New Hampshire based Planet Fitness (NYSE:PLNT) reached across the world to shake hands with Australia's Bravo Fit Holdings, in a franchise agreement to open a minimum of 35 Planet Fitness locations in the Land Down Under. While this agreement is newsworthy on its own, it also demonstrates a budding international expansion opportunity for the company.

G'day, Australia

Taking Planet Fitness to Australia was a little complicated. The name was already trademarked in Australia, with several gyms using it. This franchise agreement includes buying the Planet Fitness name, taking gyms operating under that name and converting them to actual Planet Fitness locations, and opening a minimum of 35 new locations over the next few years.

Australia is a relatively small country, with a population of around 25 million people. That's less than the population of Texas, where Planet Fitness has over 119 franchised locations. But an interesting feature of Australia is that 90% of the population lives in urban areas -- ideal for a gym location. Considering each Planet Fitness location averages less than 8,000 members, it's feasible for the company to have hundreds of locations in Aussie country long term. 

aerial view of Sydney harbour

Sydney Harbor. Image source: Getty Images.

How Planet Fitness' business works

When investing in stocks, we are investing in the underlying businesses, and not all businesses operate the same. In Planet Fitness' case, it divides its business into three distinct segments: franchised locations, company-owned locations, and equipment. As of this writing, only 4% of the company's 1,899 locations are company-owned, the rest being franchised.

Expansion is cheap for Planet Fitness, since the brunt of the cost is shouldered by the franchisee. Right now, the company has existing agreements with over 150 franchisees, with commitments to open another 1,000 domestic locations as it works toward its long-term domestic growth plan of 4,000 locations.

As the company expands, equipment sales make up an ever bigger portion of its revenue. All franchisees must buy exercise equipment from Planet Fitness, and replace all equipment every five to seven years. Equipment revenue so far in 2019 is $175 million, up 36% year over year. This segment now accounts for 35% of all revenue, though it's the least profitable of the company's three business segments. The equipment segment has accounted for only 21% of EBITDA this year. Nevertheless, it's a fairly predictable recurring revenue stream.

Further expansion opportunities

While domestic expansion is full-speed ahead, Planet Fitness is slowly laying the groundwork for international expansion. The company first announced a franchise agreement to expand into Panama in July 2017, but over two years later it operates only five locations in the country. Additionally, it signed a franchise agreement for Mexico in January 2018, but still runs only two locations there.

The slow start is for good reason. Every country presents a unique market that needs to be understood. For example, in Planet Fitness' third quarter, management mentioned that tanning beds are illegal in Australia. Tanning is one of the primary perks in its premium membership program, and 61% of Planet Fitness members are premium members. Will as many Australians upgrade to this without the draw of tanning beds, and can Planet Fitness find a different incentive in that country? It'll take time to see.

There are some hurdles with international expansion, but overall Planet Fitness is being smart about it. The franchisees it has partnered with internationally are U.S.-based companies, and ones with experience operating Planet Fitness franchises. This existing business relationship is reason to believe that the company is making the right partnerships for success abroad.

Furthermore, equipment sales could have been a big challenge internationally. But Planet Fitness is being smart about this, too. Rather than try to export equipment from the U.S., it has partnered with manufacturers in each international market. In those equipment sales, Planet Fitness only earns a small commission; the local manufacturer makes the majority of the profit. But this model really simplifies the process.

All in all, this is a well-run company with a lot of growth opportunities domestically and internationally. Given its track record, I like its chances for success in Australia, and overall, for years to come.