In this episode of Industry Focus: Consumer Goods, join Motley Fool analyst Asit Sharma and host Emily Flippen as they discuss six companies, each with its own unique take on tackling the fitness industry in general and the recent at-home fitness trend in particular.

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This video was recorded on April 13, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, April 13th, and I'm the host of this Consumer Goods episode, Emily Flippen. Today, I am joined by Motley Fool Analyst Asit Sharma, to talk about our expectations for the future of the fitness industry and in particular, how investors can play this trend. We have businesses all the way from at-home fitness pure plays to the person who believes that the universe is going to revert back to normal as soon as everybody's vaccinated. Hopefully we'll have a little bit of something for everyone in the show.

Asit Sharma: Emily, what a fitting topic you've chosen for mid to late spring. As I'm looking out my windows we're recording, it's a beautiful afternoon and that would be great for those of you fitness buffs. Maybe you're listening to this with your headphones on taking a jog or something of that nature.

Flippen: Yeah. I feel bad because I can always motivate myself to work out, but I can never motivate myself to work out outside. That's somehow justifiable when it's cold and I'm like, "Oh, I could just stay at my apartment or go to the gym or or do something indoors." Whenever it's beautiful outside, I'm always imposed this feeling of immense guilt. You see people running, you see people going for walks, and man, I already don't leave my apartment now that I'm working with Motley. Now that I'm exercising for my apartment as well, I'm truly living in a box. [laughs]

Sharma: Well, you know something, Emily? I am the opposite. I spend a lot of time outside, but I will say that I have not been exercising much even though I've been outside. But you've chosen an interesting basket of stocks. There's something for everyone. There is a stock for those who like to stay indoors, there's stock for those who like to get outside. That's what makes this basket today very interesting to me.

Flippen: Why don't we start with probably the one that everybody clicked on this episode or is tuning in live to listen to, they fully expect to hear this business. You talked about it a lot before on Industry Focus and that's the purest play of the month, at-home fitness stock to end at-home fitness stocks, it's Peloton (NASDAQ:PTON). I'm still a shareholder of this business, I'm still a fan of this business, but I am an owner of one of their competitive products, NordicTrack. I think I'm biased here because I really do like my NordicTrack a lot.

Sharma: Well. The thing about the NordicTrack is, it's been around for a long, long time. It has a great brand name. You know the product is going to be well made and you're going to have a piece of equipment that's durable. You enjoy getting on. NordicTrack, probably, in my estimation, an underestimated piece of exercising equipment, Peloton, as far as the popular imagination is concerned, has stolen a lot of mindshare over the past couple of years.

Flippen: It's interesting that you just pulled out mindshare because I think that's really accurate to describe what Peloton's like in terms of its consumer appeal. I refer to my NordicTrack as a Peloton. That's how ubiquitous the name has become. But when you look at how the business and management defines their addressable markets, they still have less than 10% market share of the at-home fitness market and what they believe is their addressable market. That's out of an already pretty narrowed market. If you look at how they break down their TAM, they start with all the people who have a household income of a certain level who are interested in fitness. You would think, OK, that's their TAM, but I like that management actually trims that down by nearly a tenth into what is just that core base of consumers that they actually believe would buy a product at today's prices. Even within that group, they still have less than 10% penetration into their market. It has a lot of mindshare. When you get into the nitty-gritty of the numbers, they don't have as much market share as you would expect for a company that is that ubiquitous.

Sharma: Emily, a couple of things come to mind as you discuss that one is I do also like the way that management trims down that total addressable market. So many times we see companies that start with the widest possible range of customers or addressable market and you know they're never going to capture everything because the product doesn't even really hit every part of the market. Management at Peloton helps you as an investor understand where they're going and where the sweet spot is. I would say they provide a bunch of metrics that are really appropriate to how this brand can grow. As for that market share short, maybe they are not going to ever capture the whole market or even 50% of the market, but over time, if they go to something that's, I don't know, low double-digits, with every customer that they seem to generate, I can see them being a really solid investment for years to come. I see that total customer lifetime value as being one of the key parts to our both theses here. 

