Summary
- We were bearish on the name from March-June as COVID-19 ravaged the country and gyms were closed in many states.
- Gyms are reopening, even in the most stringent of locked down states, which could give a boost to PLNT stock.
- The economy is still on thin ice, with much of Main Street still unemployed or seeing their businesses crushed, but the low dollar gym memberships should get a boost.
- Most recent earnings show the COVID-19 impacts, but we think that things improved to end the year and into 2021.
- This idea was discussed in more depth with members of my private investing community, BAD BEAT Investing. Get started today ยป
Prepared by Stephanie, Analyst at BAD BEAT Investing
Planet Fitness (NYSE:PLNT) is a stock we have traded several times. We took solid profits in back in 2018 and have been just trading it here and there ever since. We had another trade on in H2 2019 that worked out. As the stock had pulled back as the market sold off due to COVID-19, the stock caught our eye as a short, but we missed a possible rebound play. But it is not about where a stock has been but where it is going. The stock has been pressured but has recently started to move again, and we think that traders can look to come in for a swing over $60. The market has had some good news in potential treatments/vaccines, but more importantly, gyms are being allowed to reopen in most areas, including New York State which was ravaged by COVID-19 and saw some of the most stringent rules put into place. We think PLNT stock gets a boost from this. Here, in the mid-$50s, we think the stock has some upside. A lot of competitors went bankrupt like 24 Hour Fitness, and Gold's Gym, with many independent gyms feeling the pinch too. Planet's low cost membership and structure allow it to be a survivor. The company recently reported earnings, and it shows the severe impact of COVID-19. Bottom line here is that things will improve into 2021, and the market is likely to price the stock accordingly. Let us discuss the play we think you can make and the story here longer term.
Top line contraction from COVID-19
The just-reported Q2 saw revenues contract significantly. That had not happened before other than in Q1 2020, and it was rough. It was tough to handicap the quarter, but let's be real, the shutdowns hurt. We saw Q2 revenues coming in down by as much as 80% to $38-$40 million, based on membership dues freezes across all stores, equipment sales reductions, and national advertising fund revenue. It was bad. Revenues fell 77% year over year, destroying a trend of strong growth.
Revenues fell to $40.2 million and came in actually above our estimates. The Street saw a consensus figure that was more liberal than ours. Their consensus was beat by $1.6 billion. Normally, we look at growth metrics like same-store sales growth and new gym openings, but in an effort to protect members, team members and communities, the company and its franchisees made the decision to temporarily close all Planet Fitness stores mid-March. So, we saw this huge decline.
New gyms were certainly driving growth in the past, but everything was on hold. When things return to 'normal', we believe store count will continue to grow at a very reasonable and manageable pace in the coming years. There is so much room for growth, especially international growth. COVID-19 will be behind us largely a year from now. As we get a better treatment course, and work toward a vaccine, this pandemic will end. Some say life has changed forever. No, it has not. Volumes may take time to return to historic levels after the pandemic, but for this trade, we are looking for the market to value the stock higher in coming weeks and months as reopenings look good. While that could change if we have a big second wave, the market is pricing out a return to lockdowns etc. But it is a risk. The company is incredibly strategic with its new stores, and all new gym openings are carefully selected so as not to cannibalize other shops. As for the key metric of same-store sales, looking at them now does not make sense with the closures. But before COVID-19, same-store sales were strong, growing 8-10% like clockwork. But what about profits with this huge revenue shortfall?
