PLNT - Planet Fitness: A Justified Rally

2023-11-07 13:40:02 ET

Summary

• Our investing group closed a trade on Planet Fitness, Inc. with a 30% gain in 6 weeks following the ouster of CEO Chris Rondeau.
• Q3 revenues rose 13.6% to $277.6 million, surpassing expectations, driven by growing memberships and successful advertising.
• Adjusted EBITDA grew by $18.0 million to $111.9 million, and net income jumped 33% to $41.3 million.
• While leverage is a concern no debt is due until 2025.

Planet Fitness, Inc. (PLNT) is a stock we have traded several times, though our most recent activity has not been shared publicly. We closed a trade this morning after alerting investors to a strong buy conviction following the ouster of CEO Chris Rondeau, good for a 30% gain in 6 weeks. When stocks are beaten down unfairly, sometimes the opportunity is there to pounce on the action. The PLNT trade from September was a clear opportunity. We still see an upside from here, despite some ongoing macro headwinds. We see the business model as sound, with one risk being a severe recession where consumers axe things like gym memberships to save money. We are of the opinion that a mild recession is in store. Our members who bought this stock and were patient for a few weeks saw rapid returns. While we cannot blame anyone for locking in profits here being up on the trade following our guidance, there may be more room to run as evidenced by the just reported earnings, which we will discuss.

Top-line growth continues

The just-reported Q3 saw revenues improve once again. We saw Q3 revenues coming in at $275 million, based on growing memberships, more stores, equipment sales, and successful advertising. Our results were surpassed by $2.6 million, with revenue coming in at $277.6 million, rising 13.6% from last year and surpassing $9.4 million. Franchise segment revenue was a highlight as it increased $17.4 million or 21.6% to $98.2 million from $80.7 million a year ago, while corporate-owned stores saw increases of 11.8% in revenue, and the equipment segment increased 3.8%.

For this type of business, we like to look at growth metrics like same-store sales growth and new gym openings. That said, system-wide same-store sales increased 8.4%. The panic selling following the executive changes was overblown, and today's results justify a rally in shares. New gyms were certainly driving growth in the past, and the company continues to strategically target new openings and franchising opportunities. There is still 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 existing gyms in the network. In the quarter, 26 new Planet Fitness stores were opened during the period. This included 2 corporate-owned and 24 franchisee-owned stores, bringing system-wide total stores to 2,498 at the end of Q3.

Earnings growth impresses

While sales were up 13.6%, we saw that adjusted EBITDA grew nicely. Adjusted EBITDA jumped $18.0 million to $111.9 million from $93.9 million a year ago. net income jumped 33%. Net income hit $41.3 million, rising from $30.7 million last year. On a more comparable basis, adjusted net income rose 13.6% to $51.8 million or $0.59 per share. This is a sizable increase from the adjusted net income of $38.2 million or $0.42 per share a year ago.

Balance sheet healthy

One concern going forward is the debt of any company in this interest rate climate but we think the balance sheet is strong here. At the end of the quarter, Planet Fitness had cash, cash equivalents, and marketable securities of $474.1 million, which includes cash and cash equivalents of $309.0 million. The debt, net of current maturities is $1.96 billion. No debt is due until 2025. We expect 2023 net interest expense to be in the low $70 million range, but that could tick higher if debt is refinanced at a higher rate.

Currently, PLNT has four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. The company does have leverage given the adjusted EBITDA is tracking to be over $425 million, which leaves a 4.6X debt-to-adjusted EBITDA leverage. But if we back out cash and equivalents, the net debt-to-adjusted EBITDA leverage is 4X. That is certainly something to monitor, but not uncommon for a company investing in growth.

Looking ahead

There is more upside ahead in our opinion as the market considers potential growth. We like the business model, but we especially like the beat and raise from the company. For 2023 as a whole, the company is opening between 150 and 160 new stores, and between 130 and 140 equipment placements will be made in new franchise stores. We expect system-wide same-store sales in the high single-digit percentage range, but we are impressed with the revenue guidance increasing to 14% growth from 2022, up from 12%, while adjusted EPS will grow 35%, from 34% previously.

This growth is organic and from share repurchases. With that said, we have closed our Planet Fitness, Inc. trade noted in the opening, but see shares continuing to gain on the back of these earnings.

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