Description

Thesis:

• Price: PLNT recently took pricing on its Classic Card membership, raising price from $10/month to $15/month. This pricing is reflected for new members only, so given membership turns over every 3 years, this will be a multi-year comp driver. Classic Card members are ~38% of total members. My math indicates that this will be a 0.5-1% driver to comps in 3Q24, and an increasingly larger driver in future quarters. Channel checks have indicated that Black Card mix amongst new members has been higher as well in the 6-7% range, given the price differential between the new Classic Card price ($15) and existing Black Card price ($23.99) is smaller. I think that comps will be in the 4.5%-5% range in 3Q24, with the Street (3.8%) and buyside (3.5%-4%) expecting lower comps. Management is also testing a price increase to the Black Card price to $27.99 and $29.99, and sellside conversations with management indicate that this is likely to take place in summer 2025, which will continue to drive higher than expected comps in the coming years. This is additional upside and not built in to my base case.
• New store development: A key driver of top-line growth is new store development. Management indicates it has white space to develop up to 5,000 stores in the US (~2x the current level) and now has stores in Canada, Mexico, Panama, Australia, and recently opened its first store in Barcelona, Spain.

New store growth went down from ~15% in the 2016-2019 period to ~6% between 2020 and 2024. After the COVID year of 2020, the largest driver of the slowdown was rising store development costs and higher interest rates. The average cost to build a store went up from ~$2 million to ~$3 million according to management. This ultimately reduced the return on capital profile for a franchisee. A fully mature store (~3 years into its store journey) generates ~$1.8 million in revenues and ~40% in four-wall margins. Hence the higher build-out costs were pushing paybacks to 6 years vs. the previous 4.5-5 year mark, and thus reducing return on capital. Additionally, with benchmark rates at recent highs, given many large franchisees are private-equity backed businesses, return on equity for new stores was even further compressed.

At that time, the previous CEO was steadfast on not letting franchisees increase prices, but given feedback from franchisees who were frustrated that the unit economics calculus did not work out, the board fired him last year and replaced him with a new CEO, Colleen Keating (more on her below), who initiated price increases almost immediately into her tenure in late June 2024.

Additionally, PLNT has initiated several cost-efficient changes to new store development: removing a franchisee fee of $20k, extending timelines for replacing equipment, and replacing expensive cardio equipment with strength equipment and open space – this last trend is also in line with Gen Z (largest demographic joining PLNT gyms) preferences.

While store growth development does take time to materialize from planning to store opening (~6 months), I believe that the CEO has a clear focus on driving higher store growth from existing levels – this also feeds into the comp algorithm, as new stores fall into the comp base after 12 months of being open, and with productivity growing from ~70% in year 1 to ~90% in year 2 for new stores, they are a large comp driver. Indeed, the relationship between new store growth and comps is quite clear historically with 15% store growth driving roughly 10% comps historically (2/3rds conversion).

• New CEO: Colleen Keating comes with a stellar track record. Conversations with other large shareholders have indicated that her performance at Firstkey Homes, owned by Cerberus Capital Management, was top tier, driving significant EBITDA growth during her tenure. Additionally, expert call transcripts have indicated that she is an excellent communicator, very numbers focused, and among the better CEOs that her previous colleagues have worked with, especially while she was COO of Intercontinental Hotels in the Americas region.

She also has an her emphasis on building a strong organization (progressing with CFO search; CDO/CMO positions next up), and indications from sellside and channel checks are that she has a positive early rapport with the franchisee network.

 Risks:

• Macro slows: A key risk here is if the US economy goes into recession, we might see slower comps, and this would throw off management’s growth plan. Mitigants to this are the following, (i) PLNT is a high-value low-cost operator, charging on average $18 per month to members, far below the average price of a gym membership in the US (~$60/month). Arguably this could be a counter-cyclical play with more trade-down from expensive gyms to PLNT if people lose their jobs / macro becomes tougher; and (ii) price increases protect PLNT’s comps to some extent, while recently channel checks have indicated that churn has not ticked up due to price increases.
• Store growth takes longer to materialize: this could result in the business staying steady at 6% store growth for some time. Mitigants here are (i) Higher store growth is not in my numbers, nor is it in Street numbers, (ii) PLNT is being realistic regarding timelines needed for franchisees to fully react to recent improvements to PLNT's new unit economics, before ramping the pace of expansion, so this is likely to be upside to numbers in general.

Valuation:

Historically, PLNT has traded at a median forward earnings multiple of 33-34x, and is currently trading on 28.5x 2025E Street earnings. I think that conservatively, this should trade at 30x earnings, as comps continue to grow and will drive the multiple higher (likely higher than my chosen multiple), with the added kicker being when store growth is even higher.

My 2026E Adj. EPS base case forecast is for $3.75, with a bull case of $4.17 and a bear case of $3.04. Hence, the risk/reward at $80 makes sense, with a year-end 2025 bear case valuation of 20x my bear case earnings projection, or ~$60 (down 25%), with my bull case at $145.95 (up 81%), and base case up 40% over the same 15 month period ending December 2025.

More near-term, I think that the stock trades at 30x my 2025E Adj. EPS number of $3.07, or up ~15% by December 2024.

Catalyst

• Comps and churn post price changes at Classic Card
• Black Card price increase performance in trials 
• New store growth increases
• C-level executive search processes