Planet Fitness Needs a Strength Boost
The gym and fitness business can be a very tough industry. On average, 50% of new signups quit after just six months. And the success rate of selling to a new member is approximately 5% to 20% compared to 60% to 70% for a current member. So reducing gym cancellation and churn rates and increasing retention is the key to success..
One of the largest and fastest-growing national fitness chains is Planet Fitness Inc. (NYSE:PLNT). Known as somewhat of a casual, unimposing gym, the bright clean locations are typically 20,000 square feet with a large selection of high-quality, purple and yellow Planet Fitness-branded cardio, circuit- and weight-training equipment.
The gym memberships are typically only $10 per month for the standard membership. This value proposition is designed to appeal to a broad population, including occasional gym users and the approximately 80% of North American populations over age 14 who are not gym members.
The company has 2,472 system-wide units with 2,230 being franchised and 242 being corporate owned. Founded in 1992, Plantt Fitness is expected to generate over $1 in billion revenue this year and currently has a market capitalization of $4.3 billion..
Leadership transition
In an unexpected move, on Sept. 15 the company announced that CEO Chris Rondeau was being replaced by a current member of the board of directors, Craig Benson. Rondeau will continue to serve the company in an advisory role to help ensure a smooth transition. This move was likely a strategic decision and not related to near-term financial or fundamental issues.
In a statment, Chairman of the Board Stephen Spinelli said, "As we enter the next chapter of Planet Fitness' journey, the Board felt that now was the right time to transition leadership. In today's evolving environment, Planet Fitness is continuing to enhance our competitive advantage, capitalize on our size and scale, and drive further shareholder value.
As a Board member and Planet Fitness franchisee, Craig knows our business well, while also bringing deep public and private sector executive leadership experience to this role," he said. "The Board is confident that he is the ideal leader to oversee the business during this transition period. The Board remains committed to overseeing the execution of the Company's strategy as we begin our search for Planet Fitness' next permanent leader and solidify our position as a differentiated and disruptive force in the health and wellness space for years to come."
In connection with this transition, the company is hiring an executive search firm to assist in a search process to identify a permanent CEO, with both internal and external candidates being considered.
Financial review
The company recently reported second-quarter results for the period ending June 30, which showed strong revenue growth. Total revenue increased 27.6% from the prior-year period to $286.5 million. Same-store sales increased by 8.7%. System-wide sales (including franchisee sales) increased $128 million to $1.15 billion.
Adjusted Ebitda increased from $89.1 million in the year-ago quarter to $118.9 million. Net income was $41.1 million, or 48 cents per share, which was an increase from $22.3 million, or 26 cents diluted share, last year. Adjusted net income increased by $23.8 million to $57.7 million, or 65 cents per diluted share, compared to $33.9 million, or 37 cents per diluted share.
Twenty-six new Planet Fitness stores were opened during the second quarter, including three corporate-owned and 23 franchisee-owned stores. The system-wide unit count was 2,472 as of June 30.
Cash and securities were $418.9 million, which included cash and cash equivalents of $236.1 million, marketable securities of $120.3 million and restricted cash of $62.5 million. Total debt was almost $2.0 billion at the end of the quarter.
Operating cash flow was $157.3 million for the first six months of 2023. After subtracting capital expenditures of $45.1 million and franchise acquisitions of $26.3 million, free cash flow was $85.9 million. The company repurchased $125 million in common stock in the first half of 2023.
Valuation
Planet Fitness recently provided growth expectations for 2023, which included revenue growth of 12%, adjusted Ebitda growth of 17% and adjusted earnings per share growth of 34%.
The consensus analyst earnings estimate for 2023 is $2.18 per share and for 2024, the estimate is $2.56. That puts the stock trading at 22.2 times this years estimate and 18.9 times the following years estimates. The enterprise value/Ebitda ratio is 14.6.
The GuruFocus discounted cash flow calculator creates a value of $56 per share when using earnings per share of $2.18 as the starting point and a 15% 10-year growth rate. The terminal growth rate is 6% and discount rate used is 10%.
There are 15 Wall Street analysts that cover the company with an average price target of $69.79, including a high target of $84 and a low target of $54.
The company does not pay a dividend, but has repurchased $219 million of its own shares over the past 18 months.
Guru trades
Gurus who have purchased Planet Fitness stock recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Joel Greenblatt (Trades, Portfolio). Investors have reduced our sold out of their positions include Steven Cohen (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).
Summary
One tailwind for the stock is high interest rates, which slow down franchise expansion as franchisees may not want to expand at the same rate as before. There are also still supply chain issues with regard to certain essential equipment for the gyms.
Nonetheless, with Planet Fitness stock selling at 52-week lows, this may be an opportunity for long-term growth investors.
This article first appeared on GuruFocus.
