Senior Managers' Update
We are reporting an overperformance to our profit budget of £100k at the end of October although income has been challenging and we are £814k behind budget at the end of the period. The shortfall is primarily in fitness, which is £1.3m behind budget. This is mostly due to the poor performance in Q4 of FY19 leading to a lower than anticipated opening club live position, along with continued pressure from low cost operators. Performance in Q2 improved compared to Q1 following the launch of Sales Cloud, the new membership rules and the 12-month contracts. Encouragingly, we have hit sales targets for five consecutive months despite the removal of commission at all sites earlier this year. Swimming is slightly ahead of budget with a strong performance in swim memberships and school swim, offsetting a large shortfall in casual swimming. Other activity income has performed well this year, mainly in outdoor and instructor income. Retail is £257k behind budget, facing the same challenges as the high street, as consumers look to buy cheaper products online.
We have achieved expenditure savings of £578k mostly due to utility costs, through lower than budgeted energy tariffs and good consumption savings in the 1st half year. At the end of October, savings in utility costs were £720k (net of benchmarking). We have also made good savings in marketing of £72k vs budget and received a £100k rent reduction at Places Gym Edinburgh to compensate for water leak issues in the new building. Disappointingly, R&M and minor equipment are both significantly overspent at the end of October eroding some of these savings. To control expenditure in the remainder of the year, a cost freeze has been implemented to restrict spend to essential items only. Delays in capital expenditure has resulted in depreciation savings to budget of £349k.
In the like for like sites, total income shows a year on year decline of -1.6% at the end of October. This is being driven by a decrease in fitness income of -4.8% partly due to the strong performance in Q1 of the prior year. Encouragingly we have seen an improvement in the trend since July with the year on year downturn diminishing each month. Swimming shows growth of just +1.5% although this is distorted by the exceptional performance in casual swimming during the summer months in 2018. Growth in lessons has remained strong this year at +5.4% and we have also seen good growth in school swim and pool hire. Other activity income has grown by +2.1%, driven mainly by outdoor income. Operating expenditure has increased by just +1.6% in like for like sites even with large increases in R&M, IT support and LA payment. Direct staffing has only increased by +0.6% despite the National Living Wage increases and a further increase in the pension auto-enrolment employer’s contribution rate. This is being driven through the focus in fitness staffing and personal training, and the removal of commission. Although costs are less than anticipated, the decline in income has resulted in a downturn in profit of £2.4m (-42%) in the like for like sites compared to the same period last year.
Offsetting some of the downturn are strong year on year improvements in non-like for like sites, particularly within the Epping contract and at Deben following the developments there. The newer sites in Wokingham, Dover and The Bridge in Horsham are also performing exceptionally well this year.
We have recently submitted our first draft FY20 forecast and FY21 budget to Group. Thank you to everyone for your contributions to this process. We are forecasting the 2nd half year to be extremely tough, with even more low-cost gyms opening close to a number of our sites, putting increasing pressure on fitness. In addition, the continued uncertainty in the economy presents a risk to our income in the remainder of the year.
We are continuing to focus on our family offer to differentiate ourselves from the low-cost operators and the launch of the new Into:Active memberships in January will allow us to target people who are not currently engaged in physical activity. We will start to see the benefit in attrition from the 12-month contracts towards the end of the financial year and we should also see increased recoverability of failed DD collections following the outsourcing of our membership collections to Harlands. Further developments in digital solutions such as QR readers, online swim lesson enrolments and self-serve ticketing will allow us to keep on improving efficiencies, as well as drive forward income.
In light of the challenge we face in the 2nd half year, we need Managers to ensure that all controllable costs are managed tightly and restricted to essential items only to help us finish as close to our profit budget as possible.