Expanding Globally And Innovating Pricing To Fuel Revenue And Royalty Income Surge

Key Takeaways

• Expansion plans and new growth models aim to double domestic footprint and enhance global presence, promising higher franchisee revenue and royalty income.
  
• Adjustments in pricing strategy and significant investments in marketing, alongside initiatives to improve member experience, are designed to increase revenue and foster member loyalty.
  
• Rising construction costs, increased debt expenses, and a new pricing model might slow expansion and affect Planet Fitness's revenue growth and margins.

Catalysts

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

• The implementation of a new growth model aimed at reducing the cost of opening new Planet Fitness locations supports the expansion of the store network, potentially doubling the domestic footprint, which can enhance franchisees' revenue and Planet Fitness's royalty income.
  
• The international expansion strategy, as evidenced by the first European club opening in Barcelona, demonstrates potential for future growth in new markets, increasing the brand's global presence and contributing to long-term revenue growth.
  
• The introduction of the $15 pricing for new classic card members, alongside plans to test higher pricing tiers for Black Card memberships, is expected to incrementally increase Average Unit Volume (AUV) and positively impact overall revenue.
  
• Strategic investments in marketing and advertising, with a budget exceeding $300 million, aim to refine brand promise and penetrate untapped market segments, indicating potential for increased membership growth and sustained revenue.
  
• Enhanced member experience initiatives, supported by investments in the physical and digital realms (e.g., mobile app enhancements and in-club amenities), aim to reduce churn and foster member loyalty, which can lead to improved net margins through decreased acquisition costs and heightened member spending.

Assumptions

• Analysts are assuming Planet Fitness's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.2% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $237.2 million (and earnings per share of $2.76) by about September 2027, up from $157.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $204.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.7x on those 2027 earnings, down from 43.8x today. This future PE is greater than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Risks

• The cost to build a new location was up by more than 30% in 2023 compared to 2019, which could potentially slow down the expansion pace, impacting future earnings due to increased capital expenditure.
  
• The CEO highlighted the execution risks associated with international expansion, specifically mentioning the early stages of growth in international markets like Spain, which could impact the speed at which revenue from these sources grows.
  
• There is a mention of a 5.8% and 6.2% fixed interest rate on new tranches of debt, indicating an increased cost of debt, which could lead to higher interest expenses, potentially reducing net margins.
  
• A significant portion of the company’s revenue appears to be dependent on franchisee-driven store openings and equipment sales, both of which seem to be facing pressures from increased construction costs and a more competitive environment. This could lead to slower revenue growth from new store openings and equipment sales.
  
• The introduction of a new pricing model, with classic card memberships increasing to $15, could potentially impact member growth rates or increase churn rates, affecting future revenue growth from membership dues.

Valuation

• The analysts have a consensus price target of $88.88 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 $100.0, 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 $237.2 million, and it would be trading on a PE ratio of 35.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of $81.56, the analyst's price target of $88.88 is 8.2% 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.