iFIT Health & Fitness Begins IPO Effort (IFIT)

Empty gym!
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Quick Take

iFIT Health & Fitness (IFIT) has filed to raise $100 million in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides fitness equipment to studios in the United States and internationally.

IFIT has produced impressive revenue and gross profit growth, but its operating losses are a concern, although the firm appears well positioned for future growth potential from changing consumer exercise habits.

I’ll provide a final opinion when we learn more about the IPO from management.

Company & Technologies

Logan, Utah-based iFIT was founded to develop a fitness equipment and connected subscription-based exercise equipment and services company via various brands.

Management is headed by co-founder and CEO Scott Waterson, who has been with the firm since inception and was previously co-founder of iFIT’s predecessor company, Weslo.

The company’s primary offerings include:

  • NordicTrack

  • ProForm

  • iFIT Subscriptions

  • Weider

  • Freemotion

iFIT has received at least $223 million in equity investment from investors including Pamplona, L. Catterton and others.

Customer Acquisition

The firm pursues customer relationships through a direct-to-consumer [DTC] channel, large retailer channel and a commercial channel.

IFIT counted 6.1 million total members, of which 1.5 million were Total Fitness Subscribers for its variety of equipment including:

  • Treadmills

  • Bikes

  • Ellipticals

  • Rowers

  • Climbers

  • Strength Equipment

  • Fitness Mirrors

  • Yoga Equipment

  • Accessories

Sales and Marketing expenses as a percentage of total revenue have risen as revenues have increased, as the figures below indicate:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

FYE Ended May 31, 2021

35.5%

FYE Ended May 31, 2020

32.7%

(Source)

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 1.4x in the most recent reporting period.

Market & Competition

According to a 2021 market research report by Allied Market Research, the global fitness equipment market was an estimated $11.6 billion in 2020 and is forecast to reach $14.8 billion by 2028.

This represents a forecast CAGR of 3.3% from 2021 to 2028.

The main drivers for this expected growth are companies further developing technologies providing options that consumers want, such as customized workouts and display technologies along with community connections.

Also, the COVID-19 pandemic has likely brought demand forward for home-based fitness equipment and online connection as consumers spend more time at home and seek to improve their physical health in the process.

Below is a chart showing the global fitness equipment market by type as it is expected to evolve from 2020 to 2028:

Fitness equipment market (by type)

(Source)

Major competitive or other industry participants include:

  • Johnson Health Tech

  • Peloton

  • Anta Sports

  • Technogym S.p.A.

  • Nautilus

  • Core Health and Fitness

  • TRUE Fitness Technology

  • Impulse Health Tech Co

  • Torque Fitness

  • Others

Financial Performance

iFIT’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue

  • Strong growth in gross profit and higher gross margin

  • High operating losses and increasing negative operating margin

  • A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

FYE Ended May 31, 2021

$1,745,056,000

104.9%

FYE Ended May 31, 2020

$851,680,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

FYE Ended May 31, 2021

$726,203,000

120.8%

FYE Ended May 31, 2020

$328,965,000

Gross Margin

Period

Gross Margin

FYE Ended May 31, 2021

41.61%

FYE Ended May 31, 2020

38.63%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

FYE Ended May 31, 2021

$(127,634,000)

-7.3%

FYE Ended May 31, 2020

$(49,754,000)

-5.8%

Net Income (Loss)

Period

Net Income (Loss)

FYE Ended May 31, 2021

$(516,706,000)

FYE Ended May 31, 2020

$(98,543,000)

Cash Flow From Operations

Period

Cash Flow From Operations

FYE Ended May 31, 2021

$(13,883,000)

FYE Ended May 31, 2020

$27,887,000

(Glossary Of Terms)

(Source)

As of May 31, 2021, iFIT had $146.5 million in cash and $1.66 billion in total liabilities.

Free cash flow during the twelve months ended May 31, 2021, was negative ($70.1 million).

IPO Details

iFIT intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure will likely be significantly higher.

Class A common stockholders will be entitled to one vote per share and Class B shareholders will receive 10 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

[an as-yet-undisclosed amount] retained by the Company and used for general corporate purposes, and to make a $35 million payment that is required to be made to our CEO;

[an as-yet-undisclosed amount] if the underwriters exercise their option to purchase additional shares in full) to make a cash payment, which together with the issuance of New Convertible Notes, will repay in full the 2019 Note; and

any remaining net proceeds (including following any exercise by the underwriters of their option to purchase additional shares) will be used to make a cash payment, which together with the issuance of New Convertible Notes, will repay in full our Series A preferred stock.

(Source)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says that any claims against it would be defended vigorously and would not have a material impact on its operations or financial condition.

Listed bookrunners of the IPO are Morgan Stanley, BofA Securities, Barclays and several other investment banks.

Commentary

iFIT is seeking public investment to make a lump sum payment to its CEO, to pay down debt and to buy its Series A preferred stock.

The firm’s financials show very strong topline revenue growth and gross profit growth, but high operating losses and increasing negative operating margin.

Free cash flow for the twelve months ended May 31, 2021, was negative ($70.1 million).

Sales and Marketing expenses as a percentage of total revenue have risen as revenue has increased; its Sales and Marketing efficiency rate was 1.4x in the most recent reporting period.

The market opportunity for selling fitness equipment is large and expected to grow at a low rate of growth.

However, the firm’s subscription/membership approach has produced extremely high growth far in excess of the industry’s growth rate as it appears to grab market share and expand the addressable market for integrated workout solutions that consumers want.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 26.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.

While IFIT has produced impressive revenue and gross profit growth, its operating losses are a concern, although the firm appears well positioned for future growth potential.

I’ll provide a final opinion when we learn more about the IPO from management.

Expected IPO Pricing Date: To be announced.