Credit downside case for boutique gym business
I have been given a credit study where I need to write a investment memo on a gym business (Xponential Fitness).
what would people suggest I use as the downside case and what evidence would I use to back up the assumptions. Such as a peer experiencing X% drop in revenue etc
also where would I get helpful industry information regarding boutique gyms such as market landscape and competitors
Thanks in advance all!!!
Don’t know where you would find the info on industry research but I would look toward research on how gyms perform during GFC/Covid.
As far as risk/assumptions behind X% drop in revenue - I would think about another tragic occurrence of COVID like pandemic, competition from larger players in gym space who have better price point + services, and lastly consumer cut back on gym spend + pivot to in home services that’s more convenient.
Quick thoughts but hope this is helpful.
Thanks so much! I was thinking 30-50% rev drop. What would you suggest I do with the cost base?
Why 30%? Why 50%? You need to have reasoning behind the shape of your cases.
For cost base you generally need to bucket costs into fixed and variable, and many will be mixed.
^second this. Also, think about how variable can help the business and how that looks for the fitness industry (Variable vs Fixed), and if they have a demand shock how they could alleviate near terms pressure to CF by getting rid of those costs
Is it sufficient to say 50% drop was peers during Covid so I’m assuming 30% because Covid was abnormally bad. What other justification and datapoints could I use to get the right drop in revene.
Thank you so much!
Depends, is your downside case that another COVID event happens? If so, that’s a reasonable comp. If your downside is just “this bad thing happened last time so I picked that” then it’s less compelling.
Seconding what Associate 2 in PC said... your thesis needs to focus on why your assumptions make sense.
Which one(s) are the answer and what circumstances would cause them to re-occur?
There's no quick and easy answer here and you shouldn't think of the test as if there is a right answer. I would suspect the purpose of the test is to see how you think through the problem and why you come up with your thesis. Think of it like the question Bezos always asked people about "how many windows are in the city of Seattle?"
Some high level things to consider would be (1) how many people go to this gym? (2) What could cause people to stop going to the gym? Here I am thinking about GLP-1 drugs and general belt tightening if the economy goes south (3) I am unfamiliar with the offering of this gym, but if it is premium like Equinox or Lifetime, how much can they increase prices in the event that they lose recurring attendees? (4) If they were smaller or larger during '08, find publicly traded comps that have financials dating back to that period and ask how EBITDA & FCF changed? (5) Why did they issue the most recent debt that they issued? Strategic initiative? General "keep the operations going" type raise? Buying back stock?
Generally, the exact estimates you provide are less relevant than your deeper understanding of the underlying drivers of the business and where they will go from here.
Fad risk, poor unit economics driving people to leave system, capital allocation issues (buying bad concepts), CEO threatening to behead a franchisee risk. Would read the FDD’s issued for franchisees.
Source: I own a metric s***ton of XPOF in PA
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