I just ran across a vintage advertisement from my grandfather’s era, similar to the one below. It’s for the famous bodybuilder Charles Atlas, and his mail order fitness course. These ads became somewhat famous over the years. In fact, some of them ran in various iterations for decades.

The world looked a lot different in those days. The march of technology has brought miraculous innovations that could scarcely have been imagined back then… self-driving cars, GPS-guided delivery drones, even refrigerators that sense when your milk is running low.

But there’s one thing that hasn’t changed a bit over the decades, and that’s the near-universal desire for a healthy physique. Alas, even in the 21st century, nobody has invented a little white pill that melts away pounds and builds muscle while you sleep.

Until they do, there is simply no substitute for diet and exercise. It’s as true in 2021 as it was in 1950.

The Economics Of Fitness

I want to focus on the second part of that equation today. It’s not just because I joined a gym last month (spent half my time casually assessing its operating leverage and scalability). The truth is, I admire any industry that can sell a service that millions of people pay for and then never use.

The intent is certainly there. Countless gym memberships are borne from New Year’s resolutions to shed a few pounds and get in shape. But following through on that goal is another story. Motivation wanes over time, and life tends to get in the way. Those thrice-weekly visits in January start to get less frequent by March or April. For many, they end altogether long before the 12-month membership is up for renewal.

Gyms. Yoga studios. Pilates centers. Spin classes. Doesn’t matter. Statistics tell us that roughly one-third of all members rarely (or never) use the facilities. Others show up only sporadically. Believe it or not, the owners count on that.

How else do you explain the fact that a typical Planet Fitness location in midtown Manhattan has approximately 6,000 paying members, yet the capacity to hold just 300 guests? That business model only works if 95% of your customers don’t avail themselves of the treadmills and stair steppers at any given time.

Let me throw a few numbers at you.

There are approximately 50 million adults in the U.S. with some type of fitness center membership. That’s about one in five nationally. On average, most have around $50 in monthly fees deducted from their bank accounts for the privilege. Incidentally, per-capita spending on fast food runs about $100 per month, or twice as much. Still, it’s a good chunk of change.

Collectively, Americans spend a whopping $33 billion annually at the gym. Global spending is three times that amount, with worldwide revenues approaching $100 billion.

These are some compelling figures for investors. But actually, it’s the other side of the industry that interests me. I’m talking about stay-at-home workout equipment… dumbbells, ellipticals, stationary bikes. Needless to say, publicly traded stocks in this corner of the market soared during the early stages of the pandemic when lockdowns took hold and gyms closed across the country.

Stay-At-Home Fitness

If you’re going to be quarantined at home for months at a time, you might as well get in shape.

That thinking turned into a powerful catalyst for manufacturers like Nautilus (NYSE: NLS). The well-known maker of cardio and strength training products (including the ever-famous Bowflex) was doing okay selling its wares through various retail channels and direct to consumers. But the stock wasn’t exactly going anywhere. In January 2020, NLS was changing hands for around $3.

But then we started hearing about this mysterious Coronavirus. And the outlook seemed to get worse by the day. But not for Nautilus. By June, the stock had already tripled to $9. And it didn’t stop there, peaking above $30 the following February.

That’s a powerful 10-fold surge in a little over a year.

Of course, that impressive stock chart was matched by some remarkable strides on the income statement. Fourth-quarter sales jumped 143% to $206 million, shattering company records and driving operating profits up more than 1,000%.

But no company can sprint at that pace forever. Growth rates have since moderated. And with the “stay-at-home” stock trade weakening, shares of overbought companies have retreated sharply. NLS has since slipped from $30 to $20, and from $20 back down to $10.

Still… not a bad return for investors that were on board for the entire ride.

We Can Still Profit

Shares of Nautilus could see new life from these levels, but I’d encourage you to do some research on the broader industry in general before deciding on any favorites. (In fact, I’ve actually got a more attractive candidate in mind that I recently shared with my premium readers.)

But that begs the question: why look here when the party seems to be over?

Well, for one thing, this trend isn’t going anywhere. Covid is teaching us day-by-day that while some things can go “back to normal,” other aspects of business and life are being completely revolutionized right before our eyes.

Second, as you’ve probably seen, more and more devices are becoming “connected”. In the health and fitness world, that means, of course, access to classes and fitness programming on your device at home. But it also means giving users insights into data to help make better decisions. Think of it as “fitness as a service”. And unlike those expired gym memberships we spoke of, these customers keep coming back and don’t lose interest. Annual retention rates are high, often with fewer cancellations than Netflix. And that’s important because once they buy the equipment, these users keep sending in high-margin subscription fees every 30 days.

What’s more, this business lies at the intersection of fitness and technology – which makes it a good strategic fit for larger “connected fitness” players. So don’t be surprised if larger tech players end up looking into this space for deals.

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