Description

Thesis

We believe PLNT could double over the next 18 months as gyms continue to reopen with up to one third of competitors facing bankruptcy, real estate opportunities becoming more abundant, and their low-cost model’s ability to outperform in a recession. PLNT is the leading fitness chain that exhibits a subscriber model with strong customer lifetime values. As the low-price provider at $10/month base price and leading ~25% market share, PLNT dictates many industry dynamics. PLNT has a powerful marketing flywheel where ~9% of systemwide sales are constantly reinvested to drive member growth both in mature and de-novo gyms. Even before COVID, PLNT had a long growth runway ahead of it with ability to grow US store count at least 2x before expanding further internationally.

Background

PLNT is a gym franchisor with industry leading unit economics that is effectively a General Partner with ~130 Limited Partners (franchisee groups) that invest on its behalf and send PLNT ~6% of revenue which comes at ~100% incremental gross profit. PLNT has created a powerful marketing flywheel on both local and national levels. As they drive more members to the stores and as the store base grows they have more money to invest in the advertising fund for customer acquisition and retention which further accelerates the flywheel. PLNT now has roughly 2,000 units with 95% of them in the US and the balance in Canada, Mexico, Australia and two other countries. As of August 4^th, PLNT had almost 1,500 gyms reopened and ~14.6m members, which is still up nearly 3% YTD despite all locations shutting down in March and minimal marketing spend since then.

Landscape

We estimate that PLNT has roughly 25% of the 60m gym members in the United States making them the biggest gym in the country.  There are a handful of other national chains that combined have 15-20% share and then there are >30,000 mom and pop gyms throughout the country. PLNT has guided to a long-term potential for 4,000 units in the United States.  We believe that this number is understated by a few thousand units as the current economic situation is driving many gyms into bankruptcy.  In the past few months, Gold’s Gym and 24 Hour Fitness filed for Chapter 11 and Town Sports International is likely to file in short order.  Those are 3 of the biggest chains in the country and will be forced to shut hundreds of gyms.  While the mom and pop gyms don’t make the headlines, we know that many of them are struggling and we expect many to liquidate over the next 6 months to a year. These liquidations are what create the greatest share gain opportunity for PLNT in terms of both members and real estate. Many of those gym members will look for alternative gyms and PLNT has the potential to capture the lion’s share of them as their franchisees are healthy and looking to build aggressively. 

During the Great Financial Crisis PLNT had only ~25% of it current fleet of stores but it was a big beneficiary as many gyms closed and customers traded down to lower cost options.  Through 2008 and 2009 PLNT drove high teens to 30% growth in same store sales.  The model proved to be highly resilient and over the past 12 years they have averaged high single digit comps.  Most impressive is that their most mature stores are still comping positive with the 100 oldest locations beating the overall systemwide comp last year.  PLNT also has the potential to dramatically scale outside the US as they are currently in 5 countries outside the US with strong master franchisees that are looking to build.  Canada is currently at over 40 gyms, with a goal of 300 and Mexico is of a similar scale.  Australia, Europe and Latin America are new markets that are still in their infancy but the unit economics remain strong providing us confidence that this is a potentially “planetary” fitness model.

Value Proposition

PLNT is a simple business but it is important to understand the value proposition. PLNT has a unique strategy in that they are predominantly targeting new gym goers which represent 40% of gross additions and still 80% of the total US population.  PLNT has been highly successful and drove over 100% of incremental net additions for the past few years.  Their success is a function of their value proposition that stresses low cost, convenience and quality.  Their entry level membership costs $10 with the premium membership at $23 per month.  This is 50-80% lower than the average gym in the US.  There are more PLNT facilities than any other chain which provides gymgoers with convenient locations.  PLNT also mandates that gyms refresh all of their equipment every 5-7 years which means they have clean and modern equipment, which many other gyms skimp on.  They also have the highest hygiene standards of any gym we have seen and that was pre-pandemic. This has become an increasingly important differentiator in today’s environment where cleanliness is a top priority. The demographics of their members are highly desirable with over 50% women, 50% Millennial and ~25% Generation Z. Last summer, they had almost 1 million teenagers use their gyms during their summer program, familiarizing young people with the brand and experience. They are levered to customers that are young, prioritse fitness, and have the potential to stay with them for a very long time.