As we mentioned, this idea of customer value, revenue per customer is a pretty big deal. I love the way that you've broken this up as we were trading ideas. You were pointing out that revenue, it's currently 80% equipment, but those are high ticket items from $1,900 to about $4,300. They've got this subscription business, which is 20% of revenues. It's $39 per month for connected equipment. That's equipment that is connected. You have, let's say, a video that you can interact with and it's $13 per month if you just want a digital subscription and don't own the equipment. I think this spells a lot of opportunity for the company, and I think as users really buy into this idea of exercising regularly outside of the pandemic when we leave it behind, this could benefit the company long-term.

Flippen: We've talked a lot about Peloton and their economics prior, so I'll do my best not to drone onto our listeners about it anymore than we already have. But I do think a critical metric to gauge that lifetime value will be their churn rate and Peloton has done a great job of keeping their churn rate relatively low. Right now it's around 0.62%, which is pretty outstanding, but still that does mean that people are churning. This is an expensive piece of equipment, so you wouldn't expect to have a churn rate that is as high as the subscription box companies that we talk about a lot that you can jump in and out of. Either way, that churn rate has consistently fallen since Peloton's been reporting publicly. That will be a critical metric that I think investors should watch if they are interested or are invested in Peloton.

Sharma: One metric that I really like myself is how the fitness subscription workouts are growing. They just reported their fiscal year 2021 second quarter fitness subscription workout. Connected fitness subscription fees grew 303% year-over-year to $98 million and the average monthly workout has now exceeded $21. People who are doing about 12 workouts per month this time last year are now doing almost double that and to me this speaks to that brand power and just ability for this company to take its unit economics and build them over time. I think that while we talk about Peloton a lot on this show and it is top of mind for many investors in this category of at-home fitness, there's still a lot to learn about it going forward. It would be easy to assume that we know everything about how this company can grow. I think it's still early innings, and I feel they've got a lot of optionality. My message here, the summary message on Peloton is, if you're interested in the companies, stay excited and keep trying to understand how these metrics are going to pan out. It really has not been a public company for very long and I still see lots of promising things every time they report.

Flippen: Before we move on, and again, I just said I wouldn't hop on it, but I have to add one more thing before we move on and that's that there might be a lot of optionality in Peloton's business that investors who are really skeptical like myself may overlook. I think a lot of that does have to do with partnerships for things like classes. The partnerships, they get to have unique and proprietary music by big artists on their platform. These sorts of things lend itself to say that Peloton can be more than just a bike company at some point in the future. They're not there yet, but don't discount the optionality that can exist with having a really strong brand because I think it's easy to take and extrapolate what we see happening today to what the future will look like. Peloton might surprise them, people.

Sharma: Yeah. My last note on that, which is related to this optionality is that the company just acquired a manufacturer called Precor. Precor is really the largest equipment manufacturer. This is commercial fitness products that the company churns out, not just bikes. Peloton may be able over time to get into this extended market for various types of equipment and connect them one by one. It'll take a while to play out, a few years, but we shouldn't overlook yes, its ability to extend beyond the way most of us visualize it now, which is that one piece of equipment, the bike.

Flippen: For investors who are still maybe a little too skeptical to want to buy Peloton outright but are looking to get some exposure to the at-home fitness industry, there's another business that they could potentially consider investing in. It's not quite a pure-play for at-home fitness. But Affirm, I believe the ticker is AFRM, is a recently public payment processing business that provides buy now, pay later services and a large portion of their sales actually come from Peloton. So you get a little bit of exposure to the upside of the increase in Peloton of bike sales while also having a diversified enough business that exists on its own.

Sharma: Yeah, for sure. Here's the company, let's call it an impure play on this theme, but they're growing very quickly. Their gross merchandise volume in their most recently reported quarter grew about 55% year-over-year to $2.1 billion. They claim they have got about 4.5 million active consumers as of the end of last year. That's also +50% growth. This is a way that investors who like this space can participate in growth in the total industry without having to get too tied into one theme which might go sour. If you think Peloton as a theme could go south, maybe there will be other competitors in connected fitness and subscription-based exercising. This would be an interesting play because it's agnostic as to which platform will eventually win out. The only thing, as Emily mentioned, is they do have a concentration right now in Peloton, but I think the plan is to extend beyond that over the next few years.

