A few months ago, brick and mortar gyms like Planet Fitness (NYSE:PLNT) were considered recovery sector stocks with the potential to bounce back following Covid-19’s impact on the fitness industry.

Consolidating due to pandemic restrictions, the fitness market has shrunk significantly with over 17% of U.S. gyms permanently closing. Some of PLNT’s closest competitors, such as 24-Hour Fitness and Gold’s Gym, have even filed for bankruptcy. Now, emerging as one of the few, established gyms to potentially survive the pandemic, Planet Fitness still has a long road to recovery. 

Planet Fitness Post-Covid Recovery

Planet’s last quarterly earnings report was optimistic, although earnings per share came in at only $0.10 which was nine cents short of predictions.

With the growing e-fitness market capitalizing on home fitness trends, Planet Fitness must contend with the likes of Peloton whose stock is up 5.54% from three months ago while PLNT is down .8%. As Covid concerns renew, gyms are again facing public health scrutiny; benefitting companies like Peloton despite Planet Fitness’ recent advancements into e-fitness. 

Still, PLNT’s latest report – covering the months of April, May, and June – will likely not reflect these concerns. In March the company reported three straight months of positive membership growth, signaling a comeback from a drop in memberships during the pandemic. But the majority of these members are likely returning customers rather than new recruits.

Studying the spending of its customers from June 27th to July 3rd, Bank of America found that the aggregate spending on gym memberships is only 67% of February 2020’s. This indicates a drop off in consumer interest which is particularly concerning for a company that had already shown signs of a slow down in comparable sales pre-pandemic. 

Planet Fitness and other reopening stocks had been seeing an uptick due to market optimism but the Delta variant has likely shaken this. With over 2,000 locations distributed throughout Canada and the USA, Planet Fitness will have to accommodate the regional and state-level restrictions of its locations on top of recovering from an overall revenue reduction.

In March of 2020, PLNT shares suddenly dropped from $88 to $24 and its total revenue decreased by $15.4 million for the first quarter of 2021 compared to the year prior. 

Yet, the company still has a variety of positives that may help it overcome these hurdles. Most noticeably, PLNT has so far survived the gym culling thanks in part to its solid business structure. Planet Fitness directly owns only 4.7% of its locations and franchises – the rest are owned by tenants.

On average, tenants operate 20 locations which solidifies the company’s structure and makes it more resistant to shocks. For this reason, pre-Covid PLNT reported 53 consecutive quarters of same-store sales growth and even during 2020 it was able to open 130 new locations. 

In the same vein, Planet Fitness’ business model uses its low-cost membership fees to draw in new customers. As people struggle to recover economically from the pandemic’s effects, a gym which offers a budget-friendly alternative to traditional gyms has at least a temporary edge.

During last quarter’s earnings call, the company’s CFO – Tom Fitzgerald – was particularly bullish saying, “We expect franchisees to capitalize on the industry consolidation and more favorable real estate opportunities that are starting to emerge”.  However, he stipulated this growth on franchisee and lender confidence increasing with membership uptrends and gym reopenings. 

Based on decreasing Covid-19 concerns and reopening excitement throughout Q2, the consensus forecast for PLNT’s EPS was $0.23 – a significant increase over the last quarter. In fact, Stifel even updated its predictions for the stock referencing the company’s “higher-than-expected unit openings”.

PLNT Stock

In reality, the company came out with quarterly earnings of $0.21 per share making this the 4th quarter that Planet Fitness failed to surpass consensus EPS estimates. But, it reported $137.25 million in revenue which managed to surpass estimates.

The after-hours report triggered a sharp pre-market sell-off right at 8pm, dropping the share’s value by almost $4.23. It opened Tuesday at $71.26 and has since settled around $74.48 per share. Currently, its support appears to be near $72 with its resistance floating near $78.15. 

Given the stock’s sector and potential for volatility if the Delta variant continues to spread, investing in PLNT would require significant risk consideration. The company’s solid structure and Q2 revenue report indicates the stock’s potential to rebound as Canadian and American workforces return to normal life.

Indeed, the pandemic has focused consumers on their health and wellness more than ever before. Considering the pandemic’s widely reported unhealthy side-effects such as weight gain, increasingly sedentary lifestyles, drinking, and substance abuse, there could be an eager market for PLNT’s product. But whether Planet Fitness will be able to compete with e-fitness and entice customers back to its locations remains to be seen.

P.S

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