In September, shares of gym chain Planet Fitness (PLNT 0.65%) dropped to multiyear lows after the company suddenly removed Chris Rondeau from his position as CEO. Rondeau had been at the helm since Jan. 2013, leading the company through its initial public offering (IPO) in 2015.
Investors are absolutely panicking, and others are adding fuel to the fire. After previously throwing shade at Planet Fitness, a prominent investing newsletter is taking a victory lap. And the company's former CEO suggests that rampant problems are about to come to light.
Here's what investors can know for sure, what they can't, and what they should do about it.
What's happening at Planet Fitness
Leadership changes are common for public companies. But investors prefer to see planned changes like when a CEO leaves for a bigger company or retires. CEOs can even recognize the limitations of their skillset as a company grows, which is also an acceptable reason for new leadership.
Abrupt changes, however, naturally lead investors to believe there's something they're not being told.
The official press release from Planet Fitness says, "The management change is not the result of any material or unexpected financial events." But it doesn't really say what it is the result of -- it just says that new leadership is needed for the company's next chapter.
On the bright side, Rondeau is remaining with Planet Fitness as a member of the board of directors. The press release also says Rondeau will help ensure a smooth leadership transition in an advisory capacity.
In his place, the company has chosen Craig Benson, a Planet Fitness franchisee and member of the board, to fill the CEO role on an interim basis.
Speculation is running wild
The Bear Cave is a popular investing newsletter with over 50,000 subscribers. And in January, it featured Planet Fitness as a company with problems. It would seem that author Edwin Dorsey predicted this current situation, which fuels fears of deeper of problems with the business. However, it's important to note that Dorsey's criticisms of the company were quite different from what's happening now.
The gist of The Bear Cave's report relates to how Planet Fitness makes money. As of the second quarter of 2023, the company had nearly 2,500 locations and 18.4 million members. Members pay their monthly fees with automatic debits from their checking accounts, which some claim are hard to cancel once set up.
For Dorsey, that's a bad business practice, which may be true. But that critique is substantially different than what Planet Fitness is dealing with right now.
Co-founder and former CEO Mike Grondahl is also adding to speculation on social media by saying, "The board knew this day was coming the day they went public." He also says the board is "corrupt."
Since he's a former insider, I wouldn't discount Grondahl's perspective entirely. But I would point out that Grondahl left Planet Fitness in 2013. Only one of the current board members was around back then: chairman Stephen Spinelli, who joined in 2012, so this isn't the same board as the one from his experience.
What to do now
I've personally been a Planet Fitness shareholder for many years, but I readily admit that where there's smoke, there could be fire. Something does appear to be off with the company -- investors just can't be sure what exactly that is. For this reason, I'd say it's a good idea to wait for more clarity before taking any action.
That said, the explanation could be simple. Perhaps Rondeau isn't the man for the job now that Planet Fitness has reached its current size, and the board astutely recognizes this. Perhaps Rondeau disagreed with the need for new leadership, which necessitated his removal. If that's all this is, then Planet Fitness stock could prove to be a great long-term value stock now that it's dropped 43% year to date and over 50% from its all-time high. Trading at a price-to-sales ratio of 3.8, Planet Fitness stock hasn't been this cheap since the short-lived market crash of 2020.
Data by YCharts.
Long term, Planet Fitness believes it can expand to at least 4,000 locations. And management is conducting a new study because it believes there's potentially room for even more locations than previously thought.
In short, Planet Fitness could still have plenty of growth ahead of it. And shares are now trading at some of their cheapest levels in years because of uncertainty regarding the abrupt change in leadership.
These fears surrounding Planet Fitness may indeed be founded, so investors should wait for more information. Watch the stock closely, and if the leadership change does prove to be a relatively mundane affair, investors can take advantage of a bargain at these prices.
