Search Weight Loss Topics:




Apr 29

Planet Fitness: The Risks Are Too Heavy – Seeking Alpha

Fitness Comments Off on Planet Fitness: The Risks Are Too Heavy – Seeking Alpha

The advent of COVID-19 may have changed the way we work and the way we play forever. Investing now requires us to imagine what a post-pandemic world would look like. I have long believed that the most likely outcome is the gradual and slow re-opening of the economy with social distancing to persist for months on end. Given this situation, certain business models may not survive or would need to be altered in order to operate post-pandemic. Planet Fitness (PLNT) is one such company whose entire business model may need to be re-evaluated for a post-COVID-19 world.

Just a brief background on the company; Planet Fitness is a franchisor and operator of a chain of gyms predominantly in the US. Planet Fitness rose to prominence by being more inclusive and offering a non-intimidating/judgment-free environment at a much cheaper price. Planet Fitness memberships are about $10-20 while the industry median according to the company's 10-K is about $71.

The company targets the casual gym users and no fitness buff as these people may find traditional gyms intimidating and expensive. The equipment in Planet Fitness' gyms is of high quality and the company has limited the number of staff available on site. The square space tends to be smaller than its competitors' and is lacking non-essential amenities like pools, daycare or juice bars, etc. In other words, it is a low-cost and high-volume business model.

Investor Presentation

As Ive discussed in my article on Peloton (PTON), social distancing is a large hindrance to the traditional gym model. This is because large groups of people who are all sweating bodily fluids in a confined space is a potential hotbed for viruses. In order to reopen, gyms may have to change the way they operate completely. For example, a possible pre-condition for gyms to operate could be to limit the number of people in the gym at once. The good news is that the days of waiting for your turn on the treadmill may be coming to an end. The bad news for Planet Fitness is that the company may have to limit the number of memberships per location as people cant crowd in a gym any longer.

Another possible change is that strict disinfecting guidelines may have to be put in place in order to make sure viruses are not left on equipment surfaces. What that means for Planet Fitness is maybe hiring extra staff to go over all the equipment after every use to ensure proper disinfection. These two changes together would decrease the revenue due to a decrease in memberships and an increase in costs due to having to hire more staff.

Picture by Planet Fitness

The other risk for Planet Fitness is that this pandemic may have shifted the attitude of consumers away from physical gyms into a more home workout style setup. You can already see this play out a bit with the emerging popularity of home video-style workouts as people are locked in quarantine. Once people get used to exercising at home, going back to the gym might not be that enticing except for athletes and other gym-buffs. Remember that Planet Fitness' target audience is the casual gym-goer, so this may spell trouble for the company.

The main risk to my thesis is if the world totally comes back to as it was pre-pandemic and the company resumes its rapid growth.

Handling changes post-pandemic would be fine if Planet Fitness were running a premium service with few and exclusive clientele or these additional costs may be passed on. However, pre-COVID-19, Planet Fitness was utilizing a low-cost and high-volume business model. While I am sure that management is up to the task of changing up its business strategy (an example of which is offering online fitness classes), there is now suddenly an increase in "execution risk" for the stock. What will the business look like in the future? Will they have to increase prices? Is it going to be a mix of online and offline classes? There are lingering questions that need to be answered. The stock is lower by roughly 35% from its peak yet is still trading at a 53x P/E. Given the uncertainty, I dont think it makes sense to be paying this high a multiple despite the market correction.

Prior to the pandemic, Planet Fitness' revenue was growing rapidly at $430m, $530m and $640m in 2017, 2018, and 2019, respectively, indicating a CAGR of 14%. The cost of this rapid growth, it seems, is a mountain of debt as the company has long-term debt of around $1.6 billion against Total Assets of $1.7 billion. The company has negative equity of ($700) million. This makes the company a risky investment in my view as gyms right now are not earning revenue and have been mulling bankruptcy. The upside though is if a lot of gyms go bankrupt, Planet Fitness could be the last gym standing. However, such a strategy requires sufficient liquidity to pull off and given the large debt load, I would say Planet Fitness isn't safe either.

In order to invest in Planet Fitness stock, not only do you need to believe that a vaccine would be created and consumer attitudes would not have significantly changed but also that Planet Fitness can maintain its incredible growth rate of prior years. Given the fundamental change in the business landscape for the industry as well as the high valuation, I would recommend you stay away from Planet Fitness.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don't know you or your specific circumstances, therefore, your tolerance and suitability to take risks may differ. This article should be considered general information, and not relied on as a formal investment recommendation.

Read the original:
Planet Fitness: The Risks Are Too Heavy - Seeking Alpha

Related Posts

    Your Full Name

    Your Email

    Your Phone Number

    Select your age (30+ only)

    Select Your US State

    Program Choice

    Confirm over 30 years old

    Yes

    Confirm that you resident in USA

    Yes

    This is a Serious Inquiry

    Yes

    Message:



    matomo tracker