Sweating the Pandemic: Analyzing the Fitness Industry (Chapter 03) Sweating the pandemic Prior to the pandemic, the health and fitness industry was booming. An article in Forbes reported that the industry had been growing at a rate of 3-4% each year for the past ten years, with 1 in 5 American adults holding a fitness club membership at one of 32,000 clubs nationwide. But the pandemic changed that. Along with movie theaters and dine-in restaurants, gyms were considered a high-risk venue for spreading the coronavirus, so in March 2020 most gyms across the country were ordered closed, ending a growing trend toward in-person group fitness classes. In their place, many people turned to outdoor exercise activities, at-home gym equipment, and online fitness classes. The sudden move from in-person club memberships to at-home workouts had both negative and positive impacts on companies operating in the fitness industry, as you will see. Planet Fitness, famous for its Judgment Free Zone, $10 monthly fees, and bright purple paint, had more than 2,000 fitness centers operating under its name in early 2020. Most of these fitness centers operate as franchises, which means the gyms are owned by business entrepreneurs other than Planet Fitness. Planet Fitness helps these gym owners get their businesses up and running by finding a location, negotiating a lease, sourcing gym equipment, drafting membership contracts, training staff, and providing ongoing marketing and business support. For all these services, Planet Fitness charges franchise fees that are calculated primarily based on each franchisee's own membership billings. The yearly income statements of Planet Fitness (see below) show that most of its revenue has come from franchise fees and selling Planet Fitness-branded equipment to franchise owners. Slightly less than one-quarter of Planet Fitness revenue has come from operating company-owned stores. Planet Fitness, Incorporated Income Statements For the year ended December 31 (in millions) 2019 Franchise fee revenue $ 277.6 Equipment revenue 251.5 Company-owned stores 159.7 Total revenues 688.8 Total expenses 571.1 Net income $ 117.7 2018 $ 224.1 210.2 138.6 572.9 484.9 $ 88.0 Nautilus also operates in the fitness industry. But rather than run gyms, this company manufactures and sells fitness equipment. Its commercial-grade equipment line is sold under the brand name Octane Fitness to hotels, physical therapy clinics, corporate wellness centers, and even NFL/NBA sports teams.? Nautilus at-home equipment is sold under several brand names, including Bowflex and Schwinn. The company doesn't report a breakdown of commercial versus at-home sales revenue, but it does say that slightly less than half of its revenues are from direct-to-consumer sales (most likely for at-home use). Peloton is a relatively new entrant to the fitness industry. The company makes and sells exercise bikes and treadmills that require a monthly subscription to an app that connects people in their own homes to other users online and to professionally generated content. With eye-popping prices for its bikes ($2,000) and treadmills ($4,000), plus a $39 monthly subscription, Peloton struggled in its early years, racking up over half a billion in losses prior to its September 2019 initial public offering (IPO). But in the first year after its IPO, Peloton's stock price quadrupled from $25 to $100 per share. To understand investors' enthusiasm, you have to look closely at its revenue breakdown in its income statements (see below). There you will see that customers have been not only buying the bikes and treads, but also keeping their monthly subscriptions. Unlike the one-time sale of a bike or treadmill, that monthly subscription can be a recurring revenue stream for Peloton and is a key reason for investors driving up the stock price. That's why investors closely watch the number of total subscriptions, cancellations, and average workouts each quarter. If customers are staying engaged after initially buying the equipment, they are more likely to stick with Peloton for the long term, providing the company with an easy source of ongoing revenue. Peloton Interactive, Incorporated Income Statements For the year ended June 30 (in millions) 2020 Product sales revenue $ 1,462.2 Subscription revenue 363.7 Total revenues 1,825.9 Total expenses 1,897.5 Net income (loss) $ (71.6) 2019 $ 733.9 181.1 915.0 1,110.6 $ (195.6) "Midgley, B. "The six reasons the fitness industry is booming." Forbes, September 26, 2018. Accessed September 27, 2020, from https://www.forbes.com/sites/benmidgley/2018/09/26/the-six-reasons-the-fitness-industry-is-booming. 2 As of September 29, 2020, a list of commercial customers is presented at https://www.octanefitness.com/commercial/about/#our-story. a. & b. Calculate the net profit margin of Planet Fitness for the years ended December 31, 2019, and 2018. Report the net profit margins as a percentage. (Round the final answers to 1 decimal place.) a. Net profit margin at December 31, 2019 b. Net profit margin at December 31, 2018 c. Did the company become more or less) profitable in 2019? c. The company became profitable in 2019