Planet Fitness (PLNT -1.72%) made investors happy when it reported better-than-expected financial results for the three-month period that ended Sept. 30. Shares have soared 27% since the start of November, following positive momentum for the overall market.
This fitness stock is now trading in record territory. If you’re looking to buy Planet Fitness on the recent strength, first take the time to know these three things.
Franchise model
Investors have probably seen a Planet Fitness gym near where they live, knowing that it offers a low-priced monthly membership. But it’s worth mentioning that the company doesn’t own all of these locations. In fact, the vast majority — 90% to be exact — are actually franchised stores.
Planet Fitness provides training, branding, operational guidance, and ongoing support to third parties looking to invest in opening new locations. A franchise business model can be very lucrative for a company because it’s capital-light. Outside investors take on the financial risk of opening new gyms in an effort to reap the monetary rewards, but this provides Planet Fitness with what should be high-margin revenue from royalties.
The result is consistently high profitability. The company’s operating margin has averaged a superb 25.6% in the past decade. Moreover, Planet Fitness is able to generate positive free cash flow that the leadership team uses to fund share repurchases.
Growth potential
As of Sept. 30, there were 2,637 Planet Fitness gyms in operation, which makes it one of the largest chains in the country. That figure is up significantly from 1,899 just five years ago.
Executives aren’t resting on their laurels, though. They believe Planet Fitness is staring at a massive growth opportunity, with the potential to have 5,000 locations open over the long term just in the U.S. Management says it targets people over the age of 14 who don’t have a gym membership, which is estimated to be 80% of the American and Canadian population.
Expanding the total addressable market is the ability to open small-format locations in less populated areas. Plus, there are opportunities to make moves internationally, like in Mexico, Spain, and Australia. Should the company make progress on its store-opening target, revenue and net income will be dramatically higher than they are today.
Fitness success story
Planet Fitness stands out because it’s a rare success story in the fitness industry. Companies struggle to find lasting relevance partly because consumers are always drawn to the hot new thing, whether it’s a piece of equipment or a workout regimen. This makes it difficult for industry executives to figure out where people’s interest is going next.
Additionally, consumers struggle to stick to their exercise routines. That’s why there are countless stories of these fitness fads that have come and gone over the years. Making matters worse is the intense competition in the industry. There are many other gyms out there, as well as workout content offerings, providing a challenging environment for Planet Fitness.
However, the business has built a name for itself, thanks to its scale advantage, which has led to low membership prices. This is precisely why Planet Fitness has been able to grow and be profitable. For consumers, the monthly cost is so low that it encourages those who aren’t crazy about health or wellness to still sign up. Even if they go to the gym a few times a month, it might be worth it. That’s why the company currently has just under 20 million members in total.
If you’re an investor looking to add Planet Fitness to your portfolio, you’re now familiar with its franchise model, growth outlook, and success factor.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet Fitness. The Motley Fool has a disclosure policy.
