I am probably the least fashionable person you’ll see at the gym.
My workout attire is what most people regard as ‘home clothes’.
You wouldn’t know if I was off to do a tip-run or 30mins on the treadmill.
I never really understood why people bought clothes specifically for the gym.
I mean, you’re going to get sweaty and gross. Why wear nice clothes if they’re just going to get soiled in B.O?
But then I realised, not everyone goes to the gym to exercise.
Many do it for status.
‘Gym culture’ has exploded with social media.
Hashtags like #Fitspo #Trainiac #InstaFitness #FitnessBlogger are some of the top Hashtags for the fitness industry on Instagram.
A whole industry of fitness and ‘wellness’ influencers has emerged in this rapidly growing category – fuelled by a market of millennials taking photos of their gainz.
And it’s big business.
According to a 2018 report by the Global Wellness Institute, the total global spend on the wellness industry in 2017 was $4.2 trillion, with a 6.4% p.a growth rate over a 3 year period.
Looking and feeling good is a massive, growing category.
So, if you’re going to take photos of yourself to show off those killer traps, it’s important to look fashionable as well, right?
I’ll be honest – I had never heard of Gymshark up until a few months ago.
I came across the company via a Youtube video of the founder, Ben Francis sharing his business journey.
The Gymshark story is amazing. It’s quite literally your ‘rags to riches’ story.
It goes something like this:
A 19 year-old, struggling pizza delivery boy starts a sports supplement and clothing company from his bedroom.
Armed with a screen printer and sewing machine, he spends his nights hand making clothes and selling them online.
Fast forward just 7+ years – the company is now worth $1.45B USD.
Here’s the video if you want to check it out yourself.
So what was the problem that Ben was solving here?
According to Ben, most ordinary gym clothes weren’t the right fit. Too loose, not tight enough around the arms and your butt.
Basically, you don’t look good in clothes that are ordinarily used to clean your bbq.
And that’s especially important if you’re trying to impress your friends on Insta.
GymShark’s growth has been primarily attributed to their use of ‘influencer marketing’.
They were one of the first brands to pioneer this growth tactic by gifting their products to weight lifting/gym influencers on Youtube and Facebook.
Mind you, the concept of influencer marketing has been around for hundreds of years. But the model was different.
Once upon a time, a brand had to pay the agent of a celebrity a lot of money to endorse their product. It would take a long time to negotiate. Formal contracts had to be established. Your brand was also pitched against other brands (celebrities have all the leverage). For these reasons, celebrity endorsements were reserved for large, already established corporates.
No ordinary Joe can get Michael Jordan as a brand ambassador.
What has changed is the price and accessibility of this marketing tactic.
Social media has given anyone and everyone the platform to be an influencer. The barriers to entry to becoming an influencer, and for brands to endorse them, have been eliminated.
Gymshark was one of the first brands to champion the lesser known, up and coming athletes and gym influencers. They helped to foster this gym culture, which helped to rocket their brand into what is now a legitimate player in the global sports apparel industry – a challenger brand to the juggernauts of Nike, Rebok, Lululemon etc.
Just last month, Ben announced that Gymshark is worth $1.45B. The company took an equity growth round from Growth Capital PE firm, General Atlantic and cashed his old business partner out.
Pulling data from the announcement video, coupled with the FY16 – FY19 financials pulled from the CompaniesHouse (UK’s publicly available database for company financials), I’ve put together a financial analysis of Gymshark.
In this financial teardown, we’ll be looking at:
- Revenue growth and gross profit margins
- Customer acquisition costs and Net Profit margins
- Working capital and Cash Conversion Cycle
We’ll then attempt a “back of the envelope” pricing exercise to see if the $1.45B stacks up.
Revenue and growth
Revenue has grown strongly, from £8.7M in 2015 to £176M in 2019, representing 82% compound annual growth rate (CAGR).
Although the 2020 financials haven’t been released, the revenue, according to Ben’s video was £260M.
So yes, this is extraordinary, top line growth.
But as we know, revenue is a vanity metric. Let’s look at the quality of revenue by assessing the gross profit margins.
Gross Profit (GP) margins have remained consistent at 67% – 72% of revenue – which is abnormally high for apparel, and retail in general.
For comparison (FY19):
- Nike’s Gross Profit margin: ~45%
- Adidas Gross Profit margin: ~52%
- Lululemon Gross Profit margin: ~52%
So does this mean Gymshark has superior gross margins compared to the major labels?
That’s because of its distribution strategy.
Distribution strategy has shifted with DTC
The traditional playbook to scale a consumer brand was to make a crap load of products and get that in the hands of as many people as possible.
Pre-internet, this was achieved through wholesale.
Let’s look at Nike as an example.
Nike’s sales channels can be divided into two categories:
- Wholesale – this is Nike’s biggest distribution channel
- Direct-to-consumer (DTC) via:
- Ecommerce – Nike Direct and Amazon
- Company owned retail outlets – bricks and mortar
Let’s check out the mix Nike’s sales per channel for the last 4 years, using data sourced from their annual reports.
As you can see, the majority of Nike’s sales are sold via wholesale (the old retail distribution strategy).
But, the trend is changing. DTC as a % of revenue is growing, which is an intentional strategy deployed by Nike, referred to as the “Triple Down Strategy”.
Selling DTC has a range of strategic benefits. Owning the customer experience and relationship with the customer builds and protects the brand equity moat you may lose due to a crappy experience with an intermediary retailer. Having a direct relationship with your customers allows for faster product innovation with immediate feedback loops.