Flippen: It is, and if you look at where their sales are coming from, well, around a quarter, I believe, of their sales are from Peloton. They actually saw material acceleration in the last quarter from GMV, the gross merchandise value that was generated without Peloton. So even without Peloton, at least there's some acceleration of other customers. That reminds me of, not right now at the moment, but if Peloton were to leave, I could see this being a business that's like Twilio. When Twilio lost Uber as one of their main customers, there was a lot of worry about the fact that Uber was a significant portion of Twilio's revenue, but Twilio still went on to be a really relevant and important communication service provider, even without hosting Uber. Anyway, an interesting one to look at, but admittedly not as pure play as the ones you're talking about today.

Sharma: Well, going back to pure-plays, now this is a company that is, like Peloton, still exciting, but it's also a blast from the past for some investors because this ticker has had its ups and downs. I would say it is cresting right now, investor interest is high, but I can remember just a few years ago, this was a stock that many investors just didn't want to look at anymore. So which ticker am I talking about, Emily? [laughs]

Flippen: It's Lululemon (NASDAQ:LULU). It's funny because when you think about Lululemon, well, it certainly has its ups and downs, this is a complicated company. It's brand has remained relatively resilient even while investors' opinions have periodically swelled as a result of poor management. Out of all the businesses we have on our list today, I actually think this is the one that I'm most excited about, and maybe not for the reasons that investors may think. Lululemon made a big purchase of an at-home fitness company, Mirror, last year. I wouldn't quite call it a Peloton competitor, because essentially what they sold was a big convertible TV mirror to do things like bodyweight fitness as opposed to the intense maybe bike exercises that a Peloton customer has. I'm sure there's some overlap between people who'd own both a Mirror and a Peloton. But that's the pure play exposure they have to add on fitness. I really think that the more I dug into this business, I am so excited just for what Lululemon is, even if you take Mirror out of the equation. Mirror is great, but Mirror is only going to generate around $250 million in expected revenue for 2021, so it's only a drop in the top line of what Lululemon is going to do this year. If you look at their growth, I'm just surprised by how quickly this company is growing, especially internationally.

Sharma: It's funny, Emily, Lululemon had some really aggressive targets for 2023, which included international growth, including their e-commerce business. They have such a big boost that they've been able to take out of COVID, that they've already achieved I think most of their 2023 goals in e-commerce and they're well on their way with international expansion. The interesting story is part of this involves opening new stores. This is a company that has a lot of white space outside of North America in terms of its perception, as almost like a very high end brand. This was also the company everyone knew as a manufacturer of yoga style clothing, and they've made a great pivot away from this athleisure type descriptor that most investors used to associate with them to something that's a little more contemporary. 

Now, I think their emphasis is on technical clothing, extreme fabrics. I think they've got a brand called Luxtreme, I hope I pronounced that right. When I see this, it reminds me of other companies which were at the cost of either staying in a trough, I'll speak up this metaphor again of being in a trough versus cresting, but then really understanding where the brand needed to go both from a brand perspective and a manufacturing perspective. I think they've made that transition and you're quite right, Emily. If you look at where the opportunity lies, it's overseas and it is in several markets. They actually differentiate China from Asia-Pacific, so that just shows you how important China is as a market, it's its own region. I feel that Lululemon here, if you have given up on the stock maybe a few years ago, you'll be surprised at some of the targets that management has laid out and also the uptake of the new products, they're doing quite well.

Flippen: If you look at their brand, and I love how you mentioned that Lululemon is really a brand play not athleisure play, and you extrapolate that to the acquisition of Mirror, I think it starts to make more sense. They spent $0.5 billion or so to purchase Mirror, and a lot of investors were skeptical because they thought to themselves, "Okay, are you trying to be Peloton?" The at-home fitness industry is really competitive, why are you making this acquisition right now? Are you going to spend a lot of money trying to get people to work out in the apartments? I think that's missing the bigger picture of Lululemon, which is proving out that Lululemon brand as a lifestyle brand as opposed to an apparel brand. If you look at a lot of their initiatives, I think they're starting to execute on that. 

