Flexing Gains: Planet Fitness Pumping Up Profits

Planet Fitness (NYSE: PLNT)

Stock Price as of 07/08/2024: $72.63 (-0.45% YTD)

Recommendation: Buy 

Company Description: 

Planet Fitness Inc. operates a high-volume, low-cost fitness franchise model with over 2,400 locations, 90% of which are franchised. These locations are primarily in the United States, with additional locations in Canada, the Dominican Republic, Panama, Mexico, and Australia. The company's revenue model is based on three primary streams: membership fees from company-operated stores (43% of total revenue), franchise royalties and fees (31%), and equipment sales to franchisees (26%). The company offers two membership options: the basic membership at $10 per month and the Black Card membership at $22.99 per month, which includes additional perks such as access to all Planet Fitness locations, guest privileges, and use of massage chairs and tanning beds. Known for its “Judgement Free Zone” ethos, Planet Fitness attracts a broad consumer base, leading to high membership volumes and steady cash flow, ensuring sustainable long-term growth in the fitness industry​.

Consensus View:

1. Strong Growth Potential: Analysts are optimistic about continued membership growth and expansion, supported by effective marketing and initiatives like the High School Summer Pass program

2. Resilient Business Model: The franchise-based structure provides stable revenue through royalties and fees, allowing for scalability and reducing operational risks

3. Post-Pandemic Recovery: Analysts expect strong recovery from COVID-19 impacts, with membership numbers rebounding and effective safety protocols in place

4. Solid Financial Performance: Consistent revenue and earnings growth, healthy profit margins, and steady cash flow from membership dues and franchise fees are highlighted

5. Attractive Valuation: The current stock valuation is seen as favorable, offering a good entry point for investors given the company's long-term earnings potential

Key Risks:

1. Market Saturation: Potential U.S. market saturation could limit growth

2. Economic Sensitivity: Economic downturns may reduce consumer spending on gym memberships

3. Competitive Landscape: Competition from boutique fitness studios and digital fitness solutions remains a concern

Overall, Planet Fitness is well-regarded for its growth prospects, resilient business model, and financial performance, with many analysts recommending it as a "buy" 

My thesis:

1. Growing Use of Ozempic and Similar Drugs:

The increasing popularity of Ozempic and other weight loss drugs, which emphasize the importance of incorporating exercise for optimal results, presents a unique tailwind for Planet Fitness. This trend is likely to drive new memberships and increased gym utilization, as individuals seek to enhance the effectiveness of these medications through regular exercise

2. Digital and International Growth Potential:

Planet Fitness's digital transformation, including virtual trainers, and international expansion are underappreciated growth drivers. These initiatives can drive member retention and attract new demographics, enhancing member engagement and overall value

3. Resilience and Membership Growth Initiatives:

Planet Fitness’s resilient business model and effective membership programs like High School Summer Pass attract younger members and foster long-term loyalty. The company’s low-cost membership model appeals to cost-conscious consumers even during economic downturns. Additionally, the growing demand for accessible fitness solutions due to rising obesity rates and the focus on active aging among older adults present significant opportunities

4. Market Saturation and Competitive Threats:

Concerns about U.S. market saturation and competitive threats are overestimated. There remains significant potential for growth in underpenetrated markets and smaller communities. Planet Fitness’s value proposition of affordability and accessibility continues to attract a broad audience

Near-Term Debate:

• What is the point of satiety at which opening new stores does not generate more memberships?

• Will Planet Fitness Achieve Its Projected New Store Growth Targets? How has inflation affected their store growth and are they targeting any new regions?

Long-Term Debate: Does Planet Fitness have the pricing power to continue adjusting membership fees without significantly impacting membership growth or retention?

Variant View

• Consensus View: The consensus is highly positive, expecting robust growth, post-pandemic recovery, and a resilient franchise model that ensures steady cash flow

• Variant Perception: My view differs by emphasizing the underappreciated growth potential from digital initiatives and the significant market demand driven by trends in health and wellness, particularly with drugs like Ozempic encouraging gym use

Diligence

• Evaluate the effectiveness of Planet Fitness's digital and marketing initiatives

• Assess the impact of new membership programs on long-term member retention

• Analyze competitive positioning in existing and potential new markets

• Investigate the impact of pricing changes on membership growth and retention

• Relations with vendors and what kind of contracts they are engaged in

Valuation Analysis

• To determine if Planet Fitness is a buy, I used multiple valuation methods to confirm the stock's potential for upside

• Discounted Cash Flow (DCF) Analysis: Evaluated fundamental growth through base, upside, and downside scenarios. All scenarios indicated upside due to strong cash flow projections and consistent earnings growth

• Scenario-Weighted Analysis: Assigned probabilities to each scenario, showing an upside in all cases and reinforcing a positive outlook for Planet Fitness

• Comparable Company Analysis (Comps): Compared Planet Fitness to industry peers based on key financial metrics. This analysis supported the buy recommendation, indicating that Planet Fitness is attractively valued relative to peers

• Regression-Based Analysis: Analyzed various metrics including EPS, Debt to Capital, and P/E ratios. Results consistently indicated that Planet Fitness is undervalued and has potential for price appreciation

• Convergence Timeline: Assuming a conservative annual CAGR of 5%, I anticipate the stock price could converge with the implied values within the 2024-2025 timeframe, driven by robust growth strategy, strong financial performance, and positive market conditions

Recent News

• Proposed Refinancing Transaction: Planet Fitness announced a refinancing transaction to optimize its capital structure and extend debt maturities, enhancing financial flexibility and reducing interest expenses. This proactive approach is expected to improve the company's financial health and profitability

• $280 Million Accelerated Share Repurchase Program: The company announced a $280 million share repurchase program, signaling strong growth prospects and a commitment to returning value to shareholders. This move is likely to lead to EPS accretion and indicates robust cash flow generation

Q1 2024 Highlights

• Membership Growth: Ended Q1 with 19.6 million members and a 6.2% same-store sales increase; opened 25 new locations

• Financial Performance: Revenue of $248.0 million (up 11.6% YoY); Adjusted EBITDA grew 17.8% to $106.3 million; Net income of $35.0 million

• New CEO Appointment: Colleen Keating to join as CEO on June 10, bringing extensive franchise and management experience

• Pricing Strategy: Increased Classic Card membership price from $10 to $15 for new members starting summer 2024.

• Updated Guidance: Expecting 140-150 new stores and 120-130 equipment placements in 2024 despite a choppy operating environment.

Q4 2023 Highlights

• Revenue and Membership: Total revenue of $245.5 million (up 10.9% YoY); added 900,000 net new members

• EBITDA and Margins: Adjusted EBITDA of $100.5 million with a 40.9% margin; Adjusted net income per diluted share of $0.45

• Debt Management: Plans to refinance debt tranche due in September 2025, targeting a weighted average interest rate below 5%

• Operational Improvements: Focus on reducing new store investment and remodel costs by 5-10% to improve store economics and returns