In this Industry Focus: Consumer Goods Bonus episode, Emily Flippen and Motley Fool contributor Dan Kline discuss the latest quarterly results from Planet Fitness (NYSE:PLNT). They go through the company's financials and membership numbers, and talk about how it has done in the space compared to the competition, the challenges it's facing, how it's positioned in the world of COVID-19, and much more.

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This video was recorded on Aug. 5, 2020.

Emily Flippen: Welcome to Industry Focus. It's Wednesday, Aug. 5, and this is your bonus episode of Industry Focus. I'm your host Emily Flippen, [laughs] and I'm welcoming back Dan Kline, as promised yesterday, to follow-up on Planet Fitness. Planet Fitness reported earnings after the bell yesterday, and we thought it was only fair to give a short earnings review. Dan, thanks for joining again.

Dan Kline: Thanks for having me. Emily, we did it, we're in the bonus, we got the extra life, there's another Pac-Man sitting at the top of the screen.

Flippen: It's really, this is, again, very self-indulgent of us, because I know this is a company that we love to talk about. We were both bummed to have to talk about it before the earnings review, so I'm excited that we're able to release a short episode now, just taking a look at the earnings. I sent you along a really nice review, right before we started taping right now, saying, from a nice member who left us a review on iTunes, saying, they're hoping for the Planet Fitness deep dive, and so I hope that, kind of, lives up to those expectations.

But without any further ado, Dan, how were the earnings?

Kline: [laughs] Well, they weren't great, as expected. This company was largely closed for the quarter, but that said, their financial picture and their membership picture is really strong. Total revenue decreased from the prior year period by 77.9%; that's actually less of a hit than I expected. [laughs] I thought they'd have taken in no money; they took in a little bit of money. Net loss was about $29 million or $0.36 a share, that's compared to they made $34.8 million or $0.41 a share in the year-ago period. They opened 21 new stores during this. Emily, that is unfortunate for those franchisees, because while you and I joined Planet Fitness during this, I'm guessing a lot of people weren't rushing to join a gym that wasn't open.

But here's the good news, and this is what stunned me the most:Cash and cash equivalents, as of June 30, were $423.6 million. That means they could lose this amount of money for, like, I don't know, five years. They're in a really good position to survive. Would you think Planet Fitness would be sitting [laughs] on $423 million when they only lost $30 million or $29.2 million in the quarter?

Flippen: No, I wouldn't have assumed that, but I do think it comes back to that franchise model that we talked about yesterday. It means that this business is a pretty steady, recurring, cash-generating business. And as you said yesterday, 90% of their revenue is recurring. So, even with the subscriptions largely turned off for this quarter, I guess it goes to show that that model that has succeeded for so many years in the past has built up a pretty strong cushion for Planet Fitness to handle quarters like this far into the future.

Kline: Yeah, and it's one of those scenarios, where the money they took in was largely the new franchises having to buy equipment. So, they're really making money, they take a cut of the sales, they sell them the equipment, all of the money for marketing comes from the franchisees, there's a fund for that. So, there's not a lot of corporate expense to running this company.

But here's the good news, there's a lot of silver lining. Membership is only down 4%, 14.8 million people now, they used to have 15.5 million. They are at about 60% usage with their stores reopen. The worst is over. This is really encouraging. I mean, you might see some spot closures -- frankly, if gyms didn't reclose here in Florida, I doubt they're going to reclose anywhere. I don't know, Emily, I looked at this and I was really excited.

Flippen: Yeah, when I think about the cat getting put back in the bag here, I think it's probably virtually impossible for the state [and] federal governments to try to get gyms and other businesses reclosed, even if that is the best way to control the current outbreak. So, I'm inclined to believe that moving forward, it's likely that this is going to be one of the worst quarters for Planet Fitness for the foreseeable future. But I have to be honest, I'm a little concerned that membership -- you said it was only down 4%, and while that's good in the grand scheme of things, we know other gyms' memberships were more dramatically hit. At the same time, Planet Fitness was proactive about not charging people during the period in which their memberships or their gyms were not open. So, the idea that people were still canceling, even though they weren't getting charged during this pandemic for a relatively low-cost subscription, it's still a little bit concerning.

Kline: I'm guessing that it's largely people who don't feel comfortable going to the gym and can't imagine feeling comfortable going to the gym anytime soon. I know that there's definitely people in my world, and you probably had this as well, but when I said I joined a gym or that I went to the gym to meet my trainer, are horrified. You know, that I might as well be saying, "I'm going to an all-you-can-eat buffet and I'm using my hands," you know. [laughs] I think there is a level, you know, it's all personal taste, but there's a cautious level. There's also probably some seniors and some older people who shouldn't be going to the gym, or immune-compromised people who right now can't imagine that they're going to go to the gym in the next six months or the next year. And I'm guessing it's not $10 members who quit, I bet it's more $23 members. And that's not a lot of money, but if you're out of work and you don't know what your financial picture looks like, it's still meaningful -- you know, it's a nice lunch.

Flippen: So, let's talk about what their revenue may look like in the future. You said their revenue was down almost 80% compared to the year-ago period, when you look at where the revenue is today versus where it could be maybe a quarter or two from now, how does that leave you feeling?

Kline: Well, the vast majority of their stores are reopened, that means they're re-collecting all that recurring membership revenue. They wouldn't give any guidance, they gave a really cryptic guidance, you said it to me, on what they're going to do with store openings, so they might take a hit in that area, which is actually a pretty big revenue driver for the company. But overall, I'm pretty confident that they're going to swing back to a profit. And sitting on that much cash, even if they're just breakeven for the next couple of quarters, this is actually a better investment than I thought it was.

