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Robert Stephens, CFA
Robert Stephens, CFA
Articles (230) 

Planet Fitness: Further Growth Ahead After Stock Price Surge

The company’s financial prospects could boost its investment outlook

October 09, 2019 | About:

Planet Fitness Inc’s (NYSE:PLNT) strategy suggests that it could deliver further capital growth following its 23% rise in the last year.

The fitness center operator is broadening its appeal to a wider range of consumers while also investing in new technology to enhance its market position.

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Improving competitive position

The company provided teens aged 15 to 18 with free access to its facilities in the second quarter. This was part of its Teen Summer Challenge program that led to 900,000 teens signing up to its locations across the US and Canada during the second quarter.

The program could build brand loyalty for the business and differentiate its offeringings from sector peers. It provides the company with access to highly-lucrative Gen Z consumers that together spend $143 billion in the US each year.

In addition, the program increases the company’s exposure to a broader customer base, since 75% of teens that signed up to the Summer Challenge were from households that did not previously have a Planet Fitness membership.

This provides the business with cross-selling opportunities. For example, in the second quarter, around 30,000 parents of teens on the Summer Challenge program joined their local Planet Fitness location with minimal marketing effort undertaken by the business.

Growth strategy

Planet Fitness has increased its projected new store growth from 225 locations to 260 locations in the current fiscal year. It expects around 10% of its new stores to be based outside of the US, which could improve its diversity and enable it to capitalize on international growth opportunities.

As part of its expansion program, the company has partnered with Gold’s Gym. Planet Fitness will open five new stores adjacent to closed Gold’s Gym locations in 2019, anticipating further store openings as part of this strategy next year. This will enable Planet Fitness to capitalize on current real estate trends and could strengthen its competitive position.

The company’s increased pricing for its Black Card membership program contributed to a 200 basis points rise in its second quarter same store sales. Despite its price rise, Black Card penetration increased 100 basis points to 61.5% in the second quarter. Further price rises could catalyze the company’s financial prospects, with its customer base seemingly content to pay more for the additional services offered by the membership program.

Potential threats

Weak consumer sentiment could hurt the company’s near-term financial prospects. The Conference Board’s consumer confidence reading in September declined at its fastest rate since the start of the year, with consumers appearing to be concerned about the potential impact of Chinese import tariffs.

Planet Fitness’ offerings are likely to be viewed as discretionary for the vast majority of its customers. This could lead to a reduction in its new member growth rate, as well as a fall in the loyalty of its existing members should they need to reduce their overall spending arise as a result of tariff-induced price increases across the consumer goods sector.

In response, Planet Fitness is improving the experiences of its members through its continued investment in new technology. For example, it plans to launch its mobile app in the third quarter following a test period. The test period led to positive feedback from its members, with features such as workout tracking and custom workouts proving popular among its members according to the company’s second quarter results. Its app could improve customer loyalty, as well as provide the business with cross-selling opportunities due to the ease with which its users can upgrade to higher membership tiers.

Outlook

Analysts forecast that the company will produce a rise in its earnings per share of 24% in fiscal 2020. Since the stock trades on a forward price-earnings ratio of 36, it appears to offer investment appeal.

Disclosure: the author has no position in any stocks mentioned.

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