Solid Expansion Efforts Aid Planet Fitness (PLNT), High Costs Ail (Revised)
Planet Fitness, Inc. PLNT has been benefiting from solid expansion efforts and strategic initiatives. Also, its focus on a new growth model to enhance returns from new stores bodes well.
Shares of PLNT have increased 10.4% in the past three months compared with the industry’s fall of 8.8%. Earnings estimates for 2023 have moved up 1.4% in the past 30 days. This depicts analysts' optimism over PLNT’s growth prospects. However, increased new store construction costs and interest rate expenses are a concern.
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Let’s discuss the factors substantiating its Zacks Rank #3 (Hold).
Growth Drivers
Expansion Efforts: Planet Fitness is one of the largest and fastest-growing franchisors and operators of fitness centers in the United States. During the third quarter of 2023, the company reported 26 new store openings. The company expects to open between 150 and 160 new stores in the year. Given the favorable scenario and its growth momentum, PLNT expects to achieve this goal.
Given the upside potential on the back of changing market dynamics and tailwinds related to health and wellness, the company remains optimistic for a 4,000-plus domestic store opportunity over the long term, with 600 new stores by the end of 2025.
Strategic initiatives: The company continues to focus on its marketing initiatives to drive growth. The company has transitioned from 16 marketing agencies to one (Barkley) to fuel incremental member growth. The agency caters to the company’s creative and media placement for its annual New Year's sale. Consistent with the advertising strategy (covering national and local levels), the transition paved the path for lower media costs along with solid member acquisition.
For the third quarter of 2023, the company reported solid membership conversions on the back of its marketing and promotional offers. During the quarter, membership levels grew by more than 110,000 and came in at more than 18.5 million compared with 16.6 million in the prior-year quarter. For the rest of 2023, the company expects regularized joining trends and seasonality to continue.
New Growth Model: The company's management team spent a significant part of 2023 developing a new growth model. The objective is to enhance returns from new stores without significantly impacting its P&L. The plan focuses on reducing capital requirements for opening and operating Planet Fitness franchises. This involves modifying the franchise agreement, adjusting cardio and strength reequip schedules based on usage and committing to lower CapEx for new builds and remodels. Additionally, efforts are being made to identify ways to reduce operating expenses.
The company anticipates that the implemented changes will free up a substantial amount of capital for franchisees in the short term. This will grant increased flexibility and resources to expand their store portfolios for long-term growth.
Concerns
Increased new store construction costs and inflation concerns remain a potent headwind to the company's performance. Chances of increase in materials, shipping, equipment and labor costs are likely to impact the company’s profitability in the upcoming period. During the third quarter of 2023, the cost of revenue was $53.8 million, up 10.8% from $48.5 million reported in the prior-year quarter. Higher equipment sales primarily drove the increase in existing franchisee-owned stores and costs of HVAC units sold to franchisees. In 2023, our model predicts that the total cost of revenues will increase by 17.2% year over year to $207.6 million.
Key Picks
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The Zacks Consensus Estimate for RCL’s 2023 sales and earnings per share (EPS) indicates a rise of 57.7% and 187.9%, respectively, from the year-ago period’s levels.
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The Zacks Consensus Estimate for LYV’s 2023 sales and EPS indicates a rise of 36.5% and 132.8%, respectively, from the year-ago period’s levels.
Skechers U.S.A., Inc. SKX carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 50.3% on average. Shares of SKX have increased 36% in the past year.
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(We are reissuing this article to correct a mistake. The original article, issued on November 24, 2023, should no longer be relied upon).
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