In this episode of Industry Focus: Consumer Goods, Emily Flippen and The Motley Fool contributor Dan Kline take a deep dive into Planet Fitness (NYSE:PLNT) before it announces its latest results. Learn how the business was doing before the pandemic and how it has done during the outbreak. They talk about what they expect from the results and discuss the company’s operations, strategies, competition, shortfalls, and much more.
Also, get details about a bonus episode on Planet Fitness where our hosts will go through its latest results.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Aug. 4, 2020.
Emily Flippen: Welcome to Industry Focus. It’s Tuesday, Aug. 4, and I’m your host of this Consumer Goods-focused episode, Emily Flippen. As we alluded to last week, today I am joined by Dan Kline to take a deep dive into a company that we both know really well, that’s Planet Fitness. And they report earnings after market close today, so we’re going to be taking a deep dive, and then also talking about what we expect for them coming up later today.
Dan Kline: Yeah, Emily, this is a company I’m really excited about. They own a space, and you mentioned, you just joined. You joined for the same reason, I joined, sort of. Right now, there’s not a lot of travel, part of my logic is, I will go to Planet Fitness when I travel. But we both live in a building that has a gym. There have been some issues with my building’s gym; it reopened recently, but it’s been closed off and on. And when it’s open, every other machine is randomly taped off, which is not how social distancing works, it’s stay six feet away from other people, not workout your biceps but not your triceps. And I got a tad frustrated with it. So, I don’t think I’m going to go often, but when I’m not working out with my trainer, I will go to Planet Fitness. And they are the perfect price point for that level of customer. You don’t have to go very often to feel very satisfied with your Planet Fitness membership.
Flippen: Yeah. As you said, I’m a relatively new Planet Fitness member for exactly the reason that you mentioned, which is to say that, ultimately the gym that I was going to, the gym at our work, [laughs] which I am no longer visiting, and the gym in my building, which has since been closed, are no longer accessible. And that has led me to go to a Planet 13 (sic) [Planet Fitness] to have a masked and socially distant workout.
Kline: That would be a totally different experience if you were going to Planet 13, you weren’t going to Planet Fitness. [laughs]
Flippen: [laughs] Oh, Planet Fitness, excuse me, a different experience. Planet 13 is not in the business of providing exercising, they are the cannabis business in Las Vegas. So, two very different businesses there. I’m obviously going to Planet Fitness every day. [laughs]
But for the next maybe 30 minutes or so, I want to take a deeper dive into what Planet Fitness does. We’ll talk a little bit about the business pre-COVID, because there’s been a lot of news around Planet Fitness during this outbreak. And we’ll definitely take the opportunity to talk about Planet Fitness during the recent outbreak, but we also want to look at their business just from an overview, a strategy viewpoint, because before this pandemic they were actually doing pretty well. And as I said at the beginning of the show, they will actually report earnings after market close today, so we have a little bit of a special treat for our members. We’re going to be releasing this episode, obviously, on Tuesday like we normally do, but Dan and I will be back tomorrow and we’re going to tape a really short bonus episode of Industry Focus to take a deeper dive into their earnings.
So, with that, let’s roll right into their business. Dan, you said you’re a member, I’m a member. For all the people out there who are not members, what does Planet Fitness do?
Kline: So, we’re different types of members. Now, it’s important to remember that this is largely a franchise business, but when you join a Planet Fitness, you have two options, well, technically you have three options. You can pay $10/month; and that is the barebones minimum. That requires a one-year commitment. You have to commit to be a member for a year, they’re not the easiest company to quit anyway, which is a plus and a minus for their business. That gets you access to your Home Club, wherever you joined, you can go there as many times as you want, not all of their gyms are 24/7, but many of them are. It gives you access to the gym, to all the exercise equipment, to the locker rooms. It doesn’t give you access to the premium area, which has things like massage chairs and those tubes you lay in with massage water. I think some of them have steam rooms and saunas. I’ve never been in the premium area. But I never like there being something I don’t have access to, so I joined the more expensive membership.
