Is this growth stock one to buy or avoid?

Jabran Khan details a FTSE growth stock and carefully examines the pros and cons of adding shares to his holdings before making an ultimate decision.

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The Gym Group (LSE:GYM) could benefit from increased awareness around healthcare linked to the pandemic as well as the demand for its products and services. Is it a growth stock I should consider adding to my holdings? Let’s delve deeper.

Fitness on the up

Despite lockdown causing many gyms to close, a new emphasis was placed on health, healthy living, and working out due to the pandemic. Firms like Gym Group could benefit and recent results point towards increased demand in memberships at its gyms.

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The Gym Group is the UK’s largest low-cost, value gym with over 200 locations currently open throughout the UK. Gym Group attracts its customers with no fixed contracts and a cheap monthly memberships starting from as little as £10.99. In addition to this, it offers its members flexibility to train around their lifestyles with lots of 24-hour locations.

As I write, Gym Group shares are trading for 257p per share. This time last year shares were trading for 217p, which is a 19% return. Is this new focus on health and gym-going a temporary fad or a new way of living?

For and against buying shares

FOR: Gym Group has reported that membership numbers are still on an upward trajectory. This is based on a latest trading report released in December last year. In February 2021, it had 547,000 members. By the end of November, this stood at 735,000. Gym Group reported its multi-site premium membership had increased by 27.1% at the end of November compared to increases of 24.1% in July and 22.5% in December 2020.

AGAINST: I believe the biggest threat to Gym Group is the continued pandemic. There is a real risk that a new variant, as strong or stronger than the original and one that could bypass vaccine, could arise. If this were to happen, restrictions could force gyms to close.

FOR: Gym Group has a good amount of liquidity which will support the growth stock to enhance its number of sites and its offering. It is aiming to open 22 new sites in the UK by the end of December 2022. In addition to this, it has a good track record of performance. I understand that past performance is not a guarantee of the future, however. I can see that revenue and operating profit increased for three years in a row before 2020 was impacted by Covid-19.

AGAINST: There is lots of competition in the gym market and some have a longer history, with larger brand recognition, and a more varied offering than Gym Group. Not everyone wants a cheaper, basic gym experience. Some want a state of the art experience with swimming pools and so on and are willing to pay a premium for it. The Gym Group’s business model is to cater for the basic gym goer, without these added extras.

Growth stock I’d buy

Right now I would add Gym Group shares to my portfolio at current levels. I believe the shares are cheap. Furthermore, these new gym goers and older members will continue to support its growth and profitability. Gym Group’s plans to expand seem to be on track and the next few years could be an exciting time. 

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Jabran Khan 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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