Revitalizing Club Experience And Expansion Paves Path For Revenue And Margin Growth

Key Takeaways

• Redefining brand strategy and leveraging technology aims to enhance member experience, reduce churn, and increase revenue per user.
  
• Strategic changes and expansion plans focus on cost efficiency, new club openings, and revenue growth, potentially enhancing earnings and club economics.
  
• Economic conditions, competition, and member retention challenges may impact Planet Fitness’s revenue growth, expansion plans, and international profitability.

Catalysts

Planet Fitness, Inc., together with its subsidiaries, franchises and operates fitness centers under the Planet Fitness brand.

• Planet Fitness is focused on redefining its brand strategy to attract a broader audience, including more advanced fitness levels, which could lead to improved member acquisition and retention, ultimately boosting revenue.
  
• The company plans to enhance the member experience using technology and feedback systems, which might lower churn rates and increase average revenue per user (ARPU), positively impacting net margins.
  
• Planet Fitness is implementing strategic changes in its club format and equipment, optimizing for cost efficiency and consumer preferences, which can enhance unit economics and improve net margins.
  
• The increase in the Classic card membership price is expected to result in a low to mid-single-digit percentage increase in top line revenue for existing clubs within a year, enhancing overall earnings.
  
• Growth plans include accelerating new club openings both domestically and internationally, which could drive long-term revenue growth and improve club economics, benefiting earnings overall.

Planet Fitness Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Planet Fitness's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.3% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $232.8 million (and earnings per share of $2.97) by about November 2027, up from $160.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.8x on those 2027 earnings, down from 51.4x today. This future PE is greater than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 2.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Planet Fitness Future Earnings Per Share Growth

Risks

• The club's new Classic card price increase could result in near-term softness in net member growth, impacting short-term revenue projections.
  
• The ongoing shift in equipment focus from cardio to strength may limit the appeal to some existing members, potentially affecting member retention rates and churn, impacting revenue predictability.
  
• Franchisee support and alignment are crucial; if franchisees are unable or unwilling to adapt to new strategic initiatives or increased equipment purchases, this could impact new club growth and overall system revenue.
  
• The impact of increased competition and perceived value of the offering compared to other gym and fitness options could lead to changes in member acquisition and retention, impacting long-term revenue growth.
  
• Economic conditions and consumer spending trends, particularly in international markets like Mexico, Spain, and Australia, could affect expansion plans and profitability expectations abroad.

Valuation

• The analysts have a consensus price target of $103.59 for Planet Fitness based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $130.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $232.8 million, and it would be trading on a PE ratio of 43.8x, assuming you use a discount rate of 8.1%.
• Given the current share price of $97.87, the analyst's price target of $103.59 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.