began in ~11/2021 delayed membership growth in late 2021 and early 2022. A portion of clubs closed and additional restrictions were implemented.
  • 4Q21 Full-Year Results
    • At 4Q21 results on 03/09/2022, BFIT stated that guidance continued to be feasible. Based on 12/31/2021 members of 2.22MM, member growth of at least 1MM implied 12/31/2022 members of 3.22MM+.
  • 1Q22 Trading Update
    • At 1Q22 results (04/21/2022), the company stated that guidance continued to be feasible.
  • 1H22 Half-Year Results
    • At 1H22 results (07/29/2022), the company stated that revenue guidance of €800-850MM continued to be feasible, while reducing EBITDA guidance by 6% to ~€225MM.
    • BFIT also increased member growth guidance to 1.3MM implying expected year-end members of ~3.5MM. The increase in member guidance was due to lower-than-expected churn and higher-than-expected gross member adds that continued throughout the summer.
  • 3Q22 Trading Update
    • At 3Q22 results (10/28/2022), BFIT reduced revenue guidance to ~€800MM and reduced EBITDA guidance by 10% to €200-205MM.
    • The company also reduced membership guidance from ~3.5MM to 3.35MM (just a few months after raising this target).
    • The consistent theme across the industry (see PureGym / GYM LN public commentary) is that September member trends were worse than expected. This may have coincided with peak negativity in Europe (see numerous headlines). Regardless, the weakness appears to have been broad-based. It’s also worth emphasizing that YTD trends through July were unusually strong, which management extrapolated.
    • BFIT also announced that ~50 clubs which were originally planned to be opened in 2H22 would now be opened in 01/2023.
  • December Update on KPIs/Energy/Pricing
    • On 12/29/2022, BFIT announced that club growth and members was in line with October guidance.
    • The company also announced that it had reached an agreement to fix prices for 100% of its anticipated 2023 electricity consumption in France. With that contract in place, the company has locked in 75% of its total anticipated 2023 energy needs.
    • The company also announced it would increase the price of its entry-level membership in France from €19.99 to €24.99 for new members, or by approximately 25%. The new “Comfort” membership tier allows members access to all locations in France (but not in other countries).
• Current Setup
  • Results were messy in 2022 which created significant confusion regarding where BFIT’s earnings power will settle post-COVID. Investors saw a fast-growing company pull back on growth right as inflation was calling unit economics into question and the stock sold off.
  • The remainder of this memo focuses on estimating where unit economics will settle.

Bridge to Run-Rate Unit Economics

Historical Unit Economics

Prior to COVID, BFIT spent ~€1.2MM to open a club that averaged ~16K square feet and would generate revenue/EBITDA of ~€840K/€420K at maturity (~50% EBITDA margin). Clubs would break even at ~1,700 members after ~5 months and reach maturity after ~2 years at ~3,350 members.

These targets were consistent with actual historical results. In 2019, BFIT reported average EBITDA at mature clubs (defined as clubs open 2+ years at the start of the year) of €427K and operating expenses per average club of €418K.

After accounting for time to ramp and allocating a small amount of incremental required overhead, IRRs on new clubs were ~19% (compared to the 21% on simple math shown below):

BFIT also historically operated with ~2x net debt / EBITDA and borrowed at LSD%, making levered IRRs meaningfully higher.

Historical Club Opex

The most significant components of club opex are rent and labor. Energy is also broken out below. “Other” includes cleaning/sanitization, expensed repairs/maintenance, consumables, bad debt, and additional expenses.

1H22 Club Opex

BFIT has not yet reported a full P&L for the second half of 2022. We can use 1H22 as a guide, but given some closures stretched into 1Q22 (Netherlands clubs opened on 01/15/2022), it’s a bit difficult to parse.

