Pancho et al.
I have found your argumentation very convincing, but I suspect the reason why the stock has not fallen (so far) is something like this:
Most of us have had the experience to visit and join local health clubs (maybe not chains). The barriers to entry are not high (a few large rooms, $75,000 in exercise equipment if it is bought used, two showers, changing and toilet facilities. $100,000 can get you in business in a small town, or less if you take over a club that couldn't make it before.
After the initial investment is made, the cash flow should be overwhelmingly positive. People pay in advance, operating costs are low (utilities and minimum wage staff). Marketing is overwhelmingly local, and usually cheap or word of mouth. Maintenance of machines is fairly straightforward in most cases. The only real question is what sort of return on investment will the initial cash outlay receive? A gym's success is measured by retention rate, and its ability to max out its capacity (and measuring capacity is simple for a user -- are the machines available, or the classes full, during peak periods).
So, in essence, it is a simple business, one in which service and friendliness and atmosphere count, and quality instruction and/or personal trainers.
In thinking this over -- Bally hasn't managed to fulfill on any of these, and as stated before, the barriers to entry are low, and competitors are everywhere.
What sort of advantages could a BFIT bring as a large operator or consolidator? To visit gyms anywhere in the country (if you travel, you know you can pay to visit once, or get into a gym through your hotel, etc). Back office savings (maybe a little, but management and staff typically have plenty of down time in slow periods to take care of paperwork). Purchasing? Most small operators purchase a significant part of their equipment used. BFIT may get discounts from large vendors, but is it significant? Real estate or leaseholds? BFIT will get into more exclusive or high priced leaseholds, but they will also have to guarantee it -- small guys can walk away from bad locations with a local corporate bankruptcy. The only real advantage BFIT has is in financing -- but that brings us back to leverage.
The thing that amazes me about this company, and I have not crunched the numbers, is that on an operating basis (excluding capital expenditures and debt service) that it is not strongly cash flow positive. How is it that they can't fill their gyms to the point that they reach break even? Are they that expensive to operate? It does not take too much of an imagination to imagine an operating turn-around of this company, unless there is something so fundamentally flawed with their leaseholds and structure...it should be so simple. Another way to think of it is -- are there no advantages to a "mega-gym". Or is smaller and personal simply better. I know of many gyms that operate successfully in smaller communities with between 300 - 500 members.
Am I not thinking straight here? It is true I see no synergies, no advantage to being big, only management problems and impersonal service. Lots of competition, with better local management and pricing and lower overheads. The thing is, with the leverage they have, the borrowing, if the cash flow ever goes positive than watch out, it could be ballistic upwards. Admittedly, it looks a lot more like the Titanic from here, ballasting to stern.
I'll be watching this one going forward. |
