By: Connor W. Konicke, AIM Student at Marquette
University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Planet Fitness, Inc. (NYSE: PLNT) franchises and operates fitness
centers across the United States with recent expansion into international
markets. PLNT offers a unique and highly attractive business model, with a
high-quality fitness experience while providing a welcoming and
“non-intimidating” environment called the "Judgement Free Zone".
• PLNT reported 3Q2017
earnings after market close with a 12% top line beat, boosting 3Q2017 revenue
to $97.5 million, exceeding analyst’s expectations of $93.6 million. The 3Q2017
earnings call marked PLNT’s 43 consecutive quarter of same store sales. In
addition, PLNT beat EPS consensus estimates by 18% to $0.19.
• Management increased
full year guidance with revenue expected to be between $425-430 million vs.
prior guidance of $409-415 million, with same store sales between 9.5-10% and
full year EPS between $0.80-$0.82.
• PLNT opened 31 new
stores in 3Q2017, bringing the total store count to 1,432. PLNT is looking to
achieve 190-200 stores per year for the next five years with a long term target
of 4000+ stores in the United States and 300 stores in Canada.
Key
points: PLNT continues to deliver
consistent earnings and revenue beat with exceptional growth coming from PLNT’s
franchise segment, which currently reports ~82% EBIT margins. While the stock
has risen 65% since PLNT’s IPO in August of 2015, and ~50% since the start of
the year, PLNT continues to have several catalysts to drive share price. Three
catalysts that will continue to allow PLNT to outpace the market are
international expansion, black card memberships and fragmentation within the United
States market.
PLNT has been expanding
into Canada since 2014, but more recently noted expansion into Panama. As PLNT
continues to be successful in the Canadian market and with an assumed long term
target of 300 stores, PLNT will need be assertive and thorough in evaluating
new markets as they continue to expand. While failure to expand successfully
into new markets would burden PLNT’s expansion hopes and overall profitability
of the company, management was positive regarding the success thus far on the
3Q earnings release, stating presale memberships have been extremely strong
internationally.
Secondly, PLNT has
significant pricing power over peers and has recently increased their highest
priced and most bought membership (Black Card membership) from $19.99 to $21.99,
because of positive response to consumer’s price elasticity. The Black Card
membership rolled out on October 1, 2017 and will continue to provide incremental
profitability to the company, especially heading into 4Q2017 and 1Q2018, the
two busiest quarters for PLNT. Despite the price increase, the membership
offers a significant discount relative to peers considering the benefits it
provides.
Lastly, PLNT will need to
continue being a market leader and establish its presence within their largest
market, the United States. Although there is uncertainty around the long term
target, PLNT needs to focus on finding the right markets and opportunities for
store growth to be accretive. Over-expanding into local markets that lack the
ideal demographics would pressure margins and cause investors to wonder about
the effectiveness of managements ability to scale growth.
What
has the stock done lately?
Since the addition of
PLNT to the AIM Domestic Small-Cap Fund on September 19, 2017 at a cost basis
of $26.01, the stock has gained slightly over 16% to $30.22 as of market close
on November 15, 2017. The stock fluttered within the $25.00 to $27.00 range, as
technical resistance bands limited the stocks appreciation until PLNT’s 3Q
earnings call after market close on November 7, 2017. PLNT beat street estimates,
reporting an EPS of $0.19 vs $0.16 and raising full year guidance. The stock
followed with a 17.35% appreciation.
Past
Year Performance:
PLNT has been one of the
hotter small-cap domestic consumer discretionary stocks on the market that
Amazon has not been able to penetrate. PLNT is up ~50% YTD and ~26% over the
one-year period. The stock has been held down by significant short (15-20% of
float), but continues to show its ability to thrive in the consumer market.
Source: FactSet
My
Takeaway
Chris Rondeau and his team
continue to outpace the market and prove the effectiveness of their unique
business model. With full year guidance raised, increased pricing on
membership’s due to positive responses from customers, and significant opportunities
within the US and internationally, I believe that Planet Fitness has
significant room for upside. I recommend that the AIM Small Cap Equity Fund
should continue to hold PLNT.
Source: FactSet
