Gym chains were among the countless industries upended by COVID-19. Locations were forced to shutter and still some capacity restrictions remain.
Regardless of this, one of the world’s largest gym chains, Planet Fitness (NYSE:PLNT), looks to have endured, and is primed to exit the pandemic from a point of strength. Here’s why.
An ideal business model
Planet Fitness directly owns just 4.7% of its locations and franchises out the rest of the units to tenants. Importantly, these tenants own an average of 20 stores — they’re large, durable organizations. As a result, Planet Fitness franchisees were able to survive the crisis with limited financial aid and 123 net new store openings throughout 2020.
Not owning most of its stores directly makes Planet Fitness inherently asset-light and nimble; this was especially important during a hectic period.
What’s so attractive about opening a gym with the Planet Fitness brand versus any other? The superior profit margins. For example, Planet Fitness boasts double the EBITDA margin of its close competitor Crunch Fitness in normal times. Planet Fitness’ normalized margin profile consistently eclipses its competition, making it a lucrative choice for franchisees.
To complement strong tenants and heftier margins, Planet Fitness also has one of the lowest memberships fees in the industry. In a world still economically reeling from COVID-19 this should be a great advantage. The company used this leading value proposition to take members from other chains amid the Great Recession and believes it will do the same on the back end of COVID-19.
Signs of life for Planet Fitness
For the last two quarters, CEO Chris Rondeau has offered encouraging sentiment about the company’s marketing spend. Planet Fitness halted marketing while stores were forced to close, and restarted a national campaign last quarter. The response was quite positive and that momentum has continued into the spring.
For the first time since the COVID-19 pandemic began, the company posted three straight months of positive membership growth. Planet Fitness still has not returned to positive sales growth, but membership is the predominant driver of revenue growth so that is likely coming.
As vaccination numbers rise in the U.S., we should theoretically follow the economic recoveries of places like Israel that are ahead in vaccinations. A return to normal bodes extremely well for a business model like this one that relies on in-person attendance. Encouragingly, as soon as Planet Fitness stores open they immediately return to cash flow positive and thankfully most are now operating once more. Moreover, the CDC’s reversal of its indoor mask mandate for fully vaccinated people should help.
Digital fitness: The next growth avenue
While brick and mortar is the company’s bread and butter, Planet Fitness is now also finding success in digital fitness. The company’s free digital app is now downloaded by 50% of Planet Fitness members, compared to just 40% last quarter.
The app is No. 2 for free fitness apps on Apple, and the success prompted management to explore debuting a paid version which is still in beta testing. Peloton Interactive is certainly the king of digital fitness in the stock market, but if Planet Fitness can continue to capture a piece of this trend that simply provides more potential shareholder upside.
Planet Fitness is a buy
Planet Fitness’ business model allowed it to weather the COVID-19 storm much more effectively than other companies. It’s uniquely positioned to find meaningful success in the future. For that reason, I think any investor should take a serious look at adding Planet Fitness to their portfolio.
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.