They have addition to Mirror, which is like I said, not the big top-line mover but a big lifestyle brand mover and making Lululemon a known thing. They're actually adding a lot of these Mirror stores into the physical Lululemon stores themselves, giving people the opportunity to experience at-home fitness plus Lululemon. But they also have a lot of really ambitious goals up. They apparently have goals, I didn't know this, to release their own footwear line, again, lifestyle apparel, and doubling their men's business by 2023. So really big, challenging lofty goals that don't have to do with, oh, everybody has to have a Mirror in their house, but it's everybody who has to know and associate with the Lululemon brand wherever that meets them. For some people, that might be having a Mirror in the house, for other people it might be yoga pants, and for even more people, it could be footwear, it could be men's outfits. They want to prove out optionality in their business, and I think they're doing that pretty well.

Sharma: I think they are. I wouldn't be surprised if Mirror starts to achieve a really fast run rate. You mentioned that they are going to generate $250 million in revenue this year, I think the estimate is for about $275 million in fiscal 2021. Now, that doesn't seem like a big jump. But with these stores within stores, and the fact that Mirror itself is incredibly sticky, I think that they have an opportunity to turn this into a brand that could generate $4 million-$500 million a year for them in the next, I'm going to guess seven to 10 years. Now that's not a really, really super fast expansion rate, but it's significant, and as you say, that extends the way people perceive the brand. On the idea of how sticky Mirror is, the CEO, Calvin McDonald, said on the latest earnings call, "That a small company has more live classes across more workouts than any other product in the marketplace." I like that per household more than two users use Mirror once people buy, so married couples, families with children, they're averaging more than two users per family. The average user takes six different workouts each month. 

I think that Lululemon is on to something similar to Peloton in that the idea of fitness and connected fitness is going to be a much bigger trend than many investors realize. It seems that in early innings, once people subscribe to these services, they really love them and find it hard to give up. Of course, I can see that as someone who runs. Once you get past those really hard first six weeks and your blood becomes more oxygenated and the endorphin starts really flowing every time you get up to speed, you don't want to stop. The hard part is getting there. The hard part is those first I think six weeks of any type of workout. But Emily, you work out quite a bit, you would attest to that as well, right?

Flippen: I would. I was just thinking to myself that I would feel a lot less guilty I think, having an unused Mirror product in my house store than having an unused Peloton. The Peloton has no other purpose. It sits there as a constant reminder about the fact that you haven't worked out all week or all month or in many months, however long it is. Whereas Mirror converts to a mirror when you're not using it, you can almost sell yourself on the idea that this has some utility outside of me just getting a good workout in. I don't know if that makes it more compelling or less compelling, but I feel like that phenomenous exists.

Sharma: I am sure. Except for those few people who see a Peloton and think, "If I'm not using this, I can hang my clothes on it." [laughs] Some dual-purpose there.

Flippen: I may be there in a couple of months, don't tempt me.

Sharma: Moving on to a very interesting choice that you have. It's a company that I used to follow every quarter and I know I still have a soft spot for this and maybe your research has convinced me to take a closer look, you wanted to talk about Garmin (NASDAQ:GRMN), symbol GRMN. What's the story here, Emily?

Flippen: I did, and I wish I had a better story. I don't have a long history following this company or using their products. But I'm aware of it because Motley Fool Advisor Seth Jason is a huge fan of Garmin, both as an investment and as a product, and he's also an amazing runner and generally just wonderfully in shape. If you want to feel really bad about how little you work out, all you have to do is talk to Seth. But because he does have such experience, I take his opinions very wholeheartedly when he talks about products. One of the products he raves about and he says it has its issues, but everything does, but one of those products are Garmins. He does say that there's this insider joke around ultra-marathon runners that goes something like, "If you find me collapsed at the digital alongside the trail, pause my Garmin for me, OK?" [laughs] This is something that I won't say pro athletes necessarily, but people like Seth, people who maybe don't do it as their job, but they're also not casual once a day bikers like myself, they love Garmin products.

