The Motley Fool

The Gym Group’s share price is still falling. Here’s what I’d do now

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young man exercising in his house gym, doing push ups
Image source: Getty Images

The last time I covered The Gym Group (LSE: GYM) shares on 7 July, I said they were a “risky play.” I was concerned that, with Covid-19 lingering, people may steer clear of gyms for a while. I added that there were much better stocks to buy.

That call looks pretty good right now. Since my article, The Gym Group’s share price has dropped from 153p to 130p – a decline of 15%. Over that period, plenty of other small-cap stocks have soared.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Here, I’m going to take another look at the investment case for The Gym Group. Is the stock a recovery play or should it be avoided?

The Gym Group: interim results

Let’s start with the group’s interim results. These were, understandably, pretty poor. For the six months ended 30 June, revenue decreased 50% to £37.3m. Meanwhile, adjusted earnings per share came in at -14.9p, compared to 4p reported a year earlier. Non-property net debt was £29m, which is high when you consider that adjusted EBITDA was just £1.7m.

One interesting takeaway from the results was that membership numbers have fallen significantly this year, as I predicted. In late February, the group had nearly 900,000 members. However, by 30 June, this had fallen to 698,000. And by 25 July, the number of memberships had fallen further, to 658,000. This trend doesn’t look good.

Outlook: huge challenges

Looking ahead, I think The Gym Group is going to continue to struggle in the near term. There are a few reasons why. 

Firstly, Covid-19 lockdowns are back. As of today, gyms across the country have been forced to close. This is devastating news for companies such as The Gym Group. It means revenues and cash flows are going to take another big hit. We’ve been told the lockdown will only last a month. But I wouldn’t be surprised to see it extended, which could place further pressure on gym operators.

Secondly, when gyms can reopen again, I think people will be slow to return. While Covid-19 is hanging around, I believe a lot of people will stick to exercising at home, jogging, or cycling. I used to be an avid gym-goer before the coronavirus, but I’ve no intention of stepping foot inside a gym any time soon.

Third, I expect to see lower levels of disposable income among those aged 20-40 – the keenest users of gyms – in the short term, due to Covid-19. This could limit membership growth.

A happy senior couple indoors at home, doing exercise on the floor.

Bearish data

Digging into the data on The Gym Group shares, there are a few things that concern me. One is the lack of substantial insider buying. In the last six months, only one insider has purchased GYM shares. That was chair Penny Hughes, who has purchased stock twice. But her purchases were absolutely tiny. The last purchase was worth less than £4,000.

Meanwhile, founder John Treharne has been offloading stock. This suggests insiders aren’t confident about the future.

Another is that GYM has an Altman Z2 score (this a measure of financial strength) of just 0.17, according to Stockopedia. This indicates there’s a serious risk of financial distress within the next two years.

The Gym Group’s share price could keep falling

Putting this all together, I’d continue to avoid The Gym Group shares for now. Why take a risk investing here when there are so many other good stocks to buy?

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.