Chegg (CHGG -0.53%), Planet Fitness (PLNT 0.55%), and The RealReal (REAL -3.31%) have all issued second-quarter reports. In this episode of MarketFoolery, host Chris Hill welcomes Motley Fool analyst Maria Gallagher. Maria analyzes the reports and shares why she likes the long-term trends working in The RealReal's favor.
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This video was recorded on August 10, 2021.
Chris Hill: It's Tuesday, August 10th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Maria Gallagher. Thanks for being here.
Maria Gallagher: Thanks so much for having me.
Hill: We've got a trio of the second quarter earnings reports and we're going to start with Chegg. Good results from Chegg, this is the online education company. Profits and revenue came in higher than expected. They also raised guidance for the full fiscal year and shares up around 5%. This seems like the right response for the stock when Chegg's putting up these numbers and raising their guidance.
Gallagher: Yeah, Chegg's actually been a pretty fascinating story to follow. It was founded in 2005. It was initially your place to go to for textbook purchases and rentals. It was more of a capital-intensive and low-margin business. But then, when Amazon invaded that textbook category, it began to expand its service offerings. In 2015, it shifted that strategy away from the textbook business to the higher-margin learning category. It made a number of acquisitions starting with Easybib in 2016, most recently Thinkful in 2019, to expand their service offerings. I think that Chegg is this really interesting example of a turnaround, like you said, last quarter revenue was up 30%. There are a total of 6.6 million Chegg services subscribers, which is 67% up year-over-year. There are about 19 million Chegg platform unique visitors in an average month and 87% of students have heard of a Chegg service. It has so many offerings, it's really shifted its strategy in the past five to 10 years. I think it's been really fascinating to watch and it's really going to continue to do well as we see a lot more people who are taking classes in addition to working or trying to shift career paths, this is a really useful tool for them.
Hill: Yes, I was talking the other day with Jason Moser and we talked about how some companies can expand their optionality and others don't and Chegg has done a great job of that. This is just a sample size of one household, but my younger daughter is starting her first year of college this fall. My older daughter is turning her last year of college this fall. The two of them were talking recently, just the older one sharing her experience and everything from the basic things of roommates and just social life on campus. When they started talking about classes and textbooks, not that I was eavesdropping, but the word Chegg just came up repeatedly in that conversation. The stat you mentioned of 87% of students who have ever heard of Chegg, that's certainly been my experience as well.
Gallagher: Yeah, Chegg Study has 66 million step-by-step solutions. About 60 million experts answered questions and answers and six million textbook solutions. For really most classes you could be in if you have a textbook. I remember when I was in college, I used it with my textbook, in one of my math classes that I had a hard time with and it was really helpful with those step-by-step solutions. I think that it's just proving to be a helpful addition to a lot of people's needs in education.
Hill: I like to think that if Chegg were around when I was in college, I would've been a better student, but I'm not sure that's necessarily the case.
Let's move on to Planet Fitness. I don't have a great sense of this business and their stock. I take a little bit of comfort in the fact that Wall Street appears to be agreeing with me because the stock is basically flat today. Revenue looks pretty good for Planet Fitness, they were a little lower on profits, but this is a quarter where gyms were reopening. Some memberships were going back up. Maybe that's a silver lining. But now, you think about the next three to six months. I have a hard time imagining that there's going to be a lot more reopening of gyms and a lot more gym memberships being added. But what stands out to you when you look at this quarter and when you think about this business?
Gallagher: Planet Fitness is interesting because it is a franchise business model. They have a couple of different revenue streams. They have their corporate-owned stores, they have their franchise stores, and then they have the equipment segment. If you are a Planet Fitness franchisee, you are required to reup your equipment every five to seven years. That's an additional revenue stream for them. It's an interesting and a little bit different business model. In the past quarter, they added 700,000 new members. The past six months have been consecutive months of net member growth. Their total membership is more than 14.8 million and over 98% of their stores are open globally now and so more than 13 million people remained members of Planet Fitness during the pandemic. What's also interesting is that they did shift to a lot of digital strategy. They had an app that they tried to really focus on. They had a lot of workouts on Facebook Live, and they partnered with a lot of different athletes and different celebrities from The Biggest Loser. Actually last month, they hired Sheryl Kaplan as the first-ever Chief Digital Officer. I think that they are planning at least for a continuation of utilization, and I guess we can say an Omnichannel experience for fitness. You have your app and you can work out at home and you can pay a little bit less for that or you can go into your membership and you can go into the gym. You have all of these different offerings. Whatever your comfort level is with the gym, you feel comforted by the Planet Fitness brand. They're still only about halfway to their long-term target of 4,000 locations. It'll be interesting to see how that can expand in the next couple of years.
Hill: It seems like a smart move because certainly there are plenty of people who look at the upfront cost of a Peloton. Any of these in-home equipment devices and then services, and not everyone can afford those things. For Planet Fitness to say, we think there's a market for people who don't want to pay thousands of dollars for a stationary bike, we're going to go after it; it seems like a smart move. You look at the stock, it's back where it was in January of 2020, and the previous few years before that was a pretty steady upward trend. I still come back to where I started with Planet Fitness, which is like, I have no idea where this is going over the next six months.