Sharma: Garmin has been around for a while, but it is just experiencing really, really steady growth. They have multiple categories that they can spread their revenue from or extract growth from. Although arguably some of those are a little bit slower growth or even in the negative territory. But they are cyclical. They have sales that cross fitness, outdoor, aviation, marine, and even auto, of course, which used to be something people associated Garmin with more, but by far, I think fitness is now the most promising category with outdoor close behind. Again, for those of you who are listening today and you've [...] like to be outside, this may be the product for you. Emily, you talked about that steady growth in recent quarters, and going forward I want to point out this. Looking backward, they've had, I think, five consecutive years of revenue and operating income growth. But going forward, you're putting on notes that sales are projected to keep growing even as we're leaving COVID behind or hopefully leaving COVID behind. They're looking at 10% growth in the fitness division next year on top of really strong growth from last year. Why do you think that Garmin has remained so popular and why do you think that this product or this set of products has so much potential going forward?

Flippen: Yeah. First of all, we're going to get a check on offset because somebody who has followed this company for a long time in comparison to myself, who had just started to look at it when Seth started to talk about it, I didn't even realize that Garmin had legacy GPS auto units. I only associated Garmin with their wearable devices as kind of a higher-end FitBit. I think part of the reason why growth is projected to continue even past 2020 and 2021 is because of the type of user who goes after Garmin wearable devices. Like I mentioned, there are people who tend to be a bit stickier, tend to be a little bit more loyalist to the brand than somebody who is casually, like myself again, more like somebody who picks up a FitBit and then probably forgets about it for six months. I think that's part of the reason why they are fueling growth. 

While fitness is their fastest and most growing segment, within that, it's more than just the wearable devices. It's all the add-on services they have as part of their devices. They actually have a lot of data and a lot of analytics that they sell people who actively use Garmin devices, and it can be used for things from casual runners or casual cyclers, to people who would use Garmin devices in their profession. So I think it's an interesting business that does a pretty good job of upselling, if you will, consumers or customers on the brand and then on the analytics side.

Sharma: Yeah, I think that's a great answer. For me, I've been impressed how the company's done just this. They've made that transition from being a device company to a company that has subscription components, that has these add-on services. They just introduced their own, it's not a bike. I'm not sure exactly what it is. It's an indoor trainer, they call it the Tacx Boost, T-A-C-X. I'm not sure how you're supposed to pronounce this.

Flippen: I didn't even know this.

Sharma: Yeah. I mean, it's not a huge bit of their forward revenue, but it is interesting in that they're also getting into indoor training. These trainer users like magnetic break. It looks like a cross between a transformer and an indoor bike. I don't know how else to describe it. You can manipulate the shape to different sizes and basically, if you picture just a very small unit that you can clip to a chair and sit in with two pedals, that's more or less what it is. But it shows that the company is still innovating and moving beyond the technology that provided a lot of cash flow in the early years. Speaking of cash flow, that's something that you really like about it, correct?

Flippen: Yeah. One of the things I was really surprised to see, especially for a business that does many factors, so much just Garmin does, is to see if they have 15%-ish cash flow margins. So they are generating just a ton of cash flow. They're reinvesting, obviously, a lot of that back into their business coming up with these new devices. But it's a highly profitable, really steady business that's posted nearly 60% gross margins for the past five-ish years. So it's a really steady cash producing business, and it's almost deceiving if you just go back and you look at some of the ratios of this business over time. But then also not taking to curb a huge business transformation that's happened over the same time period. Away from cars, and aviation and to things like fitness and outdoors. It's amazing how they've maintained such impressive margins while changing their business so dramatically.

Sharma: Yeah, I feel like management really has a handle on how to transition and keep growing in this industry. So of all the companies that you picked today, the five companies, this was the one that I think I was most excited about. To see that you liked it, rekindled my interest in this company. I never purchased it, but it's one of those that it just grows steadily and keeps expanding. So why not? Asit, just pick up a few shares. I think they'll do well.