1H22 opex per club increased 3% compared to 2019:

Assessing Pro Forma Opex/Economics

Guidance does not imply a dramatic increase in opex per club in 2H22. However, European inflation averaged 8% throughout 2022 and was higher in the second half, indicating 2023 will likely see opex per club increase meaningfully year-over-year. BFIT has faced labor inflation (including minimum wage increases) and increased rent for a portion of clubs that are indexed to inflation. Energy prices were fixed for 2022 but will increase significantly in 2023 as fixed-price contracts end.

BFIT’s 3Q22 release (10/28/2022) reiterated that the company expected to return to 2019 EBITDA levels at mature clubs and that an increase in revenue per member would offset cost inflation.

However, as previously stated, BFIT’s current valuation implies that this will not occur. The following analysis walks through the key components of club operating costs to derive a pro forma estimate of unit economics in 2023 and later years.

Rent

Estimated rent expense per club will increase by 13%/14% in 2023/2024 compared to 2019, or by €20K/€22K per club:

Note that the mix of clubs with fixed escalators and those indexed to inflation is estimated based on public inflation data combined with rent per club progression from 2019 to 1H22. Management has stated that the majority of contracts have caps on annual rent increases.

Labor

Estimated labor expense per club will increase by 22%/18% in 2023/2024 compared to 2019, or by €23K/€19K per club:

Energy

Energy prices fluctuated significantly in 2022. From a peak several months ago (see Appendix), prices have decreased materially. As mentioned, BFIT provided an update on 12/29/2022 announcing that it had reached an agreement to fix prices for 100% of its anticipated 2023 electricity consumption in France. With that contract in place, the company has locked in 75% of its total anticipated 2023 energy needs. Below, energy expense is estimated based on disclosure from that press release, otherwise using prices implied by the respective forward curve for each country.

Estimated energy expense per club will increase by 110%/128% in 2023/2024 compared to 2019, or by €27K/€32K per club:

Energy pricing is complicated and typically a number of charges (tax/network/capacity/usage) are bundled into one bill. For that reason, the below has been simplified to a EUR/mWh equivalent:

Total Pro Forma Club Opex

Taking these items together, the net result would be an expected increase in club opex of 21% in 2023 compared to 2019:

And by 23% in 2024 compared to 2019:

Hypothetical Impact to Club EBITDA ex Revenue Adjustment

Based on pre-COVID revenue of €840K, absent any offsetting factors, a 21%/23% increase in club opex would cause mature club EBITDA to fall by 21%/23% and club margins to decline to 39%:

New club returns on an EBITDA/Invested Capital basis (vs. a €1.2MM build cost) would decrease from ~35% to 28%/27%. On a cash flow/levered basis, returns would fall materially (esp. accounting for higher rates).  

Membership Mix Shift & Pricing Actions

However, revenue per club will increase materially relative to 2019 due to several drivers:

• Premium: Increasing adoption of BFIT’s Premium (€29.99/4 weeks) membership.
  • In September, BFIT modified its membership tiers, limiting access to a single club for new members choosing its entry-level Basic membership. Previously, the Basic tier provided access to all clubs across Europe, a feature valued by members who live near multiple gyms, work out by both home and work, or travel frequently. Following this change, ~50% of new members are now choosing the Premium membership.
  • By the end of 2022, Premium members will represent >30% of all members (32% as of 10/2022) compared to ~20% at the beginning of the year.
  • (Each 10% of members that is converted from Basic to Premium is equivalent to a price increase of ~5%: ~50% pricing uplift x incremental adoption by 10% of total members.)
• Comfort: Introduction of France “Comfort” membership on 12/29/2022.  
  • BFIT announced in December that the company would increase the price of its entry-level membership in France from €19.99 to €24.99 for new members, or by ~25%.
• Surcharge: A 1 Euro surcharge which will go into effect for certain existing members beginning 03/2023 in the Benelux and France.
  • Certain BFIT members received an update from the company in December communicating that prices for existing members will increase by €1 beginning in March. This increase will apply to members in the Benelux and France who have been under contract for a minimum time period.

As Premium adoption continues to run at ~50% of new members, the Comfort membership replaces Basic for new members in France, and the €1 surcharge gradually applies more members, the membership base should evolve over the next few years in a manner similar to the below:

~2/3 of Planet Fitness members pay for premium (the company’s “Black Card”) and BFIT will likely be able to continue to increase adoption over time.

