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Planet Fitness (PLNT) has bulked up since its August 2015 initial public offering, thanks to a $10 per month fee, along with a catchy slogan that promises members a judgment-free setting with what it likes to call "no gymtimidation."

It's a formula that seems to be working, as the chain boasts more than 8.7 million members and 1,200 facilities as of the third quarter.

Macquarie analyst Matthew Brooks calls Planet Fitness the Domino's Pizza (DPZ) of gyms, lamenting that he doesn't own a franchise in a Jan. 10 research report. Buy like you would a pizza franchise, he suggests.

"The biggest pushback on Planet Fitness is the gym business 'sucks,'" he wrote. "We get the comments from investors with experience but who are basing their comments more on what other listed gyms have done and not after going through the Planet Fitness model."

And therein lies the difference: "Planet Fitness is not a gym," Brooks said.

22% Growth

It's a franchise with 1,242 facilities as of Sept. 30, the day Planet Fitness wrapped up its third quarter. The number of facilities grew 22% year-over-year during that three-month period with membership running up 21%.

Brooks says there is "clear evidence" the Planet Fitness model works. Low cost plus a judgment-free environment equals share gain.

Investors seem to agree. Planet Fitness stock finished 2016 up 44% and shares have climbed nearly 7% year-to-date. Shares have been creating a flat base with a 22.17 entry point since mid-November. The stock inched down 4 cents Monday to close at 21.45.

To that end, Planet Fitness stock has easily outperformed Investor's Business Daily's 31-company Leisure-Services industry group which ended 2016 up 4.4%. Shares for the group are up nearly 6% since New Year's Day. The group includes the likes of Carnival (CCL), Royal Caribbean Cruises (RCL) and Six Flags Entertainment (SIX).

But there is only one other gym in the group, Town Sports International (CLUB), which owns New York Sports Club and Boston Sports Club. Town Sports's $76 million market cap pales in comparison with Planet Fitness' $1.1 billion. Town Sports shares are up 14% for the year, but that's partly because the stock is trading below 3.

What It's Doing Different

Planet Fitness was established in 1992 when former Chief Executive Michael Grondahl acquired a struggling gym and reduced prices to compete with bigger box gyms, according to Grondahl grew the business by focusing on first-time gym patrons.

Since then, Planet Fitness has expanded nationwide and is dabbling with facilities in Canada and the Dominican Republic via a franchise program that began in 2003. Each gym is considered a "judgment-free zone" and even has a "lunk alarm" to discourage grunting and dropping weights.

"It doesn't matter if your legs have never seen a squat machine before," according to Planet Fitness' website. "We believe no one should ever feel Gymtimidated by Lunky behavior and that everyone should feel at ease in our gyms, no matter what his or her workout goals are."

Grondahl stepped down in 2013 after most of Planet Fitness was sold to investment firm TSG Consumer Partners. Chris Rondeau, a 20-year veteran of the company, was named CEO. TSG sold 4 million shares during the company's IPO in 2015 and held several major sales last year.

As of November, records show TSG holds 31.3% of the stock.

4,000 stores?

It has been Rondeau who maintained Planet Fitness' "no gymtimidation" standard and $10 monthly fee amid its far-reaching expansion.

Jefferies analyst Randal Konik is bullish that Planet Fitness can expand to 4,000 U.S. stores and sees "strong potential for other areas of growth." Planet Fitness management has said it's now looking at expanding in Europe and South America where it will likely have to license the business.

On the third-quarter conference call with analysts, Rondeau said competitors are struggling to match Planet Fitness. Rivals who encroached on Planet Fitness' turf five years ago with 10-20 stores are now "looking for a way out because they just can't compete with us in our space."

IBD'S TAKE: Analysts are calling for newbie IPO Planet Fitness to deliver 216% earnings growth in the fourth quarter when the company issues its quarterly report in March. But Planet Fitness isn't alone in major stock and earnings performance following its IPO. Check out IBD Stock Analysis for other big ideas.

Konik noted as much in a Jan. 10 report. No rival seems able to keep up with Planet Fitness' vigorous expansion. With more than 1,000 facilities already committed to be built by franchisees, competitors are left lagging, he wrote.

"Planet Fitness' scale, reach, size and value are proving impossible to replicate and the moat widens with each new mound of dirt that is moved to build a new unit in the solar system," he wrote. "The competition just can't keep up."

Edging Out Rivals

On a year-over-year basis, Planet Fitness' sales grew 38.5% to $87.01 million in third quarter, and 16 cents earnings per share minus items was up 60%. But that was the first period those metrics could be measured vs. the year before. Sequentially, sales and earnings per share haven't been as smooth, with both dipping in the third quarter and the first.

Still, Guggenheim analyst John Heinbockel is encouraged by Planet Fitness' ability to generate free cash flow. In November, Planet Fitness used $150 million on adjusted earnings and $17 million on capital expenditures to give shareholders a $275 million special dividend.

By mid-2018, Planet Fitness should be a similar position to return some cash to shareholders, Heinbockel wrote in a Dec. 30 report. He rates Planet Fitness stock with a buy and has a 24 price target. He expects Planet Fitness to smartly leverage its $40 million ad fund, which is growing 20% annually.

The monthly fee remains a predictable $10, but Planet Fitness could bump its annual fee above $39 - after all, it was once $29, Macquarie's Brooks wrote. Still, the company is likely to keep members coming in with monthly pizza nights, bagel mornings and Tootsie Rolls on demand.

If that's not enough, the laid-back attitude might be. Heinbockel notes a new ad campaign likely to resonate well after a particularly divisive presidential election. The ad, combined with a compelling $1 joining fee in January, likely boosted first-quarter sales, he said.

The new slogan? "The world judges. We don't. At Planet Fitness, be free."


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February 14, 2017


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