Flippen: I feel like we should keep an eye on this one and maybe schedule it for a full deep dive one day on Industry Focus because I feel like if we keep going we are going to probably spend an entire show just dissecting Garmin's business. Because they do have so many different products, it would be quite a task to do that. So we should definitely keep an eye out. Hopefully, it continues to perform pretty well and we can circle back.

Sharma: Perfect. Yeah, that sounds great. This next one that you've talked about, I must say that I was surprised by the choice because once in a while you'll bring up an obscure company, Emily, that I've never heard off. I think this fits in that category, one of these that you really had to pull up the symbol, read through the 10-K report and figure out what this company is, not having heard of it before, but it looks intriguing to me. So what is our next symbol?

Flippen: So I really wanted to talk about this business because Dan Kline, he was a formal Fool and frequent guests on Industry Focus: Consumer Goods, on his Twitter account, must be a week ago or so now, I can't quite remember how long they go it was, but on his Twitter account, he decided to hold a poll. He had four mostly fitness-related companies and he asked, "Which one do you think is going to have the most steady, well-known brand for the next 30 years?" A really long timeframe. I actually picked Lululemon in this Twitter poll. But by far the consensus was toward this company that we're going to talk about, which is Nike (NYSE:NKE). The ticker symbol is NKE. I'm a little surprised. I can't say that I have the best opinions of Nike. Granted, I'm not a big sports person. I'm not a big shoe person, and I think I'm mostly associating Nike with a lot of labor issues as opposed in developing countries. But there is something to say about the brand name of Nike. You can probably go anywhere in the world and say the word Nike and people will know exactly what company you're talking about.

Sharma: For sure, and of course, I was being facetious in saying that I'd never heard of Nike before.

Flippen: Of course, that must have gone right over my head on that comment.

Sharma: I have memories though of being, I don't know, 10 or 11 years old and telling my mother that I didn't want anything but Nikes because those were the shoes to buy and that's what all the kids were buying. Unfortunately, I went through a phase in my life when I was a kid of having to go along with the hurting, and now my fashion is so bad. I clearly do not care any more what type of brands that I buy and where. But for much of the world this is an aspirational brand. I have to say, Emily, if I weigh the scale truly over the last couple of years, I think I've become much more skeptical of Nike as well. Nike is a fiercely competitive company. It's an extremely innovative company. We can't ignore that. It has a lot of still experimentation with materials in its DNA left over from the days when Phil Knight founded the company. So I think this is a global business. If you are looking for, let's say, a very solid play, as Dan survey probably indicated, that's going to be around and you want to round out your basket. So the true growth names in your basket with a stable company that will slowly grow and should continue to appreciate year-over-year. Maybe Nike is your choice. I will say in researching this episode, when I went to their homepage, they were very adamant. The first thing you see on Nike's homepage is, we are a growth company. It's almost like they're trying to tell investors that we're not stodgy. We're just like those little companies. But it's hard when you are so big and so global to pull that off year-after-year.

Flippen: I'm in the process of studying for level 3 of my CFA exams and I've just finished the unit over Behavioral Finance, which sounds easy, but it's actually really challenging. Because you realize how many of these heuristics that you bring out in your day-to-day analysis. I'm saying this, realizing that maybe I'm getting a bit of a framing bias throwing out some keywords there framing bias for management and how they talk about the business. But I do believe that Nike is this innovative company and it feels to me that they're constantly thinking about what's the next new partnership? What's the next new product? They throw a ton of ideas at the wall. They have the money, they have the resources to do that, and it really takes only one thing sticking for it to be a huge driver of growth. 

