Gymshark revisited: Uncharted waters ahead for the direct-to-consumer darling?

Fitness apparel giant Gymshark just released its FY22 financials – so it’s time to take a deep dive.

In early 2020, I published a financial tear-down on Gymshark, where I uncovered how the direct-to-consumer brand has scaled with exceptional capital efficiency.

A lot has changed for the company since then – a growth funding round from Private Equity Firm General Atlantic, a change in CEO, COVID-19 (and associated whiplash), North American expansion, even a chain of brick-and-mortar stores.

Gymshark just released its FY22 financials, so I thought it would be worthwhile to see how Ben Francis and the gang are getting on.

Just when you thought it was safe to go back in the water…

The Gymshark story revisited

Gymshark has lived up to its promise with respect to growth, with revenue growing to a record £485M in FY22. The spike in revenue in 2020 and 2021 was attributed mainly to the COVID-19 bump, which saw revenue growth at 48% and 54%, respectively. Revenue growth slowed to a modest – yet still impressive – 20% in FY22.

Gymshark has stuck to its direct-to-consumer (DTC) strategy since the beginning of the business, but it was interesting to see that for the first time ever, we saw revenue generated from wholesale channels. There was limited commentary about this on the annual report, but it could be a signal that Gymshark is testing the waters of a wholesale strategy.

It’s also interesting to note the geographic expansion, with the US now the largest market for Gymshark, representing just under 50% of total sales. For a UK-founded business, this is an epic development.

Gross Profit margins – for the purposes of which I’ve included ‘Distribution costs’ as COGS, on the assumption these are primarily shipping and other direct costs – took a bit of a hit in 2022 at 40%.

This isn’t unexpected, as retailers were – and still are – feeling the impact of sky high freight costs, coupled with some cheeky discounting to move excess inventory built up shortly after COVID.

Working Capital took a bit of a hit in FY22, with inventory days climbing to a whopping 216 days. This reversed the company’s impressive negative cash conversion cycle in FY20 and FY21. 

I’d love to know the root cause for inventory days creeping up. Was this intended by the management team, or was it due to slower sales? I suspect it was the latter, with revenue growth halving compared to the prior year. We’ll have to wait another 12 months to see what the FY23 results show.

A side note: Take note of the accounts payable days (DPO) from 2019 to 2022, which have increased 3x from 60 days to 180! Gymshark’s suppliers are waiting half a year on average to get paid. It’s uncommon to see this in practice, so Gymshark have clearly got some leverage over their suppliers.

Extending your accounts payable is a tactic that requires you to pay your suppliers later. Doing this allows you to cover your expenses without having to seek external sources of financing.

This can be effective, but be warned.

Your accounts payables are your supplier’s accounts receivable.

Stretching a friendship too far can damage the relationship with your suppliers. Suppliers should be held in the same regard as your employees and even your customers – because without them, you wouldn’t have a business. If you decide to pursue this strategy, be conscious of their needs and seek their permission first before making any drastic changes to your arrangement.

This excessive inventory on hand put pressure on operating cash flow, which was negative in FY22 – which I believe is the first negative result since the company started.

Times are getting tough for consumer brands, driven by cost-of-living pressures as a result of soaring inflation and tightening interest rates by central banks. The next 12-24 months will be testing for many operators. 

It’ll be interesting to see how DTC darling Gymshark continues to navigate these waters.

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