Analysts question performance of Goodlife Health Clubs

The performance of the Ardent Leisure Group's Goodlife Health Clubs has been questioned by business analysts, with Ardent’s once high performing division being assessed as facing long-term structural challenges.

Having reached a high of $3.49 last year, shares in Ardent Leisure fell dramatically in March following the company's announcement of below-expectation results for the second quarter of 2014/15, largely influenced by Goodlife Health Clubs’ performance, and the departure of group Chief Executive Greg Shaw.

Following this, analysts at Deutsche Bank last month highlighted that Goodlife Health Clubs had materially underperformed due to increased competition in Australia’s fitness club sector.

According to the Australian Financial Review, Deutsche Bank suggested this drop in earnings as being caused by “structural change rather than a one-off issue and as such it lowered near-term earnings forecasts.”

Goodlife’s earnings declined 11% in the first half of 2015, as a result of increasing competition for customers in the fitness sector and Goodlife’s trial of a new flexible membership plan, which resulted in more people leaving the gyms than joining.

While the Deutsch Bank analysts rightly point out the increased competition in the sector, Australasian Leisure Management Publisher Nigel Benton highlights that this merely echoes findings from IBISWorld, published in February, that market saturation is expected to have a major impact on the Australian gym and fitness centre market in the coming years.

Benton believes Goodlife is particularly well placed in this market, stating “Goodlife wholly owns its 76 clubs around Australia, and this is a major long-term asset.”

While the massive growth in fitness clubs openings in Australia over the past five years has largely been through franchising, what analysts have thus far ignored, is that during the next 18 months a large number of these franchises, many of which were five-year deals, start to expire.

Benton sees this as creating a climate of considerable industry instability, suggesting “with many franchisees having linked a fixed-term franchise of, say five years, to a five year lease on their site and a five year equipment financing/leasing plan, the expiry of these deals will see them facing many questions in relation to the future of their business.

“In the early years of their franchises they probably made healthy profits but with increased competition in the last few years their incomes will have dipped.

“As a result, will they stay in the industry or, with their leases and franchise coming to an end, will they just walk away?

“At the very least, if they choose to continue operating, with an established site and membership base, clubs may choose to continue trading under their own brand rather than renew their franchise.”

This Benton feels, will leave the fitness industry’s many franchisors facing major hurdles in maintaining their numbers of franchised sites.

However, this change in the market will not aid Ardent Leisure in the short term, with some of the Group’s biggest shareholders reportedly unhappy at Greg Shaw being replaced by former Ardent Director Deborah Thomas.

According to media reports a group of Ardent's institutional shareholders have been considering calling an extraordinary general meeting in an effort to have Shaw reinstated as Chief Executive.

Greg Shaw (left) is leaving Ardent Leisure after 13 years, being replaced as Chief Executive by Deborah Thomas (right).

In other developments at Ardent Leisure, the Group’s media account will now be managed by Match Media.

As many as seven advertising agencies reportedly bid for the contact, worth $2.3 million in the year to March, an amount expected to rise to $10 million as Ardent ramps up its advertising in the coming months.

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