The big question mark for me with Nike is just which business transformation they've been over for the past couple of years? At pulling off from third-party retailers. They pulled off of Amazon, but also a ton of other retail locations like end-store retail locations, in order to focus on its direct-to-consumer business. The idea was that sales would probably decrease. A ton of places that they had distribution would no longer be selling Nike products. But margin should start to increase, and control over the Nike brand should also increase, which long term should build more pricing power. We saw this start to happen in the most recent quarter, Nike's gross margins expanded by nearly 1.3%. Really substantial gross margin expansion. Sales fell, although there are some other reasons for that. But it will be interesting to see if this strategy, this control over the Nike brand ends up being really beneficial long-term.

Sharma: Yeah. We're clouded by the pandemic because they had that wave of temporary store closures around the globe and this long term view of this shift that we had now the data, I think it's all messy. But one of the things that both Nike and Adidas are accounting on so, Adidas or for those of you who maybe from other continents some say adidas. [laughs] We'll just stick with what I am comfortable with. Both of these companies' global footwear giants are trying to be more direct-to-consumer and they are also building in a lot of customization in the DTC, direct-to-consumer ordering. As you become, let's say, the next generation of Nike adherence go back to those who are like me are now eight and 10 years old, but buying for the right reasons, maybe because they like the technology, they like the feel of the shoes, and of course, they don't only do shoes, they're also in the bigger athleisure trend. But as you can start with a pair of Nikes and customize it at a young age, it really is a path for you to become a lifelong customer, and this is one of the reasons why I think so many Dan's followers probably voted for Nike, because they understand where Nike is going in terms of innovation. 

I think also the labor issues of years passed, maybe in the back of many investors minds that that is something that bothers me, although ostensibly they've really cleaned up the act in their supply chain. You can see that Nike has a path to really avoid not just its own retail outlets, but those third-party stores which have been the core part of their revenue growth for so many years. I think they'll do it. I think that they will become a much more profitable company than they already are, and they are very profitable to begin with. I think cash flow will also improve, which will give them additional optionality in other spaces within the athletics market, but again, how fast can this company grow and at what point do you start to get diminishing returns from this big shift into direct-to-consumer? Those would be my long term questions about their thesis. Again, bottom line though, it's hard to see this being an investment that's going to lose money. If you buy Nike today, I think over the long term, consistent, steady cash flow growth is your best friend in this industry and with an investment in Nike as well.

Flippen: The last company we're going to talk about today isn't an at-home fitness company at all, actually. What's interesting and starts comparing to something like Nike, I would say they don't quite have the raving fan base that maybe Nike does. I could be wrong about that, but I will say this, my boyfriend and I recently toured around a couple of gyms. He was looking for a gym membership. I'm perfectly happy with my NordicTrack bike. But as we were touring around, the person who was showing us around, I believe it was LA Fitness told us, "I don't care where you go to the gym, just promise me, you won't go to Planet Fitness (NYSE:PLNT)." You know what, that's the next company we're going to talk about today. [laughs]

Sharma: There's a story here, so why not? I'm just curious before we really jump into Planet Fitness.

Flippen: She said, "You can't throw the weights on the floor. They have a lunk alarm and the alarm will go off if you make too much noise, and I didn't tell her this at the time, but that's an appeal to me. [laughs] That sounds wonderful.

Sharma: There are a couple of things going to a gym that bother me. The first is my scrawny physique. Safe to go in there and there's a bunch of buffet people working out, both sexes, and the second is that clanging of heavyweights, which is further reinforcing how out of shape I am. My problem was of course, when I was younger, I used to go to the gym and I would work out, small diversion here listeners, please bear with me, and I would do some exercise, upper body exercises. I would bench press, do some machines, and I'd run to the Mirror to see if anything had changed. Nothing had changed. [laughs] This was my pattern at the gym and it never really worked. As a result, in my middle age I have the same scrawny physique that I had as a younger person in my 20s, and I always pause and try to tell people and I recollect this about myself, don't invest the way that I used to work out. If you're investing, invest for the long term, don't run to the Mirror, i.e. don't check your portfolio every five minutes. [laughs] Try to make the right choices and not look at them too often. Getting back to this though. I hate that sound, Emily. I hate it when really strong people are pulling up weights and dropping them, because it just reminds me [laughs] of how out of place I am.

