Why Peloton Investors Are Smiling Today
After all the bad news, Peloton reassures investors: Q2 revenue is safe.
Staying healthy and looking good will never go out of style. Whether you’re trying to improve your cardiovascular health or want to get stronger, it pays to work out at home or hit the gym.
While gym memberships and home exercise equipment cost money, you might be able to recoup that expense by investing in the most profitable gym stocks.
Here are six top fitness companies to watch in 2021:
|Planet Fitness (NYSE:PLNT)||$6.4 billion||Owns and franchises a chain of low-priced gyms, primarily in the U.S.|
|Peloton (NASDAQ:PTON)||$34 billion||Sells connected bikes and treadmills and monthly subscriptions.|
|Nautilus (NYSE:NLS)||$450 million||Sells home workout equipment under the Bowflex, Schwinn, and Nautilus brands, and a digital subscription under the JRNY brand.|
|Lululemon Athletica (NASDAQ:LULU)||$52 billion||Retailer specializing in workout apparel for women and men.|
|Garmin (NASDAQ:GRMN)||$28 billion||Develops and sells a range of devices, including fitness trackers and adventure watches, specializing in GPS technology.|
|Life Time Group Holdings (NYSE:LTH)||$3.7 billion||Luxury gym owner in the U.S. and Canada.|
Planet Fitness operates a chain of ultra-low-cost gyms with monthly fees as low as $10. Planet Fitness, with more than 2,000 locations, prides itself on being inclusive of all fitness levels.
Most Planet Fitness gyms are located in the U.S. Management has a long-term goal of reaching 4,000 locations in the U.S. alone, and the company has plenty of opportunity to expand internationally.
Most Planet Fitness locations are franchises, but the company also directly operates more than 100 facilities. The franchise business model results in a very high operating margin with low capital intensity.
Planet Fitness is well positioned to capture market share after many of its competitors closed their doors permanently during the coronavirus pandemic. After stronger-than-expected results in the summer of 2021, management raised its outlook for store openings. Its profits are likely to increase as people start going back to the gym.
Peloton is known for its connected stationary bikes and other home workout equipment. Although users must purchase Peloton equipment, the company earns most of its revenue from the subscriptions required to fully utilize its bikes and treadmills.
Peloton has more than 2 million subscribers who pay $40 per month for a connected fitness subscription. Nearly 1 million more pay $13 per month for the digital-only subscription. Digital subscriptions are immensely profitable for Peloton, which has a gross margin of more than 60%.
The home gym company thrived during the pandemic since most people were confined to their homes. But, as the coronavirus pandemic subsides and gyms reopen, the company hasn’t kept up its pace of growth. Management slashed its sales forecast by about $1 billion for fiscal 2022 after sales slowed in October. Even after reducing its equipment price and launching a new treadmill product in August, Peloton now expects to end 2022 with fewer subscribers than it had predicted earlier.
Nautilus is the owner of well-known home gym equipment brands such as Bowflex, Schwinn, and its namesake Nautilus brand. The company also benefited from the pandemic, posting record highs in revenue and nearly doubling its year-over-year sales in 2020.
Nautilus, which is focused on connected fitness, launched its JRNY digital subscription product at the end of 2019. It expects to reach 250,000 subscribers by the end of fiscal 2022 and 2 million by the end of 2026, at which point connected fitness will likely account for about 20% of the company’s revenue.
Although the company’s brands allow it to operate with strong margins and produce a profit, connected fitness represents a significant opportunity for the small cap stock to generate attractive, reliable profits on a long-term basis. If management meets its subscriber goals, its revenue split between equipment and subscriptions would be on par with rival Peloton.
While many apparel retailers have struggled during the pandemic, Lululemon Athletica managed to expand its sales and gross margin. In 2020, the company, which is best known for its yoga pants and accessories, successfully generated more sales from e-commerce.
Management is expecting to increase the company's 2021 revenue to more than $6 billion -- up from $4 billion in 2019 -- representing an acceleration from pre-pandemic growth rates. Lululemon’s brick-and-mortar retail operations are once again operating at full capacity, and the number of Lululemon stores is increasing.
The company has also moved into the connected fitness space with its 2020 acquisition of Mirror. This $1,500 home gym device requires a $40-per-month subscription, and Lululemon is uniquely positioned to leverage its retail stores to drive sales of the service. While the product will likely continue to be a drag on profits for the next few years, successfully scaling this connected fitness offering to millions of subscribers will produce plenty of long-term recurring revenue for the company.
Garmin started by manufacturing global positioning system (GPS) navigation devices for automobiles. Today, the company generates the bulk of its revenue from personal fitness devices such as smartwatches, fitness trackers, cycling power meters, and heart rate monitors. Consumer demand for fitness trackers continues to grow as more people look for ways to enhance their health.
Garmin expects 2021 to be the sixth consecutive year its revenue has increased. The company’s management is aggressively investing in research and development, which should ensure that Garmin maintains its gains in market share while also expanding into new markets.
Life Time Group Holdings operates more than 150 luxury fitness centers in the U.S. and Canada. Many of the high-end gyms were forced to close during the pandemic, but Life Time has reopened and is building new centers. It has plans for 12 new fitness centers in the works. Revenue is trending back toward 2019 levels and should return to its pre-COVID run rate in 2022.
As a luxury brand, Life Time has the opportunity to increase the value of its memberships more than low-cost gyms catering to budget-conscious consumers such as Planet Fitness. That’s especially true as members return to physical gyms. The company still has thousands of members on its digital-only subscription, which doesn’t provide access to its centers where there are opportunities to provide value-added services such as dining, spa treatments, and personalized services.
Gyms, connected fitness, and digital subscriptions all generate recurring revenue, which can lead to more predictable revenue growth. Subscriptions can also provide a strong revenue base for companies to sell equipment or apparel. Focusing on investing in companies with business models that generate plenty of cash is likely the most profitable approach.
The performance of gym stocks can vary seasonally since many people focus more on their health around the new year. But despite that potential price volatility, adding a top gym stock to your portfolio may be just the right fit for you. At the very least, buying stock in a fitness company may make you feel better about paying for an unused gym membership or a Peloton that you hang clothes on.
After all the bad news, Peloton reassures investors: Q2 revenue is safe.
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