Fitness First shares plunge by a third after profits alert

Shares in Fitness First plunged by more than one third yesterday after the health club operator shocked the market by admitting that full-year profits would be 20 per cent below expectations.

In a trading update, released five minutes before trading on the stock market closed, the group blamed its UK estate for the profits shortfall.

It said it was proving harder to persuade people to join its new clubs, sparking concern in the City that the health club market was approaching saturation. Slowing "fill rate" meant clubs were taking up to nine months to reach break even, against six months previously.

Mike Balfour, the chief executive, said opening 25 more clubs than it had anticipated had given it "indigestion". The group opened 111 new sites in the past year, including 38 in the UK, taking its estate to 311. Last year it opened 80.

The warning, which was the first from a budget player in the health and fitness market, contributed to a 36 per cent fall in the group's shares to 135p.

Fitness First also cited escalating costs as a factor, admitting that its UK teams had "lost some focus" in controlling costs and dealing with underperforming clubs. It said 30 jobs, mainly at head office, had been axed, which would force it to take a £1.1m restructuring charge.

Analysts said the warning, which follows a difficult time for operators at the premium end of the market, raised questions over the industry's long-term viability. "We just don't know how mature this industry is going to get," Mark Reed, at Teather & Greenwood, said.

But Mr Balfour said the recent trading difficulties were "very much our problem", denying that they spelt disaster for the market in general. I believe the business has some real growth to go for. [This is] a slip rather than a fall." The company's overseas operations were trading in line with expectations, he added.

The group said it would scale back its opening programme to 50 clubs per year, reducing its capital budget to £80m for 2003 against £140m in 2002.