Flippen: It's such sage advice you have about not constantly checking your physique, like your portfolio and Planet Fitness 100% caters to the person who isn't necessarily trying to make a scene in the gym about how strong they are. I realize there are people out there who are very fit, who actually need to make noise when they lift weights, good for you, I'm very happy for you. I'm not jealous at all, everything's fine, but I and a lot of other people don't necessarily need to hear it, [laughs] and Planet Fitness knows that. A lot of people might be listening and thinking to themselves, "How does Planet Fitness have anything to do with at-home fitness?" Clearly, their growth story is just how many stores or how many locations they can open. That's really true, which is why we said this basket today would have something for everyone. They actually have a partnership with iFit alongside a business called ICON, and they have partnerships to help build out their own digital experience. They've been investing a ton into their app, pulling people into the Planet Fitness ecosystem by getting them involved digitally first, and even when they were locked down back in, I believe May, April 2020, when the lock-downs first started to happen, they were trying to get people, even without paying anything for their Planet Fitness membership, to engage with at-home workouts over their app. I love how management talks about that opportunity because management said, "Hey, we saw people coming into Planet Fitness who were doing workouts on their phone, in a Planet Fitness," and they thought, "Well that's an opportunity that we're just automatically losing, despite the fact that somebody is coming here to do those workouts, they should be using the Planet Fitness app." That's exactly in the direction that they are going.

Sharma: I think that's smart of them. I also think that for Planet Fitness, they don't really need a solution like this, to bounce back from the pandemic. They had a tough year last year, their revenue declined considerably and they ended up with a loss of about $15 million on about $407 million of revenue. The year before, they had almost $689 million of revenue and they had $118 million in income. That just gives you an idea of the trajectory they've been subject to during COVID. People are going to come back to the gyms, and as the U.S. opens up, it looks like we're on track to really get through this, and as I like to say, put COVID in the rearview mirror. People are going to come back, but adding this layer to it will open up their membership to people who might not have considered having a Planet Fitness membership. I like this and I think getting in on the subscription angle, partnerships, all of that is good long-term for their business. This is something that, again, there's certain stocks in this industry which are easy to overlook because they are very familiar and they might be small, or you might think that they're business models from yesterday. 

We were talking about Lululemon at the beginning of the show and how they've transformed. Planet Fitness seems to be like a Lululemon to me, or a company that's been around, they've had their ups and downs, but they're trying some innovative ways to grab new subscriptions and to make people more loyal. I think it's a great one to put on the radar screen. I'm eager to see how it will perform over the next year or so, as a lot of people, not Emily who likes to stay indoors, [laughs] but other people like her boyfriend want to get out and get back in the gym and experience fitness in that matter.

Flippen: Well, I know we didn't put together today's show to be a full basket of at-home or fitness companies really in general, we're just talking about some businesses that we like that play in the industry. I do think and I look at I think we're on five businesses that we talked about today, maybe five, six. When I look at these businesses, I like them all actually. I feel like after talking with you, I kind of wanted to go out and buy all of these businesses if I don't already own them, because it is interesting. You're seeing a very real trend that's happening in the market today, and all of these businesses have some unique way of tackling that market. I know we didn't intend for it to be a basket, but I think this could be a basket.

Sharma: We might have talked ourselves into it because we realize there is this whole technology angle that's growing. There's the subscription angle which is growing and a huge interest in getting fit, which the pandemic may have started, but I think people are going to keep going as they realize how fun it is to be healthy. I need to, as I said, get back into that frame of mind myself. Let's do this. Emily, either way, let's revisit this one at the end of this year because we have another basket that we actually mapped out in more formal terms in January. When we revisit that shopping, we called it the shopping basket, we'll add this one in just to see how it did.

Flippen: That sounds great, and we'll see if my NordicTrack is just a clothes hanger by that point. [laughs]

Sharma: Fools, it's a lot of fun. Thank you for having me, Emily, it's always a great joy.

Flippen: Thanks, Asit. Listeners, that does it for this episode of Industry Focus. If you have any questions, you can shoot us an email at or tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks, of course, who worked behind the screen today. For Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.