The financial benefit is better gross profit margins.
Instead of selling wholesale to a middle man, where typical Gross margins are between 40-50%, can you realise the supply chain margin and achieve gross margins of up to 60% even 70%.
This pure-play DTC model is being rolled out by Gymshark, which is why Gymshark’s product gross margins are up in the 60%- 70% range.
But, is this really an apples with apples comparison?
No. Here’s why.
Selling DTC comes with a bunch of other costs that don’t come with wholesale.
And the biggest cost is distribution.
Distribution in the form of shipping (which is usually absorbed by the brand) and customer service.
The “trade-off” benefit of the wholesale sales channel is that your retailers are your distribution costs: customer support, fulfilment, support tickets. Equally, they wear the full brunt of dealing with returns refunds and the irrational Karens…
These are direct costs your profit margins, and for Gymshark cost ~20% of revenue.
According to the financials of Gymshark, the Distribution Costs are regarded as operating expenses.
There are limited notes in the financials that disclose what these costs entail, but it’s likely they are the shipping, customer service and other fulfilment costs.
For analysis purposes, these should be considered as direct costs, adding to Cost of Sales (COS).
But for some reason Gymshark’s auditors have regarded it as operating expenses.
If we consider these distribution costs up to COS, the adjusted GP margins are as follows:
So, factoring distribution costs, the margins are back to being comparable with other apparel brands, who primarily sell wholesale.
So what conclusion can we draw here?
Well, perhaps the advantages of being pure play DTC isn’t financial at all. Strategically, it’s more about owning the customer and building that brand equity – the only economic moat available to DTC businesses.
Accounting and finance tips for Ecommerce founders:
- Consumer facing retail brands should aim for gross profit margins of 40%+, irrespective of your distribution strategy (wholesale vs DTC).
- This gross margin should be net of returns, discounts, merchant fees and fulfilment costs
- If you’re trying to calculate your gross margins, ensure you correctly structure the chart of accounts in your accounting system so that all these direct costs are considered.
- You can learn more in our Ecommerce accounting guide here.
Gymshark has remained profitable as it has scaled. This is ultra rare to see in this day and age where every consumer facing brand seems to be raising a bucket load of money to acquire market share cue Casper.
Who would have thought bootstrapping a company comes part and parcel with profitability?
Operating margins have ranged between 9% and upwards of 20% over the 5 year period to 2019 – which is healthy.
Our recommendation is that growing DTC brands should be aiming for net profit of 10% -15%, so Gymshark is well within the realm of profitable growth.
It will be interesting to observe how this changes with the growth equity round from General Atlantic – as raised cash will undoubtedly be deployed into customer acquisition as it expands into the North American market.
Cash flow and Working Capital
Retail businesses are traditionally capital intensive business models.
Most of an eCommerce business’s cash is locked up in Inventory. The key to operating leverage is a company’s ability to manage working capital – it’s inventory, receivables and payables. This ensures profit and cash flow grows at the same time.
Gymshark does this well.
Gymshark’s Cash Conversion Cycle (CCC) was an enviable 48 days at FY19. It held its inventory by an average of 108 days and settles suppliers on an average of 60 days.
Compare this to:
So what makes it so different to the major players?
Again, its distribution strategy. Gymshark is strictly DTC, so it has no accounts receivable. Contrast this to Nike where accounts receivable days (DSO) was 34 days because of wholesale distribution.
This directly correlates to its Operating Cash flow.
Gymshark’s cash flow operating margin for FY19 was ~6%, meaning that for every $100 of sales, the company spins off $6 of operating cash flow. Cash to be deployed back into reinvestment.
This is a very healthy position for a typically capital intensive business model.
Simply put, Gymshark is a cash-generating machine.
Accounting and finance tips for Ecommerce founders:
- Your ability to manage working capital is the secret sauce to improving the cash position in your business.
- Read this article on “The Power of Having a Negative Cash Conversion Cycle”
Ok, so now the question we’re asking. Is Gymshark worth over a $1bn?
To start, let’s look at some Enterprise Value (EV) /Revenue comps.
EV / Revenue comps
- Nike: 5x
- Adidas: 2.8x
- Lululemon: 13x (whoa!)
This table outlines the implied EV/Rev multiple using Gymsharks 2019 actual revenue and reported 2020 revenue per Ben’s video.
So, is it in the money?
Given Gymshark is still a private company, one would typically add a liquidity discount of 25% from public multiples (which should lower the implied multiples from the comparative companies). Gymshark is also still small relative to the comparative companies, so there should be a discount to that.
All things considered however, Gymshark is on a growth trajectory – and General Atlantic are betting it won’t slow down. This growth would be baked into the multiple.
So overall, it’s not unreasonable.
Ben Francis has created an incredible, high-growth and cash flow producing powerhouse of a brand.
Many outsiders see Gymshark as a brand with awesome marketing and leadership. It’s personally pleasing that the brand hype is supported by equally strong financial management. Full credit to Ben who had the self-awareness and humility to insert professional management (CEO and CFO) at the early stages of the business.
Gymshark without a doubt sets the standard for scaling a bootstrapped Ecommerce business. and benchmark for aspiring Ecommerce entrepreneurs.
It’s a refreshing case study for everyone to reflect and stark reminder to those looking to scale their business.
You don’t need to raise venture capital to be a great, high growth business.
Fund your company with customers.
If you’re interested in more financial tear-downs like this, subscribe to our newsletter.