Shares in Planet Fitness (NYSE:PLNT) are still trading at high multiples if compared to multiples paid in the past by private equity firms for similar businesses.
A gym is mostly a fixed-cost investment. There is a high degree of operating leverage in the business model. If customers stop showing up, that operating leverage would accelerate losses. Now, a combination of operating leverage plus financial leverage could hurt even more. Planet Fitness has a lot of debt on the balance sheet. Its net debt/EBITDA ratio stands at 5x.
We believe the company is on the hook for opening new gyms due to the guidance given in the Q4 call, the lag between when lease negotiations start and the construction of the gym. If that is the case, then it will be adding more capacity when demand is practically gone.
Given the uncertainty and leverage of the business, we have a Neutral stand on PLNT.
Business Overview
Planet Fitness is a franchisor and operator of fitness centers. We say franchisor first because its business model relies on selling the franchise license to people wanting to become a franchisee of Planet Fitness. As of its last annual report, the company had 1903 franchised gyms and 98 corporate-owned gyms. Franchised gyms account for 95% of the total 2001 gyms. It had approximately 14.4 million members as of December 31, 2019.
The goal of the company is to grow the number of gyms to over 4,000 in the U.S alone. When new franchised owners buy into the system, Planet Fitness allows them to acquire more franchises under an Area Development Agreement. This simply means you could purchase more franchise licenses for an added fee but given the exclusivity of an area. You then decide to operate the gym or sell the license to another
