Planet Fitness Strategic Efforts Bode Well: Should You Hold?

Shares of Planet Fitness, Inc. (NYSE:PLNT) have gained 36.2% in the past six months, outperforming the industry’s 7.7% increase. Robust same-store sales growth, higher average royalty rate and international expansion bode well for the company. However, high debt remains a concern. Let’s delve deeper.

Growth Drivers

Planet Fitness’ low-cost gym franchise is the key growth driver to its above-average customer growth and subsequently, share price. Although the company’s nature of the business is traditional/generic, the strategy to attract customers with a $10-a-month membership fee and no-frills atmosphere has helped it gain a significant share in the existing market and expand market size. The low-cost model has also helped it to tap into the market that is enthusiastic enough to join a cheaper second gym. Despite a lower-than-peer membership fee, higher demand and lower costs have helped the company generate above-average profits.

In an effort to expand its presence, Planet Fitness has been focusing on strategic partnerships and international expansions. Recently, it announced a partnership with Kohl’s. Per the terms of the agreement, Planet Fitness can open stores adjacent to select Kohl’s stores. In 2019, Planet Fitness intends to open up to 10 stores, adjacent to select Kohl's retail locations across the country. This apart, the company’s existing franchisees signed agreements to open 1,000 more gyms. Planet Fitness expects almost half of these gyms to be opened in the coming three years.

Additionally, this Zacks Rank #3 (Hold) company’s same-store sales growth is impressive. During first-quarter 2018, Planet Fitness posted the 41st straight quarter of positive same-store sales. In the first, second, third and fourth quarters of 2018, same-store sales increased 11.1%, 10.2%, 9.7% and 10.1%, respectively. In the first, second, third and fourth quarters of 2017, comps increased a respective 11.1%, 9%, 9.3% and 11.6%. Increase in net member and higher average royalty rate have been driving comparable sales higher. Moreover, increased Black Card pricing bodes well.

Headwinds

Planet Fitness’ heavy reliance on debt financing remains a concern. As of Mar 31, 2019, cash and cash equivalent totaled $336 million. Total long-term debt, net of current maturities, increased to $1,158.5 million. The company might fail to finance its upcoming projects due to a higher debt burden. Moreover, any downturn in the macroeconomic and credit market conditions may make it difficult for Planet Fitness to pay or refinance its debt moving ahead.

As Planet Fitness significantly outperformed the industry in a year’s time, its valuation looks a bit stretched compared with its own range as well as the industry average. Looking at the company’s EV/EBITDA ratio (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is the best multiple for valuing leisure companies as they are highly capital-intensive, investors might not want to pay any premium further. Currently, it has a trailing 12-month EV/EBITDA ratio of 31.28. The stock is relatively overvalued right now compared with its peers as the industry average EV/EBITDA multiple currently stands at 7.16x.

Key Picks

Better-ranked stocks worth considering in the same space include SeaWorld Entertainment, Inc. (NYSE:SEAS) , The Marcus Corporation (NYSE:MCS) and Studio City International Holdings Limited (NYSE:MSC) . While SeaWorld Entertainment sports a Zacks Rank #1 (Strong Buy), Marcus and Studio City International carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SeaWorld Entertainment reported better-than-expected earnings in the trailing four quarters, the average being 35.6%.

Marcus reported better-than-expected earnings in the trailing four quarters, the average being 34.7%.

Shares of Studio City International have gained 22.3% in the past six months.

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