Core stock: Europe’s largest fitness chain (OTCMKTS: BSFFF)

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The following segment is taken from this fund letter.


Basic fit (BSFFF)

Basic-Fit has been the subject of a lot of buzz lately, especially after being featured on the Business Breakdown podcast (we promise our research started long before the podcast is out!).

Basic-Fit is Europe’s largest fitness chain with over 1000 clubs across Europe and over 2 million members, focusing on providing a convenient and inexpensive gym experience. Basic-Fit’s research reminded us of the quintessential newbie business example, where a single “lemonade stand” generates large profits reinvested to create a chain of lemonade stands.

Likewise, the average Basic-Fit club has an after-tax return on investment of 20% or more (our calculation), thanks to a lean operating model with minimal staff per store, bulk equipment discounts in due to scale and an ability to spread market costs across multiple stores via their cluster strategy.

Basic-Fit is led by René Moos, a former professional tennis player, who started HealthCity in the Netherlands in 2004. What was originally a mid- to high-end gym concept evolved into Basic -Fit (via additional mergers and divestitures) which focused on the low-cost segment of the market after the success of Planet Fitness in the United States.

The company operates in France, the Netherlands, Belgium, Spain and now Germany. It has a significant scale advantage over its competitors in most of its markets and implements an aggressive cluster strategy. This means opening several clubs in a particular region over a short period of time, thereby increasing the accessibility of clubs for gym goers.

Number of clubs 2020 by county

We believe this increase in accessibility will also increase the penetration of gym goers in Europe, which is significantly lower than in the US (8% vs. 20%+). This has been proven by concrete examples of Basic-Fit entering the markets and increasing the penetration of gym goers in the cluster (thus not only taking a slice but also increasing the pie).

When we spoke to the company, one of the big questions we had was why one of their competitors couldn’t copy them – and the company admitted that what they were doing wasn’t rocket science . But after further conversations with the company, other investors, as well as our internal discussion, we came to two conclusions.

On the one hand, an aggressive expansion strategy (the goal is to reach over 3,000 clubs by 2030) requires a few special ingredients

  1. solid execution
  2. access to capital and
  3. an aggressive but capable leader.

We think Basic-Fit has all three.

Second, we think their scale simply makes them hard to compete with.

In the table below you can see that we are comparing a single Basic-Fit club with two hypothetical competing clubs, the first (competitor A) trying to compete on price and the second (competitor B) trying to copy exactly Basic-Fit.

competitors

We assume similar rent/staff cost/other operating costs (although due to its scale Basic-Fit does have rent reductions in some markets and due to the configuration of its clubs they may operate with small teams). We then incorporate benefits for maintenance investments and initial investments required because, according to industry experts, Basic-Fit is at least 30-40% discounted compared to family gyms and 20-20% 25% compared to other decent sized players. .

As can be seen, the ROIIC is significantly lower for the two hypothetical competitors. So even if competitors do pop up (which is always a possibility), we doubt they’ll do as well as Basic-Fit.

Now, investing in Basic-Fit involves certain risks. On the one hand, the company has about 550 billion euros of net debt on an equity base of 410 billion. Additionally, we believe the company will need to borrow more over the next 3 years to meet its expansion goals of around 250-300 clubs per year. That said, we believe that despite the high level of leverage, leverage ratios will actually decline as clubs begin to generate EBITDA following the covid shutdowns.

Second, many of our internal IRR figures (which are around 25%) are based on the company meeting its 2025 targets of around 2,000 clubs and its 2030 targets of around 3,000 clubs. . What we have learned over the past few years is that a lot can happen between now and then.

So, we will slowly move into the position as the business runs.


Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

Mary I. Bruner