With mandated social distancing due to COVID-19, gym chains have struggled immensely. All were forced to shut their doors temporarily, and some will never open back up again.
In light of all this industry pain, Planet Fitness (PLNT 0.65%) looks to be a strong, long-term purchase. Here's why.
Image source: Getty Images.
A durable business model
Planet Fitness operates a franchisee-based business. It owns just one quarter of its stores while the rest are owned by operators paying Planet Fitness licensing fees and for equipment refreshes. This meant that while gyms were closed, Planet Fitness was not paying many of the fixed costs associated with ownership -- its franchisees were.
Considering this financial stress placed on franchisees, who they actually are matters a great deal and leads us to another company strength. Planet Fitness gym owners are predominantly large corporations owning an average of 20 locations in multiple states.
This is ideal for two reasons. First, the large franchisees have required little financial aid during the pandemic -- all have been able to largely weather the storm on their own thus far. Second, the geographic diversity makes Planet Fitness operators less reliant on one individual state's pandemic policies -- 70% of franchisees own locations in multiple states. Franchisees have been able to enjoy staged reopenings, thus easing the pandemic's pain in steps while it still endures.
The sheer size of Planet Fitness gyms also makes social distancing more feasible for the 90% of its locations open once more. Boutique workout studios simply cannot practice social distancing -- there is no room to do so. The 20,000-square-foot Planet Fitness gyms have been able to effectively space out returning users. To date, no outbreaks have come from Planet Fitness gyms reopening, and this gives the company more credibility in arguing it can safely return to normal.
Encouraging signs
Whenever the company can return to normal, there are signs consumers are eager to resume their memberships. This past quarter, Planet Fitness resumed its advertising campaigns. The resulting sign-ups were so encouraging that the board of directors approved a sizable boost to the marketing spend plans.
At Planet Fitness locations already open, as of September the restart in advertising has led to the year-over-year membership trend reinflecting to positive.
Furthermore, CEO Chris Rondeau frequently speaks on COVID-19 as an opportunity to expand further. Rather than expressing concern over his own business's future, Rondeau has spent time on the last few earnings calls discussing how the pandemic has created new real estate opportunities for Planet Fitness to grow more quickly going forward.
The company thrived post-Great Recession by taking more market share, and is confident it will thrive on the tail end of this turmoil as well. A combination of a durable business model and an industry-low $10/month membership is quite ideal amid the economic turmoil COVID-19 inflicted -- that's what Rondeau and Planet Fitness bring to the table.
Dabbling in digital
While many consumers appear to be ready to return to the gym, some simply aren't, and Planet Fitness is caring for them as well. Its digital "workups" have been garnering more and more attention with the pandemic raging on. The success prompted the company to announce its plans to debut a paid digital-only subscription in the next few months.
The subscription will cost consumers $5.99 per month and will offer a broader supply of workout content from Planet Fitness trainers. At 15% of the cost of an All-Access Peloton Interactive subscription (not including the Peloton hardware needed), I believe this subscription has the opportunity to capture meaningful market share. Time will tell.
Planet Fitness is a buy
While so many brick-and-mortar businesses are struggling to survive, Planet Fitness is not one of them. Its business structure, franchisee strength, and gym size all lend itself to being a business with staying power. Encouraging marketing results and some early success in digital show clear interest in Planet Fitness's offerings regardless of the circumstances. Keep an eye on this one as we move past COVID-19 -- it looks to be a strong long-term buy.
