Can Planet Fitness Whip Malls Into Shape?

If your New Year's exercise resolutions have fallen by the wayside, you still have time to get back on track before summer arrives. Or maybe you'll wait until next summer. Either way, Planet Fitness (PLNT 1.07%) will be happy to help, and by next Jan. 1, it will have added an additional 225 locations where you can get your sweat on.

And, as MarketFoolery host Chris Hill and analyst Emily Flippen discuss in this segment, the company's choice to put a large share of those new gyms in storefronts previously occupied by Sears and Toys R Us is clever for a number of reasons. They also talk about Planet Fitness' impressive comps growth record, its business model, and why the current expansion plan is a win-win-win strategy.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 7, 2019.

Chris Hill: We've talked before about the bankruptcy of Toys R Us and Sears continuing to close locations. One of the questions that comes with these stories is, what's going to happen to all those locations? We got at least a partial answer this week because Planet Fitness announced they plan to open 225 gyms this year. A lot of those are going to be Toys R Us locations, and some Sears locations as well. Were you surprised at the number they're going to open? I was. I don't know the company as well as you do, but that struck me as a pretty large number.

Emily Flippen: Well, there's still about 80% of Americans who are un-gymed, if you will --

Hill: [laughs] Un-gymed?

Flippen: Un-gymed Americans, it's really a crisis in this country. Eighty percent of Americans don't belong to a gym. While it sounds like a lot -- 225 is a lot -- I still think to myself, there's a lot of room for expansion here. You'll notice that they're being really smart about the stores that they do pick up. Over three-fourths of Planet Fitness customers say they combine their gym visit with other shopping needs. So picking up these old Toys R Us locations, it's smart for them, because they're picking up the ones that are close to things like grocery stores or shopping malls, places that people would normally go. And these shopping places are excited to have Planet Fitness because this drives recurring weekly traffic. People go to the gym every single day, or at least a few times a week, at a minimum, vs. other shopping places, which is maybe a once every week, every two weeks type of visit. So it's really a good business.

They're picking up this land for much cheaper than they would get it otherwise. And they're strategically placing them across the country. I think there's a lot of opportunity, despite this company's rock star growth up to this point, for them to continue to grow.

Hill: Yeah. The stock has done very well. It's an important point you made that not only are they being very smart about these locations, they're keeping a very close watch on the money that they're spending; they're also clearly doing a great job of engagement once they get people in the door. They've had 12 straight years of same-store sales growth. That's super impressive when you consider the inherent challenge in running a gym is, we're going to get a bunch of new people in January because people are making those New Year's resolutions to get more physically fit and they join a gym, then how do we keep them? Because it's great and natural to think that in January, but invariably, you're going to lose people. Clearly, Planet Fitness has figured out not just how to be smart about how they're spending their money on new locations, but they're also apparently very smart about keeping people in the door.

Flippen: Exactly. I remember when Planet Fitness used to be a controversial company. People said what they were doing was taking advantage of lower-income people, the $10 a month charge, "What they're doing is charging such a small fee that people forget that they are even subscribed to a gym membership. They'll never go to the gym, they'll just keep paying this fee, what an abusive business model!" But in actuality, we're seeing, for exactly the metrics users mentioned, that what they're doing is they're changing the culture around gyms. These people who were subscribing to a gym and never going back weren't doing so because they didn't want to go to the gym; it was because going to the gym was not a fun thing for them to do. It was uncomfortable, it was hard, and it was challenging. Planet Fitness is convenient, fun, you feel associated with both the brand and the other gym-goers. It's really a smart, minimalist business model that is succeeding really well.

Hill: We always like it anytime we see a business that recognizes the challenges that they're facing. Years ago with Panera Bread, it was Ron Shaich coming out with the famous comment about the mosh pit, recognizing, "We do a good job producing good food. We do a terrible job for the in-store experience. We have to fix that." So, the fact that Planet Fitness recognizes, there certainly can be a culture problem at gyms, so, Planet Fitness attacking it head-on, saying, we're creating these, what they call "judgment-free zones," and even using free pizza as a way to entice people -- but also to demonstrate like, yeah, we're not that kind of gym that's going to be super judgmental. Because who wants to go to that?

Flippen: Exactly!