Latin American Expansion And Digital Offerings Will Drive Lasting Success

Key Takeaways

• Aggressive Latin American expansion and operational improvements are driving network growth, higher margins, and resilience despite varying economic conditions.
  
• Enhanced digital offerings, cross-selling, and pricing power boost customer retention, brand equity, and sustained revenue and margin expansion.
  
• Aggressive expansion, rising competition, macroeconomic challenges, reliance on lower-margin platforms, and digital disruption threaten Smartfit's profitability, growth, and operational resilience.

Catalysts

Smartfit Escola de Ginástica e Dança S.A.

• Continued aggressive expansion, especially in underpenetrated Latin American regions where gym penetration remains low and white space is significant, positions Smartfit for strong long-term recurring revenue and network-driven earnings growth as secular health and fitness awareness rises.
  
• A growing middle class and advancing urbanization across Latin America support a secular shift toward affordable gym memberships, expanding Smartfit's potential customer base and providing resilience to revenue even if economic cycles are weak in individual countries.
  
• Strategic investments in operational efficiency-such as better site selection, improved capital allocation, and renegotiated leases-are driving higher margins and superior ramp-up in new vintage units, which should support stable or improving company-wide EBITDA and net margins as portfolio maturity increases.
  
• The scaling of digital and hybrid offerings, proprietary apps, and cross-selling through TotalPass and Fitmaster enhances stickiness and upsell opportunities, increasing average revenues per user and reducing churn, which should drive outsized growth in both topline revenue and customer lifetime value.
  
• Ongoing pricing power demonstrated by successful ticket increases and revenue management, even in competitive markets, reflects strong value perception and brand equity, supporting both revenue growth and margin expansion potential over the medium to long term.

Smartfit Escola de Ginástica e Dança Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smartfit Escola de Ginástica e Dança's revenue will grow by 21.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 13.0% in 3 years time.
• Analysts expect earnings to reach R$1.5 billion (and earnings per share of R$2.57) by about August 2028, up from R$530.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 26.3x today. This future PE is greater than the current PE for the BR Hospitality industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.95%, as per the Simply Wall St company report.

Smartfit Escola de Ginástica e Dança Future Earnings Per Share Growth

Risks

• Persistent aggressive expansion into new and existing geographies increases the risk of diminishing returns on capital expenditures, higher SG&A relative to revenue growth, and potential overextension of operational resources, which could ultimately compress net margins or impact profitability if new gyms underperform.
  
• Intensifying competition, particularly from boutique studios, smaller local gyms, and evolving low-cost chains in key markets like Brazil and Mexico, may result in price wars, loss of pricing power, and downward pressure on ARPU (average revenue per user), thereby affecting net revenue and earnings.
  
• The company's increasing reliance on ancillary platforms such as TotalPass for member growth and diversified revenue introduces margin risks, given their lower gross and EBITDA margins compared to core gym operations; delays in achieving scale or a narrowing gap between transaction revenue and check-ins could negatively affect consolidated profitability.
  
• Macroeconomic headwinds in Latin America, such as rising cost of living, stagnant consumer discretionary spending, volatile local currencies, or elevated interest rates against a backdrop of high CapEx and debt, could materially impact membership growth, renewal rates, and the company's ability to deleverage, negatively affecting cash flows and net income.
  
• The secular trend of digitalization and growing consumer adoption of at-home or hybrid fitness models poses a structural risk to the brick-and-mortar gym model; if Smartfit fails to keep pace with technological disruption or consumer preferences shift more rapidly than anticipated, this could reduce new memberships, raise churn, and dampen long-term revenue growth.

Valuation

• The analysts have a consensus price target of R$30.125 for Smartfit Escola de Ginástica e Dança based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$35.0, and the most bearish reporting a price target of just R$24.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$11.4 billion, earnings will come to R$1.5 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 23.9%.
  
• Given the current share price of R$23.36, the analyst price target of R$30.12 is 22.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.