When Planet Fitness (PLNT) is mentioned, most people think of the chain’s controversial free pizza day and bottom-barrel pricing. It costs a mere $10 a month to use one of the company’s 1,742 locations.
The mere fact that Planet Fitness is willing to offer the occasional free pizza to members is a testament to its mantra as a “judgment-free zone.” The question is whether the Planet Fitness business model will make investors money in the months and years to come.
Planet Fitness went through three straight years of declining growth. The company’s revenue spiked more than 23% last year as net margin reached a 5-year high of just under 17%. Management deserves praise for providing a 17.1% capital return. This figure is a testament to Planet Fitness executives’ ability to use capital in a prudent fashion to grow the business. As a result, the stock has increased more than 350% since 2016. It appears as though Planet Fitness has built substantial momentum for continued growth.
On the surface, Planet Fitness appears to be operating like a well-oiled machine. However, once the company’s $1.172 billion of debt is considered, plenty of investors shy away from parking their money in this stock. As a point of comparison, Planet Fitness has more than a billion dollars in debt yet a mere $289.4 million on-hand in cash and investments. This level of debt should alarm every investor, even the most ardent Planet Fitness bulls.
Most of those who have studied Planet Fitness in-depth insist the company’s billion-plus dollars in debt can be overcome. Thankfully, Planet Fitness has amassed more than $143 million in free cash flow in mere months. The company has enough money to cover interest, taxes, operating expenses and more. The remaining money will be used to grow the business. The company’s cash from operations is of particular importance as it skyrocketed 40% between ’17 and ’18. This percentage increase in cash from operations equates to $53.4 million. Planet Fitness capital expenditures increased merely $3.2 million in this same period of time. In other words, Planet Fitness is financially healthy. Prospective investors should not let the company’s massive debt load scare them away.
Though investors rarely think of gyms as avenues for considerable growth, Planet Fitness is bucking the trend. The company has quite the impressive streak of 48 straight quarters of positive comps. Planet Fitness has enjoyed flawless year-over-year growth on the unit level for 12 straight years. Though Planet Fitness charges a mere $10 a month, the company uses its revenue wisely. About 10% of it is spent on marketing. The company’s quarterly revenue is up 30% while its adjusted income is up nearly 40%.
Those concerned about Planet Fitness’ debt as detailed above should consider the company’s motivation for borrowing massive amounts of money. The borrowed money is used for a variety of purposes including fitness equipment that is re-sold to gym owners, and the construction/operation of regional stores owned by the company. These stores are uber-important as they put the franchise model on display to prospective franchisees. Though the debt is certainly a red flag of note, it appears as though this financial liability is well worth the risk. Planet Fitness locations are popping up left and right, providing solid returns with few exceptions.
Planet Fitness executives are adamant the company is capable of doubling its current location count across the United States. The company has another several hundred locations in Canada to boot. It is interesting to note slightly less than 40% of company revenue results from the sale of equipment upgrades to franchisees. Fees associated with the franchise account for nearly the same percentage. The remainder of revenue stems from locations owned by the company. This appears to be a healthy revenue balance yet there is always the potential for store openings to be delayed or canceled. If store openings slow and equipment sales to franchisees ramp up, it will be an indication a prolonged slowdown looms ahead. Thankfully, all signs currently point to the opposite of this nightmare scenario.
Savvy investors will either hold this stock or add a small stake to their portfolio. Planet Fitness would be a much more attractive investment if it focused on paying down its debt in a timely manner. Though the company’s no-frills gyms are fairly basic, most members are willing to pay more than $10 per month. However, there are no signs Planet Fitness will hike its absurdly low prices. If you believe Planet Fitness can continue to open new locations that prove profitable, this stock belongs in your portfolio. Otherwise, hold your current PLNT position or steer clear altogether.
Regards,
Ethan Warrick
Editor
Wealth Authority
