Why Planet Fitness Was a Top Performer Over the Last Five Years

Discount gym operator Planet Fitness (PLNT 0.05%) has been a solid winner on the market over the last five years despite significant challenges during the pandemic.

In this episode of Motley Fool Live recorded on Oct. 7, Fool contributor Jon Quast explains Planet Fitness' formula for delivering shareholder value and how the company has managed through the pandemic.

Jon Quast: Planet Fitness falls into this category. This is what it has done over the last five years. As you can see, Zoom is blocking me out. Up 300% over the last five years. That's very [laughs] good performance from this company. Why has it beat the market over the last five years? First and foremost, I believe, Planet Fitness has expanded its footprint. At the end of 2016, this company had just over 1,300 locations. Fast forward to present day, as of the second quarter of 2021, over 2,100, closing in on 2,200 locations. That's an increase of 65 percent over the last five years. Having more locations helps that revenue grow. That's part of the components of beating the market or being a stock that goes up.

Total members over that time has also increased at a good rate, 8.9 million at the end of 2016. Present day, well at the end of second quarter, 14.8 million. More recently, they've surpassed 15 million. But that's an increase of 66% over the last five years, so slightly more than their locations, which means that their comparable sales, their sales per location, their members per location has been increasing as well. Perhaps not by a ton, but it has been increasing. They're getting more and more members into those gym locations. That's actually a really good thing because it helps Planet Fitness and their franchisees -- this is primarily a franchise business . That has helped those gyms gain the operating leverage when you have the same physical space, but selling to more people. That is able to help you become more profitable.

We see this is reflected in average unit volumes. This is the amount of revenue that is done on average per location. $1.8 million at the end of 2016 or recently. Put this at the end of 2019. I think it'll be clear why I did that in a second, but it surpassed $2 million in 2019. Did this for two reasons. Like I said, the more members per location, but also more members over time have been upgraded to the more premium membership. You get a couple extra perks with that. It's more revenue per location. Total revenue-that's trailing 12 months -- $378 million 2016. Over the last four quarters, $488 million. Not a big increase there in revenue, but I will point out that most of their gyms were closed over the last 12 months for a period of time. They're actually doing pretty well when you take that into consideration.

Regarding the 2020, gyms had to close because of the pandemic. CEO Chris Rondeau, at the end of 2020, said "We had zero stores permanently closed due to COVID and zero franchisee bankruptcies." That is very significant, and here's why. According to Planet Fitness, 22% of brick-and-mortar gyms permanently closed because of the COVID-19 pandemic, 22 percent. By contrast, zero closed with Planet Fitness. They are offering extensions on their development requirements from franchisees, they have contracts in place, franchisees have to open up a certain amount of locations, so that has been paused. They've also put an 18-month pause on equipment replacements. Part of Planet Fitness' business is selling equipment every five to seven years to its franchisees, they're contractually obligated to buy. This is how revenue broke down in 2019. Twenty-three percent company owned, so this is the locations that they own and the revenue they generate from those, 32% franchise royalties, 36% equipment sales, and 7.3% advertising. This is the EBITDA margin here. Their most profitable, of course, is the franchisee royalties. Equipment sales accordingly in second quarter are down because they're putting the pause on that, that will pick back up in time. They're just making sure that their franchisees are financially sound. The company didn't have to go into a lot of debt to weather the COVID-19 pandemic, they've got $527 million in cash as opposed to $1.8 billion in debt. That's maybe a little bit higher than some of the companies that we're used to. But I will point out this a franchise model and that's definitely within bounds with what is normal.