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Apr 19

2 Numbers That Explain Why Planet Fitness Is Growing So …

Fitness Comments Off on 2 Numbers That Explain Why Planet Fitness Is Growing So …

Most mornings, I head to a Planet Fitness (NYSE:PLNT) to do a short workout, and I'm never, ever alone. Approximately 12.5 million members like me pay at least $10 monthly to enter one of the 1,742 locations Planet Fitness brands as a "judgment free zone."

I'm not a typical gym rat and don't want the typical gym rat experience. Good cardio and minimal weight training to keep my body functional is all I'm after. Planet Fitness gets paid well to offer that experience. The only is question is, can the good times last? Two numbers -- store growth, and equipment sales as a percentage of revenue -- may give an early warning sign if the business begins to go south.

Planet Fitness is bulking up across the land. Image source: Planet Fitness.

After three consecutive years of decelerating growth, Planet Fitness' revenue jumped 23.4% in 2018 as net margin hit a five-year high of 16.6%. Management also produces a handsome 17.1% return on capital, testifying to the team's skill at putting money to work for growing the business effectively. No wonder the stock is up over 350% over the past three years. The business is firing on all cylinders, or so it seems.

If there's a worry here, it's on the balance sheet. There, you'll find Planet Fitness saddled with $1.172 billion in debt versus $289.4 million in cash and investments. That's a wide gulf, and it would become insurmountable if the company wasn't producing plenty of excess free cash flow. Fortunately, Planet Fitness generated $143.5 million in free cash flow last year, more than enough to pay interest and taxes and still have money left over to reinvest in the business.

Actually, that may be underselling it. Planet Fitness improved its cash from operations by $53.4 million, or 40.8%, from 2017 to 2018. Capital expenditures inched up just $3.2 million, or 8.5%, over the same period. That's serious leverage, and it explains why management seems comfortable taking on debt.

All the debt has to go somewhere and since Planet Fitness is a franchisor, it's likely going to two places: regional company-owned stores that anchor the business in an area and show potential franchisees the power of the model, and fitness equipment to be resold to franchisees.

So far, the formula is working. Stores are popping up quickly and earning good returns, which gets cash flowing onto Planet Fitness's balance sheet. Taking on debt makes sense as long as the math behind the formula remains sound. Management seems convinced.

According to the fourth quarter investor presentation, executives believe Planet Fitness has room to more than double its store count to 4,000 locations in the U.S. and another 300 in Canada. If they're right, here's what we'll see:

However, if Planet Fitness slows its pace of store openings while dramatically boosting its sales of equipment to existing franchisees, it could signal the concept has worn thin and that Planet Fitness is poised for an extended slowdown.

That doesn't appear to be happening, and frankly, it may never happen. The point is that the risk is there, and as an investor, it's crucial to know what to look for -- in Planet Fitness or any business in which you're investing.

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2 Numbers That Explain Why Planet Fitness Is Growing So ...

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