The number of active Virgin Active members globally has recovered to 75% of its base in December 2019, before Covid-19 lockdowns thumped the business.
Much of the recovery has come since December, with 12% growth to the end of May. Parent Brait says there has been “positive momentum in membership growth” across all its territories.
The gym operator now has 847 000 members, a decent recovery from the lows seen in the middle of last year (believed to be below 750 000). However, the 25% of the base that are no longer active members equates to nearly 290 000 paying customers. This provides some context to the quantum of new members it must add, net of terminations, to get back to pre-pandemic levels.
Just how difficult it will be to sell memberships to altogether new-to-gym members and to (possibly) re-attract those who had cancelled their memberships is yet to be seen. Many of those who terminated their memberships in favour of their own home-based set ups or boutique neighbourhood facilities will never return.
At present member levels, it is currently only breaking even in southern Africa. In the UK, the base (FY22) is 5% below breakeven and in Italy, the number is 9% below what it requires.
Southern Africa members
The South Africa and Italy businesses are performing better than the UK, with members at 78% and 77% of December 2019 levels for the former, and 70% of that base for the UK. These are the three most important operations for Virgin Active as in the most recent quarter they comprised 89% of revenue. Its operations in Australia, Thailand and Singapore are (were?) intended to be a driver of growth.
If it continues with current momentum, it will end the year on about 950 000 members – a good result.
But there are some significant headwinds.
While all its gyms in South Africa, the UK, Italy, Australia, Thailand and Singapore are open, it notes that “the business continues to be impacted by work from home trends”.
This is evident anecdotally in Virgin Active gyms in office nodes in South Africa (think the two Sandton CBD clubs, Rosebank, and, to some extent, the Foreshore in Cape Town). It is particularly apparent in its UK operation, where its “residential clubs” are at 87% of 2019 levels, while those in central London are at just 70%.
If this trend becomes entrenched, it will have to make some very quick (and likely expensive) decisions about some of its club estate: either outright closures and/or size reductions. In the last two years, it has closed a net 10 clubs globally – 4% of its footprint.
A fading SA business
Brait says the acquisition of Kauai (Real Foods) will “expedite Virgin Active’s strategic transition to a wellness themed business”.
The jury is out on quite whether investors (once Virgin is listed, or when it becomes the sole Brait asset) will want to mix the margins of gyms and smoothies, wraps and coffees …
New signups are already being incentivised with free daily smoothies which, one would imagine, will at least boost utilisation and reduce churn. (Transaction approval from the Competition Commission is still outstanding).
It is in the “refreshed strategy” where it becomes clear just how much work needs to be put into the South African operation. It says the “South African clubs have strong market positions, but require facility, product and digital investment” and that it will “Invest in the member experience in certain geographies (especially South Africa)”.
Translated: many of the South African clubs require significant upgrades and that the “member experience” in many of the local clubs is nowhere near what it should be (and what the comparable experience would be in, for example, one of its offshore gyms).
In some (many?) of its clubs, the current experience is not dissimilar to what one would experience at one of the lower-cost or ‘value’ gyms that proliferated before the pandemic, many of which remain in operation. This is going to require an elevated level of capex locally.
The key question in investors’ minds is whether Virgin Active can get back to making real profits.
Arguably, this is the entire premise for investing in Brait; the value of Premier, the remnants of New Look and other bits and pieces are already accurately reflected in the share price.
Brait’s valuation of Virgin Active contends the business can achieve “maintainable” annual Ebitda (earnings before interest, tax, depreciation and amortisation) of £110 million by March 2024. In 2019, it managed Ebitda of £142 million. Last year, it reported an Ebitda loss of £19 million with a loss after tax of £115 million (an improvement on 2020’s £252 million, pre-IFRS 16).
Getting to £110 million in the next 18 months is going to be a very, very big ask especially given the global economic backdrop where high inflation and the impact of sharply higher energy prices begin to bite.
Gym membership is a discretionary expense. Terminations ought to increase to above normal levels, and sales of new memberships ought to slow. This is the single biggest problem facing Virgin Active over the next 12 months and isn’t fantastic news for a business that has R7.4 billion in net third-party debt (even if it has just refinanced this in both its SA and international operations) …
(Oh, and it’s still trying to reconstruct its financial accounts in South Africa nearly six months after year-end, stating in a footnote that: “December 2021 unaudited figures are subject to change as VASA [Virgin Active South Africa] accounts have not yet been finalised due to the cyber attack.”)