Fool's Eye View

[ October 4, 2000 ]

LA Fitness Uses Its Muscle

By Maynard Paton (TMFMayn)

Carburton Street, London -- No doubt about it, the business of fitness is a growth one. A gaggle of health and fitness club operators have all sprung up in recent years, each one capitalising on the population's increasing desire towards regular visits to the gym. Indeed, the busy Weight Training and General Fitness discussion board is also a very good indicator of the current popularity of pumping iron! Today's annual results and fund raising exercise from LA Fitness (LSE: LFS) outlines the future potential of the keep-fit market in general.

LA listed on the stock market only last October with just fifteen gyms in operation. Since then, the group has opened its doors to another ten outlets and another four are under currently under construction. The announcement to raise approximately £10.9m via a 1 for 9 rights issue will underpin LA's aim of having 36 clubs open by July 2001 and over 70 in operation two years after that.

Independent research, highlighted by LA today, gives just cause for the continuing gym roll-out. A recent survey showed that 14% of all adults claim to use a health club, while, importantly, another 21% don't use a health club but said they would "like to join one". Overall, the market for UK fitness clubs is expected to rise by almost 75% in three years time and a quick comparison with the US, where gym membership is nearly three times greater than the UK, also indicates the growth possibilities.

The fitness trend is very much borne out in today's financial details from LA. An extra 9 outlets opened in the year ending 31 July 2000 helped LA's turnover to push 75% higher to £15.2m. Operating profits surged 150% to £3.2m while earnings per share (EPS) leapt 110% to 8.2p. Importantly, for a formulaic roll-out company such as LA, like-for-like sales and like-for-like membership figures remained very upbeat, both around the 10% growth level.

Muscle fatigue

But can it all continue? As investors of fast-expanding retailers, restaurants and pub operators know, there will always be, inevitably, two threats to the ongoing success of LA -- saturation and competition. The investment trick is to ride the fast growth part and jump out before either threat hurts the company.

In terms of market saturation, the directors of LA appear quite relaxed. LA's management declare: "Based upon the significant site availability for the LA Fitness model, we believe that UK market saturation for (our) medium sized and affordable clubs is at least five years away".

But the main worry for LA investors should be the unpredictable competition. Apart from the numerous pure fitness operators, such as Holmes Place (LSE HOL), Fitness First (LSE: FTF) and Esporta (LSE: ESP), there is no end of other companies diversifying into this appealing sector.

For example, taking a lead from Whitbread (LSE: WTB) and its David Lloyd fitness chain is fellow leisure conglomerate De Vere (LSE: DVR). In a trading update today, De Vere outlined how its embryonic "Greens" fitness chain is delivering "encouraging" progress and how 19 clubs would be opened over the next two years. Elsewhere, JJB Sports (LSE: JJB), the sportswear retailer, is also said to be branching out into health clubs.

LA's performance so far, its results today and the growth potential all look impressive. But with the shares at 292.5p, falling 4.5p this morning, LA stand on an unsurprisingly rich 36 times today's reported earnings. The task for LA investors is simple -- judge how fast the ever-increasing competition will muscle into the marketplace and thus decide at what point LA's "burn out" will occur.

Where next?

• Sector Dissector -- Fighting Fit

• Weight Control discussion board

• Weight Training and General Fitness discussion board