Pro Forma Revenue Per Member

As a result of these changes, estimated revenue per member will increase by 16%/19% in 2023/2024 compared to 2019:

As shown above, increased premium adoption is the most important driver of growth in revenue per member. Based on current trends, average premium adoption will increase from ~10% in 2019 to ~40% in 2024. Swapping ~30% of the member base from a €19.99 membership to a €29.99 membership (~50% uplift) is equivalent to a ~15% total price increase.

Benchmarking Current BFIT Pricing vs Competitors

In 2022, many competitors took substantial price increases to offset inflation. Even after recent pricing actions, BFIT remains the lowest cost option:

Competitors have been adjusting pricing fairly frequently (e.g., increases, turning on/off registration fees, changing membership options), but the above is representative as of the start of the year heading into January signups. Year-to-date, SportCity and JIMS have already increased their base prices to €27.99/€29.99 per 4-week period. There will likely be additional increases in 2023 by competitors, preserving a healthy pricing umbrella.  

If the change goes well in France, the €24.99 Comfort membership will likely replace the €19.99 Basic membership in the Benelux. This would increase revenue per member by another 3-5% over time (not assumed in this writeup).

Member Per Club Walk

A key debate during lockdowns was whether members would return. As of 12/29/2022, when BFIT last provided an update, members per club had recovered to within 1% of pre-COVID levels. BFIT will likely exceed its pre-COVID level of members per club in 2023 as older members return and units opened during COVID mature:

Per BFIT’s 3Q22 press release (10/28/2022): “…we expect that the average number of memberships at mature clubs will be higher in 2023 than in the pre-COVID years.”

Total Pro Forma Revenue Per Mature Club

Together, these revenue adjustments will drive an increase in revenue per mature club of 15%/18% in 2023/2024 compared to 2019, or by €123K/€147K per club:

Pro Forma EBITDA Per Club

With this increase in revenue, BFIT will return to (and exceed) pre-COVID EBITDA at mature clubs. Mature club EBITDA will increase by 8%/12% in 2023/2024 compared to 2019, or by €33K/€50K per club:

Although not required to achieve attractive club-level returns, management has done very well at controlling costs over time, and it would not be surprising to see opex per club come in lower than assumed here.

Build Costs & Post-COVID ROI

Historically, new club build costs of ~€1.2MM broke down as equipment/construction & building modifications/other of €300K/€750K/€150K or 25%/63%/13%. BFIT has locked prices for most of its equipment needs in 2023. However, the construction pricing outlook is in flux, and there remains some uncertainty on build costs in 2023 and later years. Discussing build cost inflation with private operators yields a wide range of answers.

BFIT believes build costs will remain at ~€1.2MM in 2023 (CFO, 07/29/2022):

• “The average initial capex for newly built clubs was €1.16 million in [1H22] compared to €1.17 million in [1H21] … Given we have fixed prices for a lot of products and we are still able to benefit from increasing scale and more cost-efficiencies, we should be able to remain at around €1.2 million also next year.”

Planet Fitness has estimated that build cost inflation relative to 2019 is currently running ~10%* and expects this to come down. Although Planet operates in another geography, this is a useful sanity check (CFO, 11/15/2022):

• • “There’s very few things you can build today that cost at or less than what they did in 2019. Now, the good news is some of those costs are coming down … realized costs might be $200-300K more than they were before. [Some franchisees] are just going to keep going because the returns are still quite good. [Other franchisees are waiting] until those costs come back in line.”   

*An increase in build costs of $200-300K would represent inflation of ~10% compared to PLNT’s typical build cost of ~$2MM (typical investment range $1.6MM-$3.7MM per FDD).

Prior to COVID, BFIT targeted a 35% EBITDA/Invested Capital return on new locations (min. 30% hurdle). Based on the above mature club EBITDA, the company will achieve >30% on returns even if build costs increase by as much as 25% to €1.5MM.

