Introduction:

PLNT, a franchise gym, proudly upholds the motto "Judgment Free Zone" across all its locations. Designed with the intention of welcoming individuals who may feel intimidated by traditional gym environments, PLNT remains steadfast in its commitment to inclusivity. This commitment extends to their gym layout, which deliberately excludes standard equipment like the bench press or barbell. However, PLNT has drawn criticism for some of its practises such as "Pizza Monday" and the "Lunk Alarm" which makes it harder for users to remain committed/progress in their fitness goals.

Market:

Australia

PLNT has entered the Australian market. According to (SOURCE), the top 3 most popular brands are “Anytime Fitness”, “CrossFit”, and “F45 Training”. However, F45 Training has begun running into problems (SOURCE) where 151 of their 500 locations are in distress. This was due to their “repetitive programs” such as burpees and HIIT that cater to beginners, members felt like they weren’t progressing in their fitness journey due to how simplistic F45 Training was. F45 Training draws a lot of parallels to PLNT where they both cater to newcomers and this could potentially pose an issue to PLNT’s success in Australia where the market is more focused on intermediate gym-goers or beginners who are looking to progress.

Mexico

PLNT has also entered the Mexican market. According to (SOURCE) it seems that there is a large demand for fitness-related products within the younger demographic. A very large opportunity is with women aged 18-24, where the penetration rate is <30%. This low penetration rate could be attributed to these women being intimidated into working out. PLNT’s slogan for judgment-free could cater to the needs of these women.

Fitness in the US

PLNT’s largest market is the US, there is a large opportunity for the fitness industry in the US given that < 25% of the total population engages in exercise (SOURCE) and the US is the Top 10 most obese country (SOURCE). The fittest city in the US is Arlington (SOURCE), largely attributed to its affluence, highlighting the significant role socioeconomic factors play in promoting fitness. Affordability remains a key barrier to exercise participation, and PLNT's competitive pricing strategy addresses this challenge effectively. However, I believe that the habit of regular exercise is profoundly influenced by one's surroundings so to shift consumer's taste and preferences could require more effort and time.

Revenue:

PLNT has 4 main revenue sources. “Franchise”, “Corporate Owned”, “Equipment”, and “National Advertising fund” 

Franchise

PLNT franchises their brand out to franchisees, collecting royalty fees and national advertising effort fees.

PLNT can’t just do M&A and acquire other competitors in international market and rebrand to PLNT because acquiring competitors means acquiring their members and their gyms. These members and gyms do not fit PLNT’s target demographic of “casual/first time gym goers”, so the growth of PLNT has to be organic.

When forecasting the number of franchisee-owned stores, I assumed that it took PLNT 6 years to prove their brands in the new area they are established in. So, afterward growth rate of franchise-owned stores had a bump in growth rate to reflect the improved trust in the PLNT brand.

When forecasting the Revenue/Franchisee store, in the earlier years of my forecast I assume that the growth rate tend downward as PLNT is trying to attract franchisees so they offer more favorable terms to franchisees. However, in the later years of my forecast as PLNT gains popularity and pricing powers, the growth rate of revenue/franchisee store increases as PLNT can better monetize franchisees through charging higher royalties or more fees.

Corporate Owned

PLNT directly owns some of the gyms from which they earn income. PLNT hopes "to own approximately 10% of our fleet.” – 2023 Q4 earnings conference. I believe that in the earlier years, as PLNT is building out its presence in other locations it has to own a higher % of its stores to prove to franchisees the value of their brand. But, I assume that in the long run, PLNT will regress back to the 10% target that they set.

When forecasting the total number of corporate stores, In my base case, I assume that it takes PLNT 6 years to prove their brands in the new area they are established in. So, afterward, the growth rate of corporate-owned stores tapers downwards.

When forecasting Revenue/Corporate stores, I assumed that the growth rate followed historic averages, tapering down towards the perpetual inflation rate.

Equipment

PLNT sells equipments to new franchisees and offers replacement equipment for existing franchisees.

When forecasting Equipment Revenue/franchisee-owned store, given the uncertainty in how the small-scale gyms that management has in the pipeline would play out. I opted for less granularity and assumed that the equipment/franchisee-owned store grew in line with the perpetual inflation rate.

National Advertising Fund

When forecasting the National Advertising Fund, opting for less granularity I forecasted it as a % of the historic average of gym revenue.

Sanity Check:

I took into account the Total Members and the Total Number of Stores when determining if my forecast was overly idealistic. 

When forecasting Members/Store, I assumed that members/store would grow at a very meager rate due to the uncertainty of how management will proceed with smaller-size gyms.

Ultimately, I believe that the total number of stores will grow at a Y/Y CAGR of 4.6% and the total number of members will grow at a Y/Y CAGR of 5.1%. I believe that this number is realistic given the large number of new promising markets that PLNT is expanding in.

CapEX and D&A:

When forecasting D&A, opting for less granularity I forecasted it as a % of historic average.

When forecasting CapEX, I forecasted it to grow at slightly higher than historic %earnings reinvested given that management has only recently announced plans to expand into new markets, so higher CapEX helps to facilitate a higher number of gyms.

WACC:

10Y T-Bond Yield (1M Avg) = 4.48%
Beta (SOURCE) = 1.38
Stable Market ERP (SOURCE) = 4.60%
COE = 10.83%

PLNT does not have a bond rating, so I’ll be looking at a synthetic rating (SOURCE)
FY23 Interest Expense = 86.58M
FY23 Operating Profit = 272.86M
Interest Coverage Ratio = 3.15x
PLNT has a synthetic rating of “A-”
COD = 5.44%
Marginal Tax Rate = 21.00%
AT COD = 4.30%

Stock Price (5D Avg) = $59.56
Shares O/S = 88.169M
Market Value of Equity = 5251.35M
Weighted Average Maturity of Debt = 5 Years
Market Value of Debt = 2006.16M

%Equity = 72.40%
%Debt = 27.60%
%WACC = 9.03%

Conclusion:

Ultimately, in my base case, I value PLNT at $52.30 per share. I believe that PLNT is correctly priced given how diluted the gym franchise business is with competitors such as "Anytime Fitness" and "Gold's Gym". Many of these gyms have a more unique selling point than PLNT e.g. Anytime Fitness allows for entry to its gyms globally across 50 countries. PLNT's success hinges on its ability to break into new markets where exercise is uncommon and sell them its message of being a safe space to exercise.

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