Planet Fitness And The Netflix Like Growth – Planet Fitness (NYSE:PLNT)

Planet Fitness (PLNT) was a stock we once said could offer Netflix like growth. While that comparison may have seemed to be inappropriate to some, one thing is clear: it is a growth stock. To be clear, we sold a position earlier this year to take some profit and reallocate. Then we jumped back in, 5 points higher, and have been holding since. When we say that the name is offering Netflix (NFLX) like growth, we are not trying to say that almost everyone you know has tried the service or is a member. We are not even saying the stock could demonstrate that type of growth, though considering the stock has gained 281% in just over two years since our call, even the chart reminds us of Netflix. The similarities are striking. In this column, we offer discourse on Planet Fitness as a disruptor. We further cover the important trends and critical metrics to be aware of and offer revised projections for 2018.

A disruptor in the fitness space

Both companies offer very low rates. This often prevents cancellations, as even when cash flow is tight, these types of low dollar memberships are often the last to go. Why else is the comparison somewhat appropriate? Well, PLNT is growing as a company like Netflix was 5 years ago. Planet Fitness has an aggressive and wildly successful advertising campaign, like Netflix, especially the Netflix of years past. It is becoming a household name thanks to its marketing team. Anyone catch the Time Square New Year’s Eve 20117-2018 ball drop?

Source: TripIvint

Look familiar? Planet Fitness has had a massive presence at the last several Times Square New Year’s Eve events. We cannot think of any other gym, and really any other company that has done this. Suffice it to say, the advertising worked. No other gym chain comes close.

While Planet Fitness doesn’t have the global reach (yet) and is in an entirely different sector, the Netflix of old growth path and member model are still strikingly comparable. Like Netflix, who can compete with the price point? The freebies? The not so serious fitness center aspect? We think the model is more of a social hang out spot with fitness undertones, rather than a serious gym. And that is why it works.

Those reading this column understand that Planet Fitness runs fitness centers, but the business is a bit more involved than that. It needs to grow subscribers and sells its high-margin products (water, merchandise, etc.). While competition is severely stiff in this space, Planet Fitness continues to grow. While Planet Fitness is still one of the fastest growing franchises in the nation, the only prevalent risk we can think of is a copycat chain, trying to replicate the business in a “me too” fashion. Serious athletes will never use the center, that is a given. So that is the risk we see. Eventual saturation could be an issue, but there is a lot of room for growth. We believe that new fitness centers mimicking the business model are a major risk.

Valuation

Want to talk about a similarity to Netflix? How about a very rich valuation. It’s only getting richer too. As long as the company continues to show positive subscriber growth, double-digit revenue gains, and double-digit earnings growth, the stock will continue to enjoy a premium valuation, but it is definitely stretched. At $52.40, the stock trades at over a 70 times trailing earnings multiple and based on our 2018 projections, which we discuss below, the stock is still trading at 46 times forward earnings 2018. Although the growth is impressive, that’s still a steep valuation. JPMorgan got cautious on the name given the valuation, but like Netflix, investors continue to bid up the name. Let us discuss.

Top line growth to continue

The just reported quarter was another success. We were impressed that revenues were above our expectations once again. We saw Q2 revenues coming in at $130 to $133 million, based on new store openings and historical trends. We were blown away by the numbers relative to our expectations. While the valuation is stretched, the growth is impressive. Revenues increased 31.0% year-over-year, continuing a trend of strong growth:

Source: SEC filings, graphics by BAD BEAT Investing

It is important to understand that revenues are growing because of the strength of the business model as well as the fact that there have been a number of new store openings. Revenues climbed and were driven by strong membership and same-store sales growth, both of which have been outstanding and we see this as continuing as we move forward. Revenues were an astounding $140.6 million, setting a new second-quarter record and beating our most bullish estimate by over $7 million. This is impressive. While we cannot assume the company will continue to always beat estimates, we see no reason why sales will not continue to grow double digits. One reason for the gains is that there are simply more stores:

Source: SEC filings, graphics by BAD BEAT Investing

As you can see, the opening of new gyms is a key point of growth. Store count continues to grow at a very reasonable and manageable pace. At this time, we still do not see any risk of saturation or cannibalization, though in the future that is something investors may want to watch for. The company is incredibly strategic with its new stores. New stores are carefully selected so as not to cannibalize other shops while also bringing the brand into new markets. A total of 44 new Planet Fitness franchise stores were opened in the quarter bringing the total to 1,608. On top of that, we were impressed with system-wide same-store sales jumping 10.2%, contributing meaningfully to sales growth and better than the 8.5-9.5% growth we thought we could see:

Source: SEC filings, graphics by BAD BEAT Investing

As you can see from the same-store sales growth, the company is managing growth at existing stores effectively. That is not a simple undertaking. To see high-single digit and in this case, double-digit comp sales growth is a key result. Store growth is a positive when growth is managed, as new stores bring in both more membership fees and increased merchandise sales. But seeing existing stores continue to perform and deliver growth is a key reason why we believe that the market has assigned such a premium valuation. But what about profits?

Bottom line growth

While sales were up 30%, net income rose 66%. Net income came in at $30.0 million, up from $18.0 million last year. On a more comparable basis, adjusted net income jumped 53% to $33.2 million or $0.34 per share:

Source: SEC filings, graphics by BAD BEAT Investing

Adjusted net income per share surpassed our expectations of $0.31-0.32 per share. As we alluded to when we sold the name, this stock is now really priced for perfection. Any quarterly weakness could send shares spiraling downward at the present multiples, but when a company delivers 53% growth in earnings per share in a year, a sky-high multiple makes sense. Still, any slip up could be detrimental, and this is a risk that must be acknowledged.

Looking ahead and revising out expectations

As we look forward, we still believe in the business model, but the fundamentals have changed since we got behind the name. It is expensive here, and on a valuation basis, the name is much like Netflix. The company is delivering. So long as it delivers, the premium multiple will remain. The company has stellar same-store sales growth, marking the 46th consecutive quarter of positive same-store sales growth, which has driven results higher. As a result of what we have seen year-to-date, we are raising our 2018 projections higher.

Based on the present store count, we expect another 50% hike in store count from the current levels over the next 5 years. You can expect that revenues will grow by nearly this same amount longer-term. Factoring in another 80-100 store openings this year, the present trends in revenue growth, we see sales rising 25% (up from our prior expectations of 20%). Much of this is being driven by the immense same-store sales growth. We saw same-store sales growth coming in at 8-10%, but now see 9.5-10.25% as likely for all of 2018. Thus, our expectations on the top line are for $535 to $540 million, up from our prior expectations of $520 million. This also alters our bottom-line expectations which we now think will come in at $1.05 to $1.15 per share. We see earnings per share now coming in at $1.12 to $1.17 on the year. This would represent growth of 40% at the high end.

Conclusion

Planet Fitness is a disruptor in the space. The advertising has been strong and successful. It has found a niche that we do not believe any chain can mimic successfully. The stock is expensive, but the growth path, existing store performance, and earnings growth seem to justify it, based on our updated projections. The stock is priced for continued outperformance, so any slip up or slightly disappointing news could weigh. That said, we are taking a little bit of profit here, and holding the rest.

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Disclosure: I am/we are long PLNT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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