With build cost inflation of 10% or less, returns will actually improve:

2026 FCF/Share & Valuation

Building off of these go-forward unit economics and modeling growth over the next few years, BFIT can generate >€5/share in recurring FCF in 2026:

This has the potential to result in a share price of €80+ and upside/IRR of 150%+/~40%:

Note that FCF would increase meaningfully relative to the above once all ~2K clubs were mature.

Earnings Power of Existing Clubs

Even if BFIT did not open another club, at maturity the current club base will likely generate FCF equivalent to more than 10% of the company’s current market capitalization:

How would BFIT perform in a recession?

• Given ongoing maturation of existing clubs, BFIT’s Member Base is highly likely to grow in 2023 regardless of the economic backdrop.
• Management believes that the company is well-positioned for difficult economic periods, stating in the company’s half-year report that:
  • “In the more than 35 years that management have been in the sports/gym business, we have seen membership developments being very resilient in different economic circumstances and even reacting positively in times of recession.”
• While every recession is different (e.g., inflation backdrop), management’s statement is credible based on observed historical data:  
  • Fitness is not cyclical generally as members place greater value on the low cost of a few dollars per workout during periods of economic weakness. In the U.S., from 2006 to 2019, U.S. health club revenue grew every year including during the GFC and ensuing recession, increasing by 2% in 2009 (5% overall CAGR or ~2x GDP).
  • During the GFC, Planet Fitness benefitted from consumers choosing to trade down to the lower-cost alternative. From 2008 to 2009, Planet members increased by more than 50%, driven by same-club revenue growth of greater than 20%.
  • McFit (Germany #1) members per club increased every year through the GFC from 2007 to 2010 (this can be verified through private company filings).

Risks

• Fixed Costs / Unit Economics Levered to Key Variable
  • The model is highly sensitive to members per club. New locations can underperform old locations or members can leave.
• New Geographies
  • Moos’ past actions with respect to exiting/avoiding bad markets (e.g., Italy) indicate that he will not continue to burn capital in a country like Germany if things don’t go as planned. However, determining whether Germany, or even Spain, will “work” could take a number of years.
• Energy Prices
  • If energy prices doubled relative to what is implied by the current forward curve, FY24e mature club EBITDA would decrease by ~€50K or 11%. In that scenario, returns would remain >30% with up to 15% build cost inflation.
  • It’s possible that energy costs could increase again to the extreme levels seen last year. This is unlikely to impair the business long-term given such a scenario would likely produce significant bankruptcies (and thus member overflow to BFIT) – while also prompting a government response. However, it could cause temporary swings in earnings and/or a slowdown in club expansion to preserve liquidity. This obviously played out in 2022 with respect to the stock. If energy prices continue to decline, BFIT will likely be able to lock prices in for longer taking this risk off the table for a multi-year period.
  • Of course, the same works in reverse. If energy prices fall to historically normal levels, profitability will expand significantly as BFIT will keep the revenue/member benefit.
• Liquidity
  • BFIT had €174MM in available liquidity (cash + revolver) as of 3Q22. BFIT should see modest cash burn through 2H23 at which point the company should be FCF positive (even after new clubs). BFIT is currently significantly FCF positive prior to capex spent to open new clubs. Given expansion can be slowed if needed, the risk of requiring additional capital is very low (absent lockdowns). The company should be able to open ~200 clubs in 2023 without going materially below €100MM in liquidity.

January 2023 Datapoints

• We can observe from BFIT’s website that openings are progressing well in January, and BFIT announced 21 openings in France on 01/02/2023. Website data also indicates an acceleration of expansion in Spain.
• The Gym Group (GYM LN) released a trading update on 01/12/2023 stating that the January period had started in line with expectations. Given GYM’s recovery has lagged BFIT’s due to a greater number of city-center (London) locations impacted by work from home, this is likely a positive read-through.
• Calls with private competitors indicate that January was a strong month for new member growth.

Appendix – France Baseload Power Forward Year 1 Index