Fitness Time reported a weak set of Q1 22 results. Although net income increased to SAR46.0mn vs a net loss of SAR7.0mn in Q1 21 (SAR85.9mn in Q4 21), it was lower than the SNB Capital and consensus estimates of SAR70mn (each). Revenues increased by 55.9% yoy (-11.3% qoq) and were in-line our estimates. However, the variance in earnings was primarily due to lower than expected gross margins, which stood at 37.0% vs our estimate of 45.0% and Q4 21 levels of 47.8%. The margin contraction was mainly due to higher staff and maintenance costs. As a result, gross profit stood at SAR85.6mn vs our estimate of SAR105mn.
Revenue increased by 55.9% yoy to SAR232mn and came in-line with our estimates of SAR233mn. We believe the yoy increase was primarily led by higher membership and PT revenues due to 1) the opening of new centers and 2) higher operating days compared to the same quarter last year.
The total number of gyms stood at 150 (including 21 Xpress gyms) by the end of Q1 22 vs 137 in Q1 21. Accordingly, LFL grew 46.4% yoy, mainly due to normalization of operations after the ease of COVID-19 related restrictions.
The company recorded a gross margin of 37.0% and came lower than our estimates of 45.0%. This compares to the 18.4% in Q1 21 and 47.8% in Q4 21. We believe the variance in gross margins is driven by higher staff and maintenance costs. Although gross margins improved significantly on yoy basis, it was mainly due to a lower base in Q1 21 which was impacted by center closures due to COVID-19. We believe the margins miss is a major concern of the results.
Operating expenses in absolute terms increased by 18.7% yoy to reach SAR27.0mn against our estimates of SAR22.6mn. Opex-to-sales decreased to 11.7% vs 15.3% of Q1 21, but came higher than our estimates of 9.7%. We believe the variance in opex is mainly driven by higher IT costs and advertising expenses.
Non-operating expenses stood at SAR12.7mn (+9.8% yoy), in-line with our estimate of SAR12.8mn. We believe the yoy increase was mainly due to higher zakat expenses.
Based on our last update published in December 2021, we are Overweight on Fitness Time with a PT of SAR132.4. We believe the company’s outlook remains positive driven by growth in active memberships, centre expansions and increasing PT revenue. However, the margin contraction is a key concern. The stock is currently trading at a 2022f P/E and EV/EBITDA of 23.9x and 11.9x.