Stock Market Madness Case Study: Planet Fitness

I promised myself I wouldn't write about the coronavirus today, because, quite frankly, I am sick of it. But unfortunately, just like my promise to myself that I would do Dry January this year, I let myself down!

Speaking of broken promises to myself, the reason I am writing about the coronavirus is that people are no longer going to the gym, much like myself as soon as January ended. At least, that is the illogical nature that surely pervades the massive sell-off of Planet Fitness (NASDAQ: PLNT) shares that took place yesterday, as the company found itself falling more than 10%. 

Airline stocks such as Delta (NYSE: DAL), or travel firms like Wynn (NASDAQ: WYNN) I can understand suffering at a time like this, but a global gym chain that is up more than 320% in the past 5 years, and nearly 2,000 locations worldwide? There is some logic to it, but investors might want to look a little deeper before selling.

How does Planet Fitness make money?

My colleague Mike wrote yesterday about whether any stocks were immune to the coronavirus, in which he singled out Slack (NYSE: WORK), Teladoc (NYSE: TDOC), and Netflix (NASDAQ: NFLX). It makes sense that these stocks would rise, as more people are forced to stay at home in order to avoid contracting or spreading the coronavirus. 

In that same vein, it stands to reason that Planet Fitness can expect a low turnout from members over the coming months, but why should that send its stock tumbling 10% yesterday? Hear me out. 

• Planet Fitness charges an annual membership fee that has a basic subscription of $10-a-month. At some locations, one can cancel this at any time, but these are rare. 
• At the majority of locations, a 12-month commitment is required. 
• Some locations offer a $15-a-month no-commitment membership. 
• A Black Card membership will set someone back $22-a-month and is a 12-month commitment. 

On February 25, Planet Fitness reported earnings that beat on top and bottom lines, with revenue of $191.5 million, with same-store sales increasing nearly 9%. This growth is backed up by the fact that Planet Fitness now boasts roughly 14 million members, nearly doubling since 2015, where it reported 7.3 million. 

Do investors think that the coronavirus is going to cause these numbers to tumble?

To make it simple: if a Planet Fitness branch has 300 members who have paid their monthly fees, and exactly 0 of those members show up to the gym for a month because of the virus, Planet Fitness will have made the same money from membership fees as they would have with a full house. 

It's one of America's strongest business models

Planet Fitness often appears in Forbes list of the best franchises in the U.S. The majority of the company's revenue comes from membership fees, royalties as a franchisor, and equipment sales. 

Let's say the coronavirus's effects on the market last 6 months. Yes, Planet Fitness will take a hit, but no different to any other company being brought down by the general market sell-off. One thing is certain though: Planet Fitness won't lose millions of members overnight. 

• First of all, humans love spending money on the gym. God knows why, but we do. 
• Secondly: it is notoriously difficult to get out of a gym contract in the U.S. I spent one summer in Myrtle Beach, and tried to get out of a Planet Fitness contract, but to no avail. It's very possible that I'm still a member 3 years later, I have no idea.
• Thirdly: when the coronavirus lifts, and people have spent months in semi-isolation or away from the gym, they're going to begin feeling a little 'soft' around the midriff. Current members will go back, and potentially bring along their friends. 
• Fourthly (is that a word?): there's nothing quite like a health scare to remind people of their mortality. What do people do when they're afraid of dying? They get into shape. Planet Fitness, as one of the strongest gym brands in America, is going to win big on this.

Plenty of room for growth

According to statistics, in 2017, less than 61 million American's had some form of fitness center membership out of a total population of 330 million. Bear in mind, roughly 16% of the population is over 65, so maybe we can count them out, but that's still a large potential client base.

With nearly 2,000 locations around the world, an expansion plan in place, and a sticky brand that people keep flocking too, Planet Fitness should not feel long-term effects of the coronavirus just yet, but in this current market volatility, you never know what could happen. 
Maybe everybody will buy Peloton (NYSE: PTON) bikes instead?

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.