Down 55%! Should I buy this FTSE small-cap stock at £1.36?
One stock from the FTSE small-cap index that has been steadily recovering over the past couple of years is The Gym Group (LSE:GYM). Now at 136p, shares of the budget gym chain are up 63% since a post-pandemic low of 83p in April 2023.
Zooming out a bit further though, the stock is still down 55% from a high of 307p in June 2021. If it were to reach that price again, an investor could more than double their money by investing today.
Is this a stock that can pump up my portfolio? Let’s take a closer look.
Solid set of results
For those unfamiliar, the company was a pioneer of the low-cost gym model, offering 24/7 access and flexible, no-contract membership. I used to be a member a few years back and my gym was spacious with adequate equipment for the equivalent of less than £5 a week. Bargain stuff.
Today (12 March), we got the group’s full-year report for 2024, and there was a lot to like. Revenue grew 11% year on year to £226.3m, driven by an increase in both membership numbers and pricing.
Members rose 5% to reach 891,000 by the end of the year. And 12 new sites (half in London) were opened, at the top end of guidance, bringing the total number of gyms to 245.
Meanwhile, profitability improved significantly, with the firm swinging to a pre-tax profit of £2.5m compared to a loss of £8.3m in 2023.
We’ve just been through the peak recruitment months of January and February, when the motivation to sweat off those extra Christmas pounds is still high. So it’s encouraging that management says revenue for the first two months of 2025 grew by 8%. Like-for-like revenue was up 3%, while the membership at the end of February was 951,000.
Looking ahead, the company plans to open 50 new sites over the next three years, including up to 16 gyms this year. This expansion will be funded entirely through free cash flow.
With cost-of-living pressures still ongoing, I wouldn’t bet against 1m+ members in future.
Should I buy Gym Group stock?
The stock’s price-to-sales ratio is just 1.1, which isn’t particularly expensive. On this basis, the valuation looks decent, though the net profit margin is sill razor-thin. It wouldn’t take much — rising costs or another pandemic-style event — to put the group back into loss-making territory.
Last year, net debt was reduced by £5.1m to £61.3m. But that’s still higher than before Covid, when it stood at £47.4m.
The company has been raising prices to improve revenue per member. Last year, the average price of its standard membership rose 6% to £24.53. My worry with this though is that there might be limited pricing power from now on due to relentless competition.
Speaking personally, I have several different gym options within a five-mile radius, and nearly all offer contract-free memberships and half are open 24/7. The monthly price of my local leisure centre, with its two swimming pools, isn’t much more than the nearest Gym Group location.
This well-run company is performing nicely and the stock could have further to run. But weighing things up, I’m not going to invest. I prefer firms with distinctive and durable competitive advantages, and unfortunately I don’t find that here.
The post Down 55%! Should I buy this FTSE small-cap stock at £1.36? appeared first on The Motley Fool UK.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Gym Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
