Planet Fitness: We Missed The Boat, Now What?
Summary
- PLNT is a stock we took massive profits in back in 2018, and have been just trading it here and there ever since.
- We failed to pull the trigger on the name in March and missed a double.
- Now, here we are just under $60 a share, and we think the stock is ahead of itself because we question whether growth will return even when things open up.
- Looks like more of a short target then a long target.
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Prepared by Stephanie, Analyst at BAD BEAT Investing
Planet Fitness (NYSE:NYSE:PLNT) is a stock we took massive profits in back in 2018, and have been just trading it here and there ever since. We had a another trade on in H2 2019 that worked out. As the stock had pulled back (actually, it fell off a cliff) as the market sold off due to COVID-19, the stock caught our eye. However, this was one play where we failed to pull the trigger on, because much like cruise ships, movie theaters, sit down only restaurants, and sport venues, we had concerns over businesses that require people to pack into tight spaces together. With gyms, you factor in the sweat and multiple surfaces touched. We felt it was best to avoid the stock and advised our members at BAD BEAT in our chat service that it would rebound but we did not think a double was in the cards. We didn't play it, regrettably. The stock rallied, but it was moreso the market rally overall that pushed the stock back up in many cases.
In retrospect, it seems it was a sum of the parts opportunity. Now, here we are just under $60 a share, and we think the stock is ahead of itself. Make no mistake, we love the company, we love the business model, but we still think it was the right decision fundamentally. We are now seeing gyms going bankrupt. First it was 24 Hour Fitness, and just today, it was Gold's Gym. Some may argue if these gyms go belly up it is good for Planet Fitness. We would be inclined to agree, but bankruptcy does not mean the gyms close, so no competitive advantage is necessarily had. However, Planet Fitness is feeling the pinch too. After the company reported earnings today, this became evident. Bottom line, the country needs to open back up, but we question whether people will want to visit gyms until COVID-19 is a distant memory. As such, we want to share with you our thoughts on the stock at present. We think it can both be traded short-term and invested in for the long-term. Let us discuss the play we think you can make and the story here longer-term.
Cash cow has thinned down
Planet Fitness was long a cash cow. We think it has the potential to get there again, but it is going to take time to get there again. But why? Well, look, it offers very low membership rates, and that gives it a competitive edge over independent gyms. This often prevents cancellations, as even when cash flow is tight, these types of low dollar memberships are often the last to go. While Planet Fitness doesn't have global reach yet but is spreading, including to Australia. On a pullback to the $40 range, we would consider it again. This is because its model is more of a social hangout spot with fitness undertones, rather than a serious gym, and that is why it works. It is cheap, and it is for socialization, while having 'fun' working out. But whether members will flock to gyms again here in 2020 remains a big question, and as such we are neutral right now. We think the wildfire like growth is on hold for a bit. Let us discuss the financial metrics to consider.
Top line contraction
The just-reported Q1 saw revenues contract. That has not happened before, and frankly it was bad. It was tough to handicap the quarter, but let's be real, the shutdowns didn't even weigh until two weeks into March. If we want to be conservative, we can just say the month of March. We saw Q1 revenues coming in down 5-10% to $134-$141 million, based on new store openings and historical trends, as well as what we thought would be a huge start to the year, which panned out. But it was bad. Revenues fell 14.5% year-over-year, destroying a trend of strong growth:
Source: SEC filings, graphics by BAD BEAT Investing
Revenues fell despite some underlying strength. There was strong membership and same-store sales growth, both of which have been outstanding over the years and continued to start Q1, but we see this growth stalling in Q2 and likely into Q3. Revenues fell $127.2 million, and came in way below our estimates. The Street saw a consensus figure that was more liberal than ours. Their consensus of $152.1 million get whiffed on by $24.9 million. The growth metrics are impacted by both same-store sales growth and new gym openings, but in an effort to protect members, team members and communities, the company and its franchisees made the decision to temporarily close all Planet Fitness stores mid-March. So two weeks of closures, and we saw this huge decline.
New gyms were certainly driving growth, but we believe store count continues to grow at a very reasonable and manageable pace. There is so much room for growth, especially international growth. The company is incredibly strategic with its new stores, and all new gym openings are carefully selected so as not to cannibalize other shops. 9 new Planet Fitness stores were opened during the period, bringing system-wide total stores to 2,039 at the end of Q1.
On the other side of the equation, same-store sales were strong. We were impressed with system-wide same-store sales jumping 9.8%, contributing meaningfully to sales growth and at the midpoint of the 7.5-8.5% growth we thought we could see. Yet, revenues we poor, though it was because they did not recognize March revenues.
All COVID-19 issues aside, from what we see, the company is managing growth at existing stores effectively. The high-single digits and sometimes double-digit comp sales growth is a key result. The name is still growing like wildfire. But what about profits with this huge revenue shortfall?
Earnings hit hard
While sales were down 14.5%, net income fell 68%. Yes, it fell 68%. Net income came in at $8.6 million, way down from $27.4 million last year. On a more comparable basis, adjusted net income fell 56% to $14.4 million or $0.36 per share:
Source: SEC filings, graphics by BAD BEAT Investing
This is a disaster and we do not think the market is pricing the stock correctly based on this and the pain which will be seen moving forward. Adjusted net income per share was a massive miss. At $0.16 in adjusted earnings, consensus was missed by $0.17.
Looking ahead
We still believe in the business model, and the fundamentals remain strong, but it needs the country to open back up, and for people to have the courage to come into the gym. Yes, the former is starting to happen, but it is scattered and variable across the country. Before COVID-19, the stock was expensive on a valuation basis, but so were many other growth stocks. Now that growth is gone. More softly, it is stalled. We think the fear risk is real here.
Keep in mind the company did not recognize first quarter revenue related to monthly membership dues collected in March before stores closed due to COVID-19 because as previously announced, members will be credited for any membership dues paid for periods when stores were closed. Some of the miss is related to this a touch. Now, when things open, we expect the company will recognize franchise revenue and corporate-owned store revenue associated with those membership dues as stores reopen. But, we think many people who are recovering financially will quickly cancel things like gym memberships. The deferrals had a significant impact on first quarter financial results. We also expect decreased new store development and remodels, as well as decreased replacement equipment sales for 2020 and into 2021 as a result of the COVID-19 pandemic. We wonder how long the company will be viable if when things reopen franchisees are unable to pay rent, or cannot afford royalties. There is a lot of risk here.
Conclusion
We made great money in this stock over the years. While we did miss a rally off the bottom, and some may disagree, our reasoning for avoiding the stock in favor of other better opportunities, was sound. The company will not be the same for at least a year and probably more. The fear over COVID-19 will persist. Those who lost jobs or businesses are not going to pay the 20 a month. With reduced traffic, we think that franchisees suffer. It is a terrible shame as we love the company, we love the model, but right now, the stock is more of a short versus a long.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in PLNT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (20)
ok to reopen here in Arizona
Agree that the current stock price is a little steep and does not reflect the ugly Q2 results that will be coming.
I feel that a better entry price will come within the next few months.
The question for you is what stock price would attract your investment dollars?I would imagine a re-test below $30 would be a buy.
How about $40 or $45?Silentrumble
Planet fitness with low fees and reasonable equipment has survived as the business model works. Moving forward I expect a reduction in membership and would be hesitant to invest in sector.