Gallagher: What's interesting, it's a totally different business model to Peloton, but just in terms of the market that it's serving. People who are buying Pelotons are more likely to be people who are interested in fitness, who have already done fitness, who already like SoulCycle. They're people who will spend up or go to boutique fitness classes, as opposed to Planet Fitness is really looking for about 80% of the American population who do not have gym memberships. It's supposed to be this non-intimidating environment where you come in, there's free pizza, there's free Tootsie Rolls. It's really more geared toward people who are getting into fitness because they have to, because it's good for you. They'll go on the treadmill for 20 minutes, and then they'll go home. It's not really people who are fitness fanatics, which is really a much smaller segment of the population that I think Peloton and some of those more expensive high-end offerings are really geared to a much smaller adjustable market. Whereas Planet Fitness really has, in my opinion, a much bigger market, which is just people who workout because it's good for you, but they're not that excited about working out, and they don't want to spend a lot of money to do it.
Hill: The Tootsie Rolls just cracks me up.
Gallagher: I like pizza.
Hill: I don't want to assign any malintent, but there is a version of that. Where there's just diabolical thinking at work from some executive at Planet Fitness. "We don't want them getting too healthy. We don't want them to lose too much weight. Give them a little candy on the way out the door."
Gallagher: I think they're just trying to make people feel OK to say, "You're doing your best." That's what I think. You go to Planet Fitness because you're doing your best. It doesn't have to be a crazy workout to just feel a little bit better about yourself.
Hill: That's a much more optimistic way to do that. Thank you for bringing that. I mentioned last week, it's August, people, schedules get a little wonky in August. This is going to be a short week for us at MarketFoolery. We're going to be back on Monday, but in the meantime, you can check out Industry Focus, Motley Fool Answers, Rule Breaker Investing with David Gardner. Hey, check out Motley Fool Money this weekend for an interview that Maria did on the topic of investing mindset. It is a great interview. That's coming on Friday. Well done. Thank you for doing that.
Gallagher: Oh, thank you.
Hill: Let's wrap up with The RealReal. It is a tough day for shareholders of The RealReal. This is the online consignment business. The stock dropped more than 17% this morning after they lost more money than expected, revenue was lower than expected. If there is a silver lining for The RealReal, they appear to be doing a good job with getting repeat buyers.
Gallagher: Yeah. I actually really like The RealReal. What I really admire about them is they really carved out this niche within resale. Resale is the fastest-growing portion of online commerce. About 72% of consumers say they'll change their consumption habits in order to minimize impact on the environment. You have more interest from Gen Z and Millennials on the resale environment. Resale's growing fast, and that has a lot of competition, but then within the resale market, The RealReal has really carved out a niche for specifically luxury. It's higher orders, loyal customers, and it's vital that they be trusted in their authentication process. They have a super high take rate of 34.5%. They have 730,000 active buyers and an average order value of about $520. Like you said, 84.5% of orders are repeat customers, so that's what the high-value, loyal customers.
Additionally, this past quarter, they opened an authentication center in Arizona, which is prioritizing this element of their brand to make that more and more pivotal because that is really what differentiates them is that authentication process. I really liked seeing that they're focusing on that. It was not the best quarter of all time, but I do still really like the long-term tailwinds and the way that they've really come back pretty strong in the pandemic. They are opening new stores that are gaining more attraction, and they're continuing to have high net promoter scores and getting those buyers to spend more and more each time they go on the platform.
Hill: The trends that you mentioned in terms of buyers who are looking to minimize the impact on the environment, this being the fastest-growing segment within the industry, do you look at this drop today? I mean, 17%, do you look at this and say, "This is a buying opportunity for people who believe in this longer-term trend?"
Gallagher: I think so. I own The RealReal, I have owned it for a while. It's been quite volatile. I think a lot of people don't quite know what to do with it. They don't know the long-term staying power. There have been some problems with their authentication process in the past, which is why I like them emphasizing that. Yeah, I think that their long-term trajectory is really strong, and they've carved out a really interesting niche within the resale market.
Hill: Just to put some numbers around the volatility, this company has been public for about two years. Depending on what they were looking at in the last two years, it's been as low as $6, it's been as high as $30. It's currently around the $13.5 range after the drop today. Last question, and then I'll let you go. This is a $1 billion company. They've got trends on their side. They've gotten margins on their side. Do you think five years from now, this is a stand-alone business? Because this does seem like a business with enough going right for it, both in terms of their operations and the overall trend, that a larger e-commerce player could come in, and make them a large offer, and they become part of someone else's universe.
Gallagher: Yeah, I think that's a fair guess because you see even trends like Etsy recently bought Depop, which is in the resale market. You see a lot of these bigger companies starting to pay attention to this segment of the market. The RealReal has a very strong brand name associated with it. It has really loyal customers. It has that very distinct niche within luxury resale. I think if I was a bigger company, even if I was Etsy, I would start looking at it and thinking, "Oh, wow. This is an interesting thing that if you're going to buy it or build it, I think this would be something you could buy. Because it takes a long time to build that customer base and that customer trust."
Hill: I know I said one last question, but one more based on what you just said. It also sounds like that the branding of The RealReal is strong enough that if they were to get acquired, it would be a mistake. Let's say it's Etsy. It would be a mistake for Etsy to rebrand it as Etsy Fashion or Etsy Luxury. Just keep it as it is.
Gallagher: Absolutely, yeah.
Hill: Maria Gallagher, great talking to you. Thanks so much for being here.
Gallagher: Thanks so much for having me.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formed our recommendations for or against, so don't buy or sell stocks based only on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd, I'm Chris Hill. Thanks for listening, we'll see you on Monday.