With the rise of at-home exercise activity during the COVID-19 pandemic, many investors left gym company Planet Fitness (PLNT 0.65%) for dead. However, the company hit records for gym membership and revenue in 2022, showing it's not only surviving, it's also thriving.
There are some who still doubt Planet Fitness' prospects. But I think it's reasonable to assume that this stock will outperform the S&P 500 over the next five years and beyond. Here's why.
Planet Fitness' customer-acquisition strategy
Planet Fitness has a unique approach to the gym market. Rather than target hard-core exercisers, the company attempts to appeal to casual and first-time gym-goers. From a potential market size perspective, this is the better strategy. The casual gym crowd naturally outnumbers those who take fitness more seriously.
Planet Fitness appeals to this larger demographic by being a low-cost provider. And it's apparently doing it better than anyone else. It ended 2022 with 17 million members. And at the J.P. Morgan Gaming, Lodging, Restaurant and Leisure Management Access Forum in March, management said its business is 60% larger than the next 17 low-cost gym providers combined.
There's a hidden benefit to Planet Fitness' model. Casual gym-goers tend to not use their membership very often. Management says that only about 40% of members actually use their membership in a given month. This allows the company to accommodate a lot of members per location, leading to better profitability than if the utilization rate were higher.
To summarize, Planet Fitness appeals to a large audience of infrequent gym-goers because it's cheap. And this high-volume membership base allows for better profit margins at the gym level. According to management, franchised locations at least three years old can have a margin in the low-40% range for earnings before interest, taxes, depreciation, and amortization (EBITDA). And this is after paying royalties and marketing expenses.
Using history as a guide
From the end of 2017 through the end of 2022, Planet Fitness' revenue grew from $430 million to $937 million, up 118%. Meanwhile, its earnings per share (EPS) went from $0.42 to $1.18, up 181%. And that's with a global pandemic thrown right in the middle. This strong financial performance led to market-beating gains for Planet Fitness stock.
Franchisees are driving growth for Planet Fitness. As mentioned, the margins are good and operators are consequently eager to open more new locations. The company had 1,518 locations at the end of 2017 compared to 2,410 at the end of 2022. Notably, it didn't lose a single location due to the pandemic.
Planet Fitness is outperforming the S&P 500 because its revenue has more than doubled and its EPS has nearly tripled over the last five years. And I don't believe these kind of returns are out of the question over the next five years.
A possible 5-year scenario
According to Planet Fitness' management, around 80% of the U.S population doesn't have a gym membership. Simply put, there's still a very large opportunity for growth.
Image source: Getty Images.
Moreover, there's an important component to Planet Fitness' growth engine that investors need to understand. According to its franchise agreements, 2% of all membership dues and annual fees go to national advertising campaigns. And 7% of monthly dues go to advertising in the local markets from which dues were derived.
In other words, as Planet Fitness grows, its growth prospects improve because it increasingly plows more money back into advertising. As management points out, the Planet Fitness system spent around $250 million on marketing in 2022. Therefore, it's almost impossible for smaller competitors to outspend Planet Fitness at this point.
I expect Planet Fitness' membership base to continue growing. Management believes it can open another 1,600 locations at minimum over the long term. And franchisees are scheduled to open about 600 over the next three years combined.
Membership gains should drive robust revenue growth for Planet Fitness. And because its business model is asset-light -- the parent company only owns and operates about 10% of total gym locations -- it should deliver strong EPS growth as well.
I'll stop short of predicting exactly where its EPS or stock price will be in five years. However, because of the growth that it's projecting for the business, I don't believe it's unreasonable to assume the company's EPS could double in the next five years. And earnings growth tends to lead to gains in the stock price over extended time periods. Therefore, it could indeed beat the market from here.
