For brick and mortar destinations temporarily shuttered by the coronavirus pandemic, balance sheet health is everything. It's anyone's best guess as to when the U.S. economy will move from chaos to normalcy. But by studying liquidity and cash position, we can forecast which beaten up brick & mortar chains will overcome most of the pain.
Planet Fitness (PLNT 1.23%) fits this description. While most competition directly owns locations and bears all the associated expenses, Planet Fitness does not. Instead they operate a franchise business model, enabling enhanced flexibility. The company makes money by collecting fees from Planet Fitness gym franchises while directly owning under 5% of their branches. The national fitness chain's asset-light business model fosters a low fixed-cost approach built to survive when revenues rapidly evaporate to zero.
An enviable position
Planet Fitness's conservative cash burn rate, which is the rate at which a company uses available cash on hand over a given time period, sits at just over 7% a quarter -- a stark contrast compared to the string of credit revolvers recently exhausted by traditional retailers just to survive. Current company liquidity covers all expenses for the rest of the year and well into 2021 in a zero revenue scenario. This bleak sales projection seems overly pessimistic. Unlike many other businesses, gyms can open as part of the phase one easing of social distancing based on guidance offered by the federal government. If this occurs before the end of the calendar year, which is widely expected, then it seems Planet Fitness's financial status is a source of strength rather than uncertainty while they wait for the world to recover.
Still holding its own
Planet Fitness is in a good position to weather the current storm, but what about its future beyond this horrific but transitory event? Amazon and the e-commerce industry continue to erode the allure of standard brick and mortar business models. The good news is that e-commerce poses a smaller relative threat to service-based retail such as gyms. Why?
Consider that gym equipment is quite expensive and takes up a lot of dedicated space. It's one thing to replace a trip to Gap with getting a t-shirt online, it's another to sink thousands of dollars into creating a home gym. Real, cumbersome commitments are needed to eliminate the absolute need for local exercise destinations. In this scenario, I think paying a gym fee seems more sensible than going to a store to purchase an item. Will the significant portion of people not inherently motivated to exercise be more inclined to spend ten dollars to give it a try, or hundreds to buy a machine to do so? You be the judge.
Better days ahead
CEO Chris Rondeau went further than forecasting pandemic survival in a recent interview with CNBC. Rondeau sees the lockdown as a market share opportunity for the company just like the financial crisis proved to be. A hefty cash position and low-cost memberships offer his company the cocktail for success in a competitive industry. Financial sustainability assures longevity while ensuring industry-low membership expenses continue to sway consumers away from more expensive gyms. Compared to many of its competitors, some of which cost gym-goers well over $600 annually, Planet Fitness charges an average of just over $150 per year. Not a bad undercut. The pandemic will hit consumer wallets and only bolster the appeal of Planet Fitness's $10 monthly membership rate, while potentially increasing their lead over the rest of the fitness industry.
While, to some, cost is the most important consideration, consumer fitness preferences are not uniform. Some view going to the gym as a social activity rather than something to be done in isolation. Some, like me, prefer to be alone when they struggle to get through their third push-up rather than doing so publicly. Regardless of inclination, Rondeau's company features services to meet any work out preferences. Planet Fitness boasts a vast library of fitness content from company trainers on its app as well as on YouTube. Stay at home orders led to a 250% spike in app usage for the company, similar to the enhanced user traffic for competitors such as Peloton. The company is in a favorable sweet spot to continue as the low-cost gym provider, while remaining capable of and motivated to pivot toward digital offerings as consumer preference trends dictate.
From a fundamental standpoint, with the pandemic hindering financial performance across the world, it's more informative to orient our focus on more normalized 2021 estimates. After a string of downward earnings estimates, the company still has a mean FY 2021 analyst earnings per share estimate of $2.05. This equates to an adjusted forward multiple of just over 27 on the company. Not especially cheap, but reasonable considering average sales growth estimates of 25% in FY 2021. New location construction is being delayed by the virus, but so is nearly everything else. While the stock has recovered nicely off of its recent lows, it still remains 30% off its historic highs; perhaps now is the time to strike.
The near future is anything but certain, as recent chapter eleven chatter from JCPenney and 24-Hour Fitness seems to suggest. Regardless, Planet Fitness has financial stability, offers a service insulated from the threat of e-commerce, and does so at industry low costs. To me, this is a recipe for success and a recipe I am happy to be long on.