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Planet Fitness Rides on Expansion Efforts, Debt Woes Persist

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Shares of Planet Fitness, Inc. (PLNT - Free Report) are riding high on robust same-store sales growth, expansion efforts and increase in members. Year to date, the company’s shares have surged 26.3% compared with the industry’s rise of 1.7%. However, high debt is a concern. Let’s delve deeper.

Factors Driving Growth

Planet Fitness’ same-store sales growth has impressed investors over the past several quarters. During third-quarter 2019, the company posted the 51st straight quarter of positive same-store sales. In the first, the second and the third quarter of 2019, the company reported system-wide same-store sales growth of 10.2%, 8.8% and 7.9%, respectively. Increase in net member and higher average royalty rate have been driving comparable sales. Increased Black Card pricing too bodes well. For 2019, Planet Fitness expects revenue growth of nearly 19% year over year compared with the previous estimate of 18% rise. System-wide same-store sales are likely to increase nearly 8.6% compared with the prior estimate of 8%.

In an effort to expand its presence, the company has been focusing on strategic partnerships and international expansions. Recently, the company reached an Area Development Agreement with Bravo Fit Holdings Pty Ltd. ("Bravo") to expand its footprint. Per the agreement, the company will open 35 Planet Fitness locations in Australia over the next few years.

The Zacks Rank #3 (Hold) company’s low-cost gym franchise is a key catalyst to its above-average customer growth and share price. Although the business model is generic, the strategy to attract customers with a $10-a-month membership fee and no-frills atmosphere has helped it gain significant share in the existing market and expand market size. The low-cost model has also helped it to tap into the market that is enthusiastic enough to join a cheaper second gym. Despite a lower-than-peer membership fee, high demand and low costs have enabled the company to generate above-average profits.

Hurdles to Cross

Planet Fitness’ reliance on debt financing is a concern. As of Sep 30, 2019, cash and cash equivalent totaled $330.6 million. Total long-term debt, net of current maturities, increased to $1,155 million. The company might fail to finance its upcoming projects due to higher debt burden. Moreover, any downturn in the macroeconomic and credit market conditions will hinder the company to pay or refinance its debt moving ahead.

Key Picks

Better-ranked stocks worth considering in the leisure space are Malibu Boats, Inc MBUU, Twin River Worldwide Holdings, Inc TRWH and Callaway Golf Company ELY. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Malibu Boats has an impressive long-term earnings growth rate of 10%.

Shares of Twin River Worldwide Holdings have gained 11.8% in the past month.

Callaway Golf has reported better-than-expected earnings in three of the trailing four quarters, the average being 33.3%.

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