Unit Economics

The final key part of PLNT’s story is the unit economics, which lead the industry and are why franchisees continue to build as many gyms as they can.  The average gym costs $2-3m to build and generates $750,000 of EBITDA within 18 months or a ~3-4 year payback.  Most franchisees finance 70-80% of the build costs at 6-7% interest rates driving the upfront equity to $600-800 thousand dollars and the profit before tax to >$500 thousand dollars.  This generates a >50-100% pre-tax return on equity.  This is THE reason that the franchisees want to build every unit they can, and the next 1,000 units are already under agreement with existing franchisees. 

Bear Thesis

The bear case on PLNT rests on three hypotheses.  First is that the model is economically sensitive.  Second is that mature unit economics are degrading, which could bring the TAM into question and the third is more recent with some believing the pandemic is likely to drive higher customer churn.  We respect the bears and spent significant time and resources looking at their case but came to the view that they are off.  As shown above, PLNT is economically resilient as evidenced by their performance through the last financial crisis.  Surveys show that gym memberships are one of the last discretionary products to be cut along with cable and cellphones, especially in the high volume low price (HVLP) segment.  To level set, the average customer pays ~$15 a month or $180 a year which equates to less than $0.50 a day.  Unemployed people tend to have a lot of time on their hands and are willing to spring for a gym as it provides a modest luxury.

Rebuttals

Through our process we spoke with a handful of franchisees and surveyed a large number more.  They suggested that their mature stores continue to grow LSD per annum and that they are highly interested in building more units as soon as the building permit offices in their states allow them to build.  They were not suffering any economic hardship and few required any liquidity from the government or help from the banks. Landlords were also very lenient during the shutdown since they recognize the value of having PLNT as a tenant. Franchisees also confirmed that membership trends have barely budged since the pandemic began and that members at gyms in low case count areas are working out at ~80% of their peak levels, which helps disprove the fears around health concerns.  PLNT has a relatively young membership base that on balance is less fearful of permanent COVID health issues.  Members that are back in the gym are working out with the same frequency as they did pre-COVID. The primary research also revealed that while there is a modest increase in attrition upon reopening and rebilling, they also saw higher gross membership additions such that total membership is modestly off of all-time highs.  The gross membership additions are even more incredible as they have not advertised in months! 

Risk Summary

The key risk to the thesis is a prolonged second wave that drives some facilities to close again. While member activity levels have been highly correlated with case counts in the local region, we believe the desire for many to return to the gym is quite high. As cases continue to decline, members should flock So while we believe reclosure risk is meaningful in the short term, over the medium term (1 to 3 years) society will likely return to normal, and PLNT will be an even stronger position that it was 6 months ago with less competition, greater real estate opportunities, and a new cohort of members that have fallen in love with their offering.

DISCLAIMER

The information in this presentation is for illustration and discussion purposes only.  It is not intended to be, nor should it be construed or used as, investment, tax or legal advice, any recommendation or opinion regarding the appropriateness or suitability of any investment or strategy, or an offer to sell, or a solicitation of an offer to buy, an interest in any security. This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. You should not rely in any way on this summary. Performance targets or objectives should not be relied upon as an indication of actual or projected future performance.  Actual returns will depend on a variety of factors including overall market conditions. No representation is made that these targets or objectives will be achieved, in whole or in part. This information is as of the date indicated, is not complete and is subject to change. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified.  The preparer is not responsible for errors or omissions from these sources.  No representation is made with respect to the accuracy, completeness or timeliness of information and the preparer assumes no obligation to update or otherwise revise such information. 

This information is confidential, is intended only for intended recipients and their authorized agents and representatives and may not be reproduced or distributed to any other person without prior written consent. This information is to be read in conjunction with the applicable Terms of Use/Confidentiality/Privacy provisions or similar policies of the site on which it is posted.

Catalyst

• Gyms reopening + increasing capacity
• Marketing flywheel restarting in September
• Competitors going out of business
• Accelerated unit growth after COVID