Planet Fitness (NYSE:PLNT) has taken the spread of the coronavirus seriously by closing its roughly 2,000 company-owned and franchised gyms since March. It has also boosted liquidity by drawing down on its revolving credit facility and ceasing share repurchase activity. The senior management team agreed to pay cuts with CEO Christopher Rondeau forgoing his entire salary and other executives seeing partial reductions. Members of the board of directors similarly gave up their cash retainer fees.
In this environment, it is not surprising that management joined other companies in withdrawing 2020 guidance. There are signs that social distancing is having the desired effect and reducing the rate of infections, but certain government officials are warning that cities and states will not reopen all at once to prevent a renewed outbreak. With the decision up to each state, Georgia recently announced certain businesses, including gyms, are allowed to reopen by the end of the week. Planet Fitness has 65 clubs in the state, but it is unclear if it will reopen them.
Other states like California (140 clubs) and New York (90 clubs) are pledging a go-slow approach. This means Planet Fitness is likely in for tough sledding for some time, but it has a sustainable business that should recover quickly once the worst of the health crisis passes, even in a tough economy.
An affordable workout
The economy is likely to remain sluggish even after local governments ease restrictions. In this scenario, gym operators will feel the pinch since people are likely to cut discretionary spending. While you may feel your workout is indispensable, a job loss and lack of income have a way of changing priorities.
But Planet Fitness is in a better position than other industry participants. Its value proposition is a compelling $10 monthly fee for a standard membership (plus a $39 annual fee and potential enrollment payment), which includes access to staff trainers. The company's target market is an astounding 80% of the United States and Canadian population who are at least 14 years old. Aside from the affordable price, the company casts a wide net to attract members by stocking the gyms more with cardiovascular equipment and lighter weights rather than heavy free weights.
This has worked well in a good economy. Since 2015, several important metrics have roughly doubled, including the number of gyms (2,001 versus 1,124), memberships (14.4 million versus 7.3 million), and revenue ($688.8 million versus $330.5 million). Financial information does not go back to the Great Recession, but I expect an affordable price will remain a compelling proposition. The chain may very well see a business drop-off, but it can still outperform the broader fitness industry.
Planet Fitness has historically enjoyed a steady revenue stream. With 95% of its gyms owned by franchises, it relies primarily on royalty income, but even if membership drops, the company also sells to its franchisees the equipment that must be replaced every five to seven years, which is another nice revenue source. Equipment revenue was over $250 million last year, or about 37% of the top line.
A cash stockpile
The company has frozen memberships and fees until clubs reopen. It is the right thing to do and should engender customer loyalty, although it hurts cash flow in the short run. Competitors like Town Sports International Holdings, which owns New York Sports Clubs among other chains, are facing class-action lawsuits that allege the clubs charged fees while the gyms were not accessible.
Given the company's approximately $540 million of cash reserves as of March 30, Rondeau stated in a filing, "We believe we have sufficient liquidity to carry us well beyond the end of this year, even in the event that clubs remain closed for the rest of 2020." With the uncertainty created by the coronavirus, it is comforting to know that Planet Fitness can hold out for months on end if necessary.
Though the stock has recovered from the worst of its decline in mid-March, shares are still down 23% year to date, which should make them appealing to patient investors. Planet Fitness is well positioned to rebound after the economy reopens, and its strong business model leaves it with solid long-term prospects.