Flippen: It's interesting, because we're seeing a lot of really great quarters coming out from a lot of their competitors for the at-home fitness trend. Planet Fitness clearly is not performing as well in that category as some of their at-home fitness competitors are. But I think when you look at the valuation that's attributed to it in the market today, it's a lot more reasonable than some of their competitors. Granted, I still think the valuation of Planet Fitness -- and not that I spend a ton of my time thinking about valuation [laughs] of Planet Fitness -- but I still think, baked into that expectation is expansion opportunities.

And you mentioned before, they opened 21 new Planet Fitness stores during the quarter, which I still think is pretty outstanding considering the fact that virtually the entire country was shut down, at least at one point during the previous quarter. The big question is, can they reach their expansion milestones for the next year, for the next two years? Do the people who are franchising these Planet Fitness locations still want to expand?

You alluded to some of this cryptic guidance that they gave in the call in response to an analyst's question. What was that cryptic guidance?

Kline: I'm sorry, I don't have it in front of me, but they basically talked around the question. They more or less said, we don't know. And I hate to say, but that's correct.

So, I would argue that there are people with money that are looking to invest, and they're more likely to open a business you can join with recurring revenue for $10 a month than they are to open, say, an upscale restaurant or lots of other businesses. Look, are they going to open as many gyms in the next six months as they would have? No, just because construction is slower. There's probably not a lot of people eager to, right now, open their gym. That said, when we're post-pandemic, and let's pretend six months from now we're largely in a post-pandemic, maybe even in a vaccinated world, I think this is going to be a really attractive business, because the people who were paying $80 or $90 a month for a gym, they might look at it and go, oh, that's too much. I'm not making as much money. And the person who bought a Peloton, and for the last six months, and by then it'll be 12 months, was sitting there and only using their Peloton. They might go, "You know what? I want to go to a gym, I want to take a class, I want to work out with some weights. But I'm paying $80 a month between my financing and my monthly membership fee with my Peloton. So I'm just going to join this cheap gym near my house."

The other thing they'll benefit from is, people will start commuting again. You know, I went to the gym on the way to or the way from work, back when I used to live in Connecticut and I used to commute to someplace a little bit away from my house. Right now, Emily, nobody is commuting. To go to the gym, you have to make a concerted decision to get into the car, and I know that's a little bit tricky for some people. So I don't know what it's going to look like for the next 18 months, but two years from now, I think there's going to be a lot of Planet Fitnesses opening.

Flippen: Yeah, I put you on the spot there with that question. And the good news is, as you were speaking, I pulled up what I, kind of, wanted to reference here. They got a pretty direct question from one of the analysts during the call, who essentially said, we all know the big question here is, what is there in terms of new placement for gyms in the relatively near future? And as you alluded to, the answer was a very roundabout answer that essentially boiled down to an implication that current franchise owners are not [laughs] super-interested in going out and trying to build out new locations now until they have some sense about what the future of the clubs that they own right now is.

And I think, when you think about the declining membership base, and potentially some downgrades of membership, it's a reasonable assumption that people who are currently franchising a Planet Fitness will want to see their businesses return to a relative normal before looking to expand. But before I let you go here, I also want to talk about something that you mentioned yesterday, because it ties into the answer we got on this question. It's about real estate, and the idea that as gyms and other retailers start to go under, there's going to be more accessible real estate for Planet Fitness. What I thought was really interesting in this call is that they didn't actually say whether or not they expect to have more retail availability, especially at a cheaper price. The implication was, Planet Fitnesses are getting rent deferrals, there are a fair number of other businesses that are also getting rent deferrals, and nobody seems to be interested in signing new leases right now.

Kline: [laughs] Yeah, I think that's absolutely true. That said, there are going to be healthy gyms or pre-COVID healthy gyms that go out of business. That's going to be too attractive for Planet Fitness to pass up. The existing franchisors, they're basically saying, right now we have added cost, we don't know if we're going to sign up new members, we don't know what percentage of our existing members we're going to lose, so let's wait a little bit. But that's not exactly saying "no." Realistically, Emily, if I had a lot of money, I would happily open a Planet Fitness. Would I do it in November? No, I probably wouldn't, unless I can approach a landlord and say, "Here's the deal, I'll sign a five-year lease, but I don't want to start paying rent until there is a 2% COVID-19 rate," or a vaccine or whatever the number is.

Because, look, I think for a lot of people, it's a hassle to go to the gym and wear a mask, and it's not as fun to work out. So they're probably seeing 60% usage for clubs that aren't that busy in the first place. They're probably wondering, "Am I going to get another wave of cancellations?" I don't think that's going to happen. I think in the long term, you know, people who go to the gym, go to the gym. We already know that a pretty large percentage of Planet Fitness members didn't go to the gym anyway, so they're not really missing out [laughs] during the pandemic. So, they're going to monitor, but it will get back to normal. This is a very well-priced product for a recession world or even a world where, let's say, we quickly recover, but where people are still keeping a little bit of an eye on their pocketbook.

Flippen: Well, Dan, I appreciate you indulging me and coming back for a second bonus episode today to report on these earnings. It'll be a fun business to watch into the future.

Kline: Looking forward to it.

Flippen: Listeners, that does it for this bonus episode of Industry Focus. As usual, if you need to reach us, you can always email us at IndustryFocus@Fool.com or tweet at us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.