There’s also a $15/month option, where you can only go to one club but it’s “pay as you go” month-to-month …
Flippen: One of the things I will point out, it’s different per club. So, the pricing options, I think, are specific for your club, but depending on which club you go to which are franchise-owned —
Kline: Oh! I joined online, which is actually, you get to pick a club after you’ve joined. So, I’m guessing, if you join online, the national experience is different.
Flippen: [laughs] I had a totally different experience. I’m learning something new right now. Yeah, I also signed up online during the pandemic. While they’re taking walk-in appointments, depending on your location, if it’s physically open. Obviously, to the extent that everybody can, we should be doing stuff not in-person, so I signed up online myself, had a different experience, but I think your pricing structure is about right.
Typically, what they’re talking about is, as low as $10/month; some with no commitment, some with longer commitments. And then as high as, potentially, I think you said $23/month; which gives you the full premium experience. All of this is to say, the price point is much lower than that that you may expect compared to other gyms.
Kline: It’s very low. And here’s a trick, Fools, when I first was thinking about doing this; and this is probably why we had a different experience, because I got an email saying, OK, would you come back? So, maybe they showed me something different. When I first looked, they were doing a $49 joining fee. And they have since waived that to it’s $1 now. And that’s actually a promotion they’re running, I believe, nationally. But sometimes, when they’re not running that promotion, if you’ve engaged on their website and you leave, you might get a better offer than you would get if you just went on and signed up. That is not just true of Planet Fitness, that is generally true of anything in the recurring subscription space. They want you to sign up on a basis that you’re going to be there forever.
So, I joined as a Black Card member; that sounds very fancy, because we think of the American Express Black. What does that give me access to? Well, it gives me access to that special area in the back where I can hobnob with all the other Black Card members from six feet away, and I can sit in a massage chair. And that’s a benefit; I guess that’s good. Why did I join? I did it because it gives you access to every Planet Fitness in the world. So, when I’m traveling, if I’m in Alexandria, I know there are Planet Fitnesses that I can drive to. I could drive to the one where Emily is a member and we can work out together. You know, most places you go, there’s going to be a Planet Fitness. So, for me, someone who travels a lot, and would like to travel again, that seemed valuable.
Now, am I going to go to Planet Fitness a lot? I’m not. I’m going to go twice-a-month, that would be my plan. Once here, to shake things up with my home gym, because it’s not that close to my house. It’s six miles, but it’s about a 20-minute drive. And back when we get to travel, occasionally on a trip, to break up the hotel gym. Usually on my day that I get there, when I’m going to the office, I usually come in on Saturday. And on Sunday, I would have plans in the afternoon or at night with various Fools, but in general, I can get up and go get a workout in, and I would want to do that at a gym. So, for me, that extra money is worth it.
And, Emily, I feel like when the world opens up, you might upgrade your membership.
Flippen: There’s a good chance I may. I will say this, one of the reasons why I chose not to upgrade my membership is because when I travel, the only recurring travel I have in the United States is back to where I grew up, in Texas. And when I went online and I looked at the stores, there weren’t a ton of Planet Fitness locations in my smaller area, North Texas, as I had expected, right? Part of the reason why I joined Planet Fitness was because it is quite literally a stone’s throw away from where I am living right now.
Which brings me to a lot of the growth opportunity that Planet Fitness sees right now. So, they have over 2,000 locations across the United States; that was at the end of 2019. But they have immediate plans to open up 500 more over the next three years. And the management team actually thinks they can reach upwards of 4,000 gyms across the United States. The value proposition for Planet Fitness is not just about being the cheapest gym, but being the most accessible gym. And, Dan, you pointed out that, obviously Planet Fitness is really accessible to you, it’s accessible to you for the areas that you travel as well. There are still pockets that don’t have that immediate access that you need, almost that McDonald’s-like experience where you see a Planet Fitness all over the place.
Kline: So, one of the things Planet Fitness does really well is they see a market where a gym went out of business for sometimes reasons that aren’t related to the gym, maybe it was a Gold’s Gym and it was a $40 membership and it just wasn’t the right price point, but it had a pretty good membership, it just slowly went under. They often open up in those areas, they are really good at finding sites like — I’ll point out, my mother lives in Salem, Mass., I don’t think there’s a Planet Fitness — you know what, maybe there is now, I think something else went out [laughs] and there’s a Planet Fitness. But they’re not everywhere.
