Shares of Planet Fitness (NYSE:PLNT) sold off roughly 28% in March, according to data provided by S&P Global Market Intelligence -- and that was after temporarily regaining lost ground. At one point, shares were down nearly 60% as investors assessed the impact of the company closing its gym locations due to the COVID-19 pandemic.
So far in April, shares have resumed their downward march -- down over 20% as of this writing.
Planet Fitness generates revenue in three ways: company-owned gym memberships, franchise fees, and equipment sales. Right now, all gym locations are closed until further notice. That takes away company-owned revenue and franchise revenue. It's possible franchisees could still purchase equipment during this time. But it's not likely to be much, and it's the company's least profitable segment anyway.
In other words, Planet Fitness stock is down because revenue and profits are on hold, with no clear timeline to restarting. However, this difficult situation isn't a direct threat to Planet Fitness' long-term prospects. It has an asset-light business model and, according to management, has enough liquidity to survive even if it has zero revenue for the remainder of 2020.
To me, the bigger risk is the financial health of Planet Fitness' franchisees. We don't know how long those can survive in a zero-revenue environment. But one thing's for sure: The longer gyms stay closed, the bigger the risk becomes.
For Planet Fitness to be a viable long-term investment, at least two thing need to happen. First, this consumer discretionary stock needs to not lose members to competitors during this time. Second, Planet Fitness franchisees need to reopen before the coronavirus-related closures force them to close forever.
With the first issue, I find it unlikely that Planet Fitness will lose a significant number of members. There's no real incentive to cancel memberships at the moment, since the company has frozen memberships while it's closed. No fees are being charged, and lost months will be tacked on to the end of membership periods. And at only $10 per month for a basic membership, it's one of the better subscription values out there.
The second issue isn't as simple. The reality is we don't know how long the COVID-19 pandemic will keep gyms closed. And we don't know the financial health of independent franchisees. But I'm optimistic. That's because Planet Fitness will undoubtedly do all it can to help franchisees survive this. And the U.S. government has passed measures to help protect small business owners.
When it's open, Planet Fitness runs a great business. For those who believe the coronavirus is temporary, this could be a great time to pick up shares of Planet Fitness.