Planet Fitness: Not as Healthy as You Think

Planet Fitness: Not as Healthy as You Think.

As of June 30, Planet Fitness had 1,014 stores, consisting of 58 corporate-owned locations and 956 franchisee-owned stores.

Since 2010, the number of new stores grew at a 24% consolidated annualized growth rate. Memberships increased 28%, while revenue was up 32% over the same time period.

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The company has more than 7.1 million members who pay $10 per month. Management thinks that it can increase the number of locations to more than 4,000.

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Although all this sounds great, the gym business is highly competitive, and there is little differentiation among the chains. Plant Fitness clubs are typically 20,000 square feet and cater to the occasional fitness club user, which happens to be about 80% of the user population.

There are 34,460 health clubs throughout the United States, according to the International Health, Racquet & Sportsclub Association.

Last year, the industry grew 6.4% in units and just 2.3% in members. In other words, the industry is opening fitness clubs faster than membership grows, which is a long-term problem.

Other chains have fared as poorly as public companies. Lifetime Fitness’ stock fell so low that private-equity investors stepped in to buy the company in April.

Planet Fitness generates revenue from company-owned stores. About 32% of revenue is from its own fitness clubs, while 41% of total revenue comes from one-time equipment sales to franchises.

The company also charges a royalty fee to its franchisees as a percentage of membership dues. The royalty ranges from a flat $500 per month to 5% of total monthly membership dues.

The rest of the company’s revenue is from commissions on merchandise and the like.

The company has debt of $787 million. Of that, about $500 million is long-term debt, and the rest is capital leases and interest.

Shareholders aren’t going to own very much of the company as the corporate structure is convoluted. They will end up with a 38% economic interest in Planet Fitness and only a 14% voting interest, which doesn’t sound very shareholder friendly.

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Although the company has promises from franchises to open another 1,000 stores, Planet Fitness doesn’t seem to offer a particularly good investment as almost half the company’s revenue comes from non-recurring equipment sales.

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Planet Fitness requires franchisees to purchase new equipment every four to seven years. But the bulk of those equipment sales have been recorded because the company ramped up store openings in anticipation of the initial public offering.

Investors should avoid Planet Fitness as the fitness club business isn’t as healthy as many think.