And what’s great about this gym, and also evil about this gym — I will share both sides of it — is that this is a gym for people who are just thinking about going to the gym. You know, $10/month to make the decision, hey, I’m going to get fit, I’m going to go to the gym. That is, you feel like you’re doing something, but it’s not enough money that you’re going to actively cancel, because when you cancel, you then no longer feel like you’re doing something. There is a big user base here.
And when you join, not only do you give them a credit card, you also give them your bank account and routing number, meaning when your credit card expires, they can take your payment that way. So, I’ve mentioned this before, I was a member for four years in Connecticut to one gym where I totally forgot I was paying them for that. You know, I had changed jobs, and right after I joined Planet Fitness, and it just totally slipped my mind, figured it out when we moved and we’re, sort of, auditing our expenses. This is a company that acquires members. And they’re viable gyms, they’re lovely places to work out, it’s no-frills, but it’s no-frills in the nicest way possible.
That said, they don’t care if you work out. This is not a health and wellness company, this is a membership company, that if you choose health and wellness, will offer it to you.
Flippen: Yeah. What’s worth pointing out is that, part of the value proposition for Planet Fitness in addition to being convenient, in addition to being cheap, is also being approachable. And a fair number of their member base, I think a recent shareholder call said that around 50% of their members don’t actually go into a Planet Fitness location in the previous 30 days in any 30-day period. So, there are a fair number of people that are paying for this membership that are not appropriately using the membership, which is of course a fair criticism. But at the same time, the people that do go, they’re typically trying to attract the underserved, un-gym-ed individual. A lot of the people who are signing up for Planet Fitness memberships are people who have previously never been a member of a gym. And having things like Pizza Day or Bagel Day, make it feel like a gym that cares about you and your lifestyle as an individual, as opposed to a gym for what you feel like, maybe you need to be a professional weightlifter or a marathon runner to be an appropriate person to use that location.
Kline: It’s kind of average Joe’s from Dodgeball, they use the phrase “judgment free zone,” and even they don’t have a ton of loose weights. They have a dumbbell rack, but you can get a great workout at a Planet Fitness. I do a lot of strength training. I know it doesn’t look like it on Zoom, but I am way stronger than I was a year ago and way thinner, the camera does not flatter me sometimes. But that said, you can get a full body great workout, but it’s all geared toward people who don’t necessarily know what they’re doing and don’t want to devote their life to the gym, you know? There’s always that guy in every gym you go into that, like, he’s there when you get there at 6:00 AM. You realize, like, you forgot your coat and you go back at 6:00 PM and he’s still there, [laughs] and he’s doing the same workout. There’s a woman in my building, who in full makeup, will walk on the treadmill for three, four hours, but very, very slowly; I’m guessing not to sweat. There’s always people like that at gyms.
Planet Fitness just doesn’t have any of that. They set up things, like, 20-minute workouts, where you go around a circuit of machines and get a good workout. There’s things like trainers roaming the floor that will help you if you don’t know how to use a machine. It’s generally an environment where, you know, if you see someone who’s not in great shape, that person gets a thumbs up rather than a, like, why didn’t you come to the gym three years ago. I actually find it’s a pretty pleasant environment for a gym.
It is no-frills. The locker rooms are nothing special, it is not a place I would particularly want to, say, take a shower after my workout, because, you know, it’s — I’m not saying it’s not clean, but it’s not cleaned to the level of your $90 high-end gym membership. And I’ve been a member of every type of gym imaginable, usually based on the geography of where I lived or where I traveled from. But this is a really good value. And I think it’s hard, if you make the decision to join, to make the decision to physically go into the gym and do what you need to do to quit, I don’t think that’s an easy thing for many people to do.
Flippen: And there’s a reason why Planet Fitness, among virtually [laughs] every other gym available right now, doesn’t offer the opportunity to cancel online, is because the churn rate they would see would be dramatically greater if people had the flexibility to cancel when they wanted. Having to physically go into a gym location gives the opportunity for the people who are working at that gym to talk you into, maybe it’s a lower membership, maybe they convince you that you just need to be working out more or that they have a Planet Fitness that’s more convenient