By David Clucas

While the active-lifestyle market has hit a recent rough patch in retailing products, retailing services and experiences in the sector has been a more positive story.

Take Planet Fitness (NYSE:PLNT), which on August 11 reported its same-store sales rose 7.6 percent in the second quarter, which along with new locations — the company added 194 within the past year for a total of 1,206 at the end of June 2016 — helped boost revenue 15.9 percent higher to $91.5 million. Quarterly profit grew to $18.1 million versus $11.6 million during the same period a year ago, and the company raised its full-year 2016 guidance.

As one investor on the company’s conference call noted, the national budget-gym franchise is in the minority of businesses reporting better second-quarter numbers compared to the first quarter.

Credit the company’s national advertising campaign and its ability to attract new customers to the fold, said Planet Fitness CEO Christopher Rondeau.

“In a voluntary survey we conducted of nearly 1 million new members, a little over 40 percent self-reported they have never belonged to a gym before joining Planet Fitness,” he said. “This powerful statistic demonstrates that our affordable, non-intimidating fitness offering and brand positioning are resonating with a broad consumer audience. And it reaffirms our confidence in our ability to increase our U.S. footprint to 4,000 locations over time.”

Rondeau also sees plenty of “runway” growth opportunities outside the United States, where its preliminary forays into Canada and the Dominican Republic (nine locations in the former, one in the latter) have shown the formula works there, too.

And while some other big-box retailers struggle — Rondeau cited the day’s decision by Macy’s to close 100 stores — that’s creating a better real estate market for Planet Fitness.

“The landlords, in today’s day and age, they love what we are and do,” he noted. “A decade ago, they didn’t like the health clubs as a whole, where nowadays, they look for us to drive the traffic, and we’re the largest brand out there. So the [landlords] are looking for us to come fill these boxes, because there’s not many big-box retailers that are looking to grow.”

More ‘Black Card’ Members
By segment, Planet Fitness’ franchise revenue, which includes commission income, increased 34.7 percent to $29.5 million. Corporate-owned stores segment revenue increased 5.6 percent to $26.4 million. And equipment segment revenue — fitness gear it sells, leases and services to its franchisees — increased 10.9 percent to $35.6 million.

Known for its $10-a-month membership fee, Planet Fitness saw its upgraded “Black Card” membership ($20 a month) rate rise to 59 percent of its customers, from 58 percent a quarter ago, and up from 57 percent a year ago. Average royalty fees from franchisees also increased.

A Few Things to Watch
While there was plenty of good news, prompting investors to boost Planet Fitness’ stock up 9 percent August 12, investors on the conference call dialed in on two concerns that will keep us watching.

First, they noted the slight slowdown in new-location 2016 openings. Planet Fitness opened 84 new stores versus 99 new locations during the same period a year ago, said CFO Dorvin Lively, adding that the company still expects to hit its range of between 210-220 new doors for the year versus 209 a year ago, but the number might be closer to 210. He said there was no particular reason for the slowdown, beyond normal real estate delays, and stressed that it won’t affect the company’s guidance range, which was being increased, or its planning for 2017.

The second speed bump to watch is the potential for higher labor costs, officials said. At Planet Fitness’ corporate-owned stores, store operation expenses rose to $15.8 million versus $14.7 million a year ago, partly due to higher wages and increased staffing.

Rondeau said the recent hiring of Jim Esposito as vice president of corporate stores led to some re-evaluation of the staffing levels at the corporate store, as well as efforts to better customer experience and drive more membership sales. In addition, the company is prepping for new FLSA labor overtime law changes (coming at the end of the year), which will increase the salaries of some of its managers, Lively said.

“The combination of our incremental staffing that we’ve already started making, and then what we’ll have to do with respect to the law change, you’re talking $2,000 a month per store,” Lively said. “So it’s, with the kind of volume that we’re doing and the margins that we do in the high 30s- to low 40s-overall-EBITDA margins, $2,000 per store doesn’t move the needle much.”

2016 Outlook
Looking ahead, for the second time in as many quarters this year, the company raised its full-year 2016 outlook, now expecting:

  • Total revenue between $366 million and $372 million, versus a previous range of $360 million to $370 million.
  • System-wide same-store sales growth in the high-single-digit range, versus a previous forecast in the mid-single-digit range.
  • Adjusted net income of $62 million to $65 million, or 63 cents to 66 cents per diluted share, versus previous projections of $61 million to $64 million, or 62 cents to 65 cents per diluted share.

On the balance sheet, as of June 30, 2016, Planet Fitness had cash and cash equivalents of $55.7 million and a borrowing capacity of $40 million under its revolving credit facility. Total bank debt at the end of June was $489.7 million.

Lead photo courtesy Planet Fitness