The year 2019 has turned out to be an eventful one for Planet Fitness, Inc. PLNT. So far this year, the stock has surged 38.7%, compared with the industry’s growth of 14%. Planet Fitness’ consistent focus on strategic partnership and international expansion is a major growth driver. However, in the past month, the stock declined 0.3%, compared with the industry’s 6% gain. Planet Fitness’ heavy reliance on debt financing remains a concern. Let’s delve deeper.
Growth Drivers
Planet Fitness’ low-cost gym franchise is the key to its above-average growth in customers, and, consequently share price. Although the nature of the business is traditional, the company’s strategy to attract customers with a $10-a-month membership fee and a no-frills atmosphere has helped it gain a significant share in existing market and expand market size. Lower-than-peer membership fee, higher demand and lower costs have helped the company generate above-average profits.
Moreover, the company has been focusing on international expansions and partnerships to drive growth. Recently, it reached an Area Development Agreement with Bravo Fit Holdings Pty Ltd. ("Bravo") to expand its footprint. Per the agreement, Planet Fitness will open a minimum of 35 outlets in Australia over the next few years. Earlier this year, the company also announced partnership with Kohl’s.
Per the terms of the agreement, Planet Fitness can open stores adjacent to select Kohl’s stores. In 2019, Planet Fitness intends to open up to 10 stores, adjacent to select Kohl's retail locations across the country. This apart, the company’s existing franchisees signed agreements to open 1,000 more gyms.
Planet Fitness is one of the largest and fastest-growing franchisors as well as operators of fitness centers in the United States. As of Sep 30, 2019, the company had more than 14.1 million members and 1,899 stores in all 50 states. These apart, Planet Fitness is committed to open 1,000 new stores under prevailing area developments agreements.
In 2018, the company opened 230 new stores (226 franchise stores and 4 corporate stores). Currently, it has stores in the United States, Puerto Rico, Canada, Dominican Republic, Panama and Mexico.
The company’s solid growth plan has helped to generate sturdy same-store sales. During third-quarter 2019, it posted the 51st straight quarter of positive same-store sales. In the first, second and third quarters of 2019, the company reported system-wide same-store sales growth of 10.2%, 8.8% and 7.9%, respectively.
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Concerns
Planet Fitness’ heavy reliance on debt financing remains a concern. As of Sep 30, 2019, cash and cash equivalent totaled $330.6 million. Total long-term debt, net of current maturities increased to $1,155 million. The company might fail to finance its upcoming projects due to higher debt burden. Moreover, any downturn in the macroeconomic and credit market conditions would make it difficult for Planet Fitness to pay or refinance its debt, going forward.
Looking at the company’s EV/EBITDA ratio (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is the best multiple for valuing leisure companies as they are highly capital-intensive, investors might not want to pay any premium further. Currently, it has a trailing 12-month EV/EBITDA ratio of 27.28. The stock is relatively overvalued right now compared with peers as the industry average EV/EBITDA multiple currently stands at 8.82x.
Zacks Rank & Stocks to Consider
Planet Fitness currently has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the leisure space include Johnson Outdoors Inc. JOUT, Vista Outdoor Inc. VSTO and YETI Holdings, Inc. YETI. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Shares of Johnson Outdoors and Vista Outdoor have surged 31% and 19%, respectively, in the past three months.
YETI Holdings has reported better-than-expected earnings in all of the trailing four quarters, the beat being 51.8%, on average.
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