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The Gym Group’s share price is down nearly 50% in 2020. Here’s what I’d do now

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Shares in fitness centre operator The Gym Group (LSE: GYM) have underperformed in 2020. Year to date, The Gym Group’s share price has fallen nearly 50%. It’s not hard to see why. As a result of the Coronavirus lockdown, gyms across Britain have been closed since March.

Could the stock offer rebound potential now that the UK is slowly coming out of lockdown and gyms look set to reopen in the near future? Here’s my view.

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Strong growth pre-Covid-19

The Gym Group had been growing at an impressive rate prior to the Covid-19 outbreak. Thanks to its low-cost memberships and 24/7 gym access, and its aggressive gym rollout model, revenue increased from £45.5m in 2014 to £153m in 2019. When I last covered the small-cap stock back in early 2018, I was quite bullish on it, given its momentum.

The outlook for gyms has changed

Looking ahead, however, I think The Gym Group could struggle to generate the same kind of momentum it had prior to Covid-19. There are a few reasons I say this.

For starters, throughout lockdown, many of us have found new, innovative ways to work out. For example, I’ve set up my own little gym, complete with dumbbells, kettlebells and battle ropes, in my garden. Meanwhile, my wife has been taking yoga classes online. Others have taken advantage of new fitness technology such as Peloton exercise bikes, or followed fitness influencers such as Joe Wicks on YouTube.

I think these new habits may stick for a lot of people. Given the enormous amount of money you can potentially save by not paying for a gym membership, I believe many people may skip the gym in the future (at least while Covid-19 is hanging around) and opt to work out at home instead. My views are backed up by a recent survey by GlobalWebIndex (GWI), which found that more than 40% of people said that they plan to work out at home more regularly following the pandemic.

Secondly, the keenest users of gyms – those aged 20 to 40 – have been among the worst hit by coronavirus job losses. This potentially means lower levels of disposable income among this section of the population, which translates to fewer gym memberships.

Finally, consider where many gyms are located. A large proportion are located in city centres or close to office buildings so that people can work out before or after work or at lunchtime. If we’re all working from home more in the future, many of these gyms could struggle to achieve the same level of memberships as they did pre-Covid.

The Gym Group shares: my view

Given that the operating environment for gyms now looks far more uncertain, I see shares in The Gym Group as a risky play right now.

This is a company with a large amount of debt on its books that looks set to make big losses this year. If the operating environment doesn’t improve, it may struggle.

All things considered, I think there are much better stocks to buy at the moment.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended The Gym Group. 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.

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