Basic Actions: Long Term Beneficial Power Intact (BSFFF)
The following segment is taken from this funding letter.
Basic-Fit released its fiscal 21 results in March, which reflected a number of very positive developments, including the resumption of club operating hours, the return to new construction of gyms and entry into their new German market in the second half of 2022. The rollout to a new country will undergo a slower 20-club test period, but Basic-Fit believes the market for fitness in Germany has the capacity of 600 BFIT clubs over time.
This is bad news for the struggling, indebted and low-growth McFit, currently Germany’s largest fitness operator, but great news for us. I continue to believe that the path to 2,000 clubs by 2025 remains feasible, which will result in significant free cash flow generation from self-financing of the business in 2023.
Europe is currently experiencing its own problems, particularly on the inflation and energy fronts. When it comes to inflation and the cost of capital, Basic-Fit doesn’t need to tap debt markets anytime soon, nor has it seen an increase in churn or the inability to open new clubs from a cost perspective or when consumers are in a hurry in areas such as food and energy. . Part of the appeal of being the low-cost provider is that the monthly price of BFIT membership is only a small portion of consumers’ budgets, pushing gym membership up. low on the list of costs that consumers would eliminate during tough times.
On the corporate side, Basic-Fit is contracted with fixed prices until 2023 for things like utilities at each of their clubs, providing visibility until at least next year. In other words, they are not exposed to the energy price increases that occur in almost all of their markets. While BFIT will see small wage increases, most of the increases are for minimum wage employees, and gym rental costs are capped in each of their contracts going forward.
While there is a “careful” element to the cost structure given the macro environment, I continue to believe that management is minimizing the potential operating leverage inherent in the business model with continuous scale, as equipment costs, energy costs and investments in technology will reduce total operating costs per gymnasium. This is not included in any assessment or discussion of unit economics from management, despite the fact that it will almost inevitably happen if BFIT continues on its current trajectory.
Lease savings, if they occur, will only add to the positive leverage. Despite the company’s strong competitive position and positive developments, Basic-Fit cannot take a break. The company’s last two years have been marked by the coronavirus, followed by variants of the virus, the war in Ukraine and even a series of short-lived titles reporting the reappearance of Monkeypox in a few of the markets. of BFIT. Moreover, Europe is now facing its own set of problems, especially on the inflation and energy fronts.
So why would we want to own Basic-Fit? Despite the negative headlines, the company’s last three business updates have reflected nothing but positive news as it returns to building clubs to maturity and expanding geographically. Long-term earnings capacity is intact. Moreover, we paid a pittance for this long-term earnings power. Anything below 10 times the owner’s income for just the current base of mature clubs, excluding future growth.
Keep in mind that during any additional tough economic times, BFIT may actually benefit from such momentum. Government grants for small businesses have ended, and mom and pop gyms, with their lack of scale and higher cost structures, would have serious difficulty handling further declines in membership revenue. I have yet to find a competitor, executive or industry expert who can help me dismantle the investment thesis for BFIT.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.