Planet Fitness

Moat: 3/5

Understandability: 1/5

Balance Sheet Health: 4/5

Planet Fitness is a major player in the fitness industry, primarily focused on budget-friendly, high-volume fitness centers through a franchise model across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Core Business Model: Planet Fitness operates primarily through a franchise model, which allows it to scale rapidly while reducing capital expenditure. This approach entails the company licensing its brand and operating system to franchisees, who are responsible for the day-to-day operations of the fitness clubs. The company earns revenue through franchise fees, royalty payments, equipment sales, and sales to corporate-owned stores.

  • Revenue Streams:
    • Franchise Segment: This segment is the largest revenue generator, deriving income from initial and renewal franchise fees, as well as a portion of the monthly membership dues.
    • Corporate Owned Stores: Revenue comes from the sale of memberships and other ancillary services at the company’s owned stores.
    • Equipment Segment: The sale of equipment to franchisees for both new locations and replacement equipment for existing locations.
    • Other: This consists of other items such as advertising revenue and other small sources.
  • Industry Trends:
    • Budget-Friendly Fitness: The health and fitness industry has seen a significant trend towards accessible and affordable fitness options, which are largely provided by the likes of Planet Fitness.
    • Franchise Growth: The fitness industry, specifically the low-cost segment, is experiencing high franchise growth.
    • Digital Engagement: The use of mobile apps and digital platforms for fitness instruction and member engagement is on the rise.
  • Margins:
    • Planet Fitness boasts strong profit margins, partially due to their high-volume low-cost model. As a franchise model, their margins are mainly derived from franchise fees, monthly royalties, and equipment sales. This helps keep their margins higher and more stable compared to companies that rely purely on product sales.
  • Competitive Landscape:
    • Intensely Competitive: The fitness industry is very competitive, featuring a broad spectrum of choices from high-end luxury gyms to low-cost value gyms, at home training, and specialized fitness classes.
    • Key Competitors: Other gyms and chains are Planet Fitness’ main competition, both big players and smaller localized gyms.
  • What Makes Planet Fitness Different?:
    • Cost: Planet Fitness focuses on being a budget-friendly gym with no-frills options for people looking for basic equipment without extras like pools, saunas, and special classes.
    • Franchise Model: Planet Fitness does not require a lot of capital for growth and it utilizes franchisees’ capital to grow.
    • No-Judgment Atmosphere: The “judgment free zone” business model is a key differentiator of this company in the fitness industry.
    • High Customer Retention: Once people join Planet Fitness, most tend to keep it and use it frequently.
  • Recent Concerns:
    • Executive Departures: In the second half of 2022 Planet Fitness saw several executive departures which caused some concerns. All executives were replaced.
    • Increase in membership fees: Planet Fitness has been known for low cost and as they move towards higher membership prices, this could reduce their appeal and growth to new members.
  • Management’s View * The management acknowledges the concerns but they believe those events were a one-time thing and will not affect their business in the future. * The management still believes its membership growth will be strong, especially in their international markets.

Moat Analysis:

  • Rating: 3/5 - Narrow Moat
    • Intangible Asset (Brand): Planet Fitness has developed a strong brand reputation as a no-judgment, affordable fitness option. This reputation can be seen as a moat that keeps current members and attracts a consistent influx of new members.
    • Switching Costs: Membership at a gym isn’t a massive financial commitment for most people, but people tend to go to one gym more often than another. So, the low price tag with a convenient location can create some moderate switching costs, which make people hesitant to switch.
    • Network effect: In some sense, Planet Fitness can be viewed as having some level of network effects as a larger gym is perceived as more attractive by the customers and more likely to be better equipped with machines and better access. Also, having more locations helps give better access to customers.
    • Scale: Planet Fitness has a wide presence in the industry. It is one of the largest fitness chains, with more than 2,400 locations, which makes it harder for competitors to compete with its brand recognition and ease of access.
    • Sustainability of Moat: The overall fitness industry is rapidly evolving, and while the company has carved a moat, its easy to get competition that offer unique products or target specific demographics. So, its not a very durable moat in nature.

Legitimate Risks to the Moat and Business Resilience:

  • Intense Competition: The fitness industry is crowded and competitive, with a constant influx of new gym concepts and online options, which could potentially erode Planet Fitness’s market share.
  • Macroeconomic Factors: A recession could harm Planet Fitness because as people get less confident, they are more likely to cut expenses. The gym membership will be one of the first places people are likely to cut on.
    • Shifting Customer Preferences: Changes in fitness trends (e.g. home gyms, virtual workouts, and new fitness regimes) could affect Planet Fitness’ relevance. For example, an increase in demand for home gyms would affect Planet Fitness’s profitability and growth.
    • Technological Obsolescence: Technology, like for example AI-powered fitness devices and virtual classes, will keep evolving, so Planet Fitness has to constantly adopt to these changes in order to stay relevant.
    • Brand Image Risk: If the company has a major brand malfunction, then the brand will be tarnished, and people may not associate the brand with a “judgment free zone”.
    • Loss of Franchise Support: Since the Company is heavily reliant on their franchisees, they could see their revenue and profitability eroded if the franchisees are doing badly or exit from their contracts.
  • Business Resilience:
    • Planet Fitness’s value-oriented model provides a stable revenue stream, as it is not highly susceptible to economic changes and they have established long-term business relationships.
    • The franchise business has a high capital efficiency, and that makes it less capital intensive than other companies.

Financial Analysis:

  • Balance Sheet Health: 4/5.
    • Planet Fitness has a good financial position. They have a cash balance of more than $450 million, and total assets are more than $2 billion. There are also significant amounts of short term investments. They have shown good financial responsibility. The Company’s working capital is around 100 million dollars, indicating a positive liquidity position. They have a long history of positive net income and cash flows. Finally, debt to equity is around 2, indicating that the company is not using an unsafe amount of debt.
    • Weaknesses: Goodwill and other intangibles, as expected from an acquisitive company, comprise a significant portion of their assets. Also, some long term debt could become due in the future and create issues.

  • Revenue Growth: Planet Fitness has shown steady growth over the past few years, which shows an increasing interest in their brand.

  • Consistent Profitability: The company has been profitable in the last few years and its margins are stable or improving, showing that they have a good handle of their operating costs. This also signals strong management control and financial stability.

Understandability:

  • Rating: 1/5 - Very Easy to Understand.
    • Planet Fitness runs a simple business model which is easy to understand. They offer low-cost gym memberships through franchise model, and the company makes money through the fees and sales of franchise items. Any normal investor can quickly understand this model.

Conclusion:

Planet Fitness possesses a narrow economic moat based on its strong brand reputation and cost-effective operations. While the fitness industry is competitive and faces rapidly changing trends, the company’s focus on affordable and accessible fitness options, along with its franchise model, provides some resilience. It is essential for investors to closely track the company’s financial performance as well as the competitive landscape. They have a good balance sheet, but will have to make changes to management and strategy to adapt to future changes.