U.S. Markets close in 17 mins

Why Planet Fitness Could Keep Beating the S&P 500

- By Robert Stephens, CFA

Even though it has risen 84% over the last year, Planet Fitness Inc. (PLNT) could offer further capital growth potential. The discount gym chain has ambitious plans to increase its store numbers and is investing in new technology to further differentiate itself from competitors.

The company is also investing in the customer experience and shifting its marketing focus to appeal to younger consumers, which could help it overcome possible weakness in the wider industry.


Having outperformed the S&P 500's 9% rise over the last year, there could be further alpha ahead for the stock over the long run.

269100489.png

Store expansion

The expansion of Planet Fitness' store presence could improve its financial prospects. The company expects to more than double its store footprint over the long run, having opened 230 new stores in fiscal 2018. Of this total, 226 were franchise stores, bringing its total store count to 1,742 nationwide. The composition of its franchise system could provide it with an advantage versus industry peers since over 90% of its growth comes from existing franchises opening more stores.

Store growth could be aided by favorable real estate trends. As brick-and-mortar retailers close stores due to the increasing growth of online shopping, it creates more competitive rental rates for Planet Fitness. The company is also working with a number of retailers who are looking to downsize their presence in areas that may offer growth potential for the discount fitness chain. This could allow it to keep rental costs to a minimum.

Investing for growth

The company is in the process of launching its Planet Fitness app, which is designed to enhance members' experience through improved functionality and design. Its features include streamlining existing functionality, including members' digital key tag, workout tracking and the capacity to locate a club and join. During the trial run of the app, the company found there is a desire for enhanced fitness functionality. This could strengthen the company's competitive position through greater differentiation versus peers.

Planet Fitness is seeking to ramp up its marketing to appeal to the generation Z demographic. These consumers make up 26% of the U.S. population and are expected to become increasingly health conscious. The company's summer pilot program allowed New Hampshire high school students between 15 and 18 years of age to work out for free all summer. The program is expected to be extended since it introduces the brand to a new customer demographic.

Risks

Continued weakness in consumer confidence could hurt the growth prospects of a variety of consumer-focused companies. It is expected to decline throughout 2019. U.S. retail sales growth missed expectations in February, declining 0.2% versus the consensus forecast of a 0.3% gain. Increasing caution among consumers may mean they seek to cut back on non-essential items, such as gym memberships, while also becoming increasingly price conscious.

In response, Planet Fitness is seeking to improve the customer experience in order to boost its competitive position. It is aiming to deliver a more personalized and connected fitness journey to its members. It may also benefit from brand partnership opportunities that could provide discounts to members on a wide variety of products and services. Further, as a discount fitness chain, it may be less affected by weak consumer confidence than more expensive peers.

Outlook

Planet Fitness is projecting earnings per share growth of 54% this year, followed by 22% growth in fiscal 2020. This helps to justify its price-earnings ratio of 71 and suggests further stock price growth could be ahead.

Since the company is expected to significantly increase its store numbers, it could offer a high growth rate over a sustained period. Its investment in the customer experience, a focus on marketing to younger consumers and improved technology may enhance its competitive advantage.

Although there are risks ahead from weak consumer confidence, the stock seems to be well positioned to continue to outperform the S&P 500 over the long term.

Read more here:


This article first appeared on GuruFocus.