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Low-Cost Model Aids Planet Fitness (PLNT) Despite Debt Woes

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Planet Fitness, Inc. (PLNT - Free Report) , with strong brand image and low-cost business model, focuses on expansion and partnerships to drive growth. However, excessive debt and cyclical nature of the leisure industry remain pressing concerns.

Year 2019 has so far turned out to be an encouraging one for Planet Fitness. Year to date, the stock has gained 24.8% compared with the Leisure and Recreation Services industry’s 3% growth and the S&P 500’s rally of 14.3%.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

 


Strong Brand Recognition & Expansion

The company ranks among well-established global brands that provide leisure and recreation service. Being one of the largest and fastest-growing franchisors as well as operators of fitness centers in the United States, it enjoys customer trust and brand loyalty.

Planet Fitness had more than 14 million members and 1,742 stores in all 50 states of the United States, as of Jun 30, 2019. It added 400,000 net new members in the second quarter. Notably, in 2018, the company opened 230 stores (226 franchise stores and 4 corporate stores). Currently, it has stores in the United States, Puerto Rico, Canada, Dominican Republic, Panama and Mexico.

Moreover, the Zacks Rank #3 (Hold) company has been focusing on partnerships and international expansions. Recently it partnered with Kohl’s, through which it intends to open up to 10 stores in 2019, adjacent to select Kohl's retail locations across the country. Planet Fitness also signed franchise agreements to open 1,000 more gyms and it has plans to open half of the total in the coming three years. Such expansion strategies should boost the company’s top line.

Low-cost Business Model

Planet Fitness’ low-cost gym franchise is the key to its above-average customer growth and consequent rise in the share price. The low-cost model also helped the company to tap into the market that is enthusiastic enough to join a cheaper gym. Despite a lower-than-peer membership fee; higher demand and lower costs helped the company to generate above-average profits.

Buoyed by the above-mentioned tailwinds, the company now expects revenue growth of nearly 18% year over year for 2019 compared with 15% rise mentioned earlier. Furthermore, it anticipates adjusted net income and earnings per share to rise nearly 20% in 2019.

Concerns

Planet Fitness’ heavy reliance on debt financing remains a concern. As of Jun 30, 2019, cash and cash equivalent totaled $330.6 million. Total long-term debt, net of current maturities, rose to $1,156.8 million. The company might fail to finance upcoming projects due to higher debt burden. Moreover, any downturn in the macroeconomic and credit market conditions would make it difficult for Planet Fitness to pay or refinance its debt moving ahead.

Also, the cyclical nature of the leisure industry is concerning. Worsening global economic conditions might affect Planet Fitness’ revenues and profits.

Key Picks

A few better-ranked stocks in the same space are OneSpaWorld Holdings Limited (OSW - Free Report) , SeaWorld Entertainment, Inc. (SEAS - Free Report) and Hasbro, Inc. (HAS - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

OneSpaWorld and Hasbro have impressive long-term earnings growth rates of 20% and 10.7%, respectively.

Shares of SeaWorld Entertainment gained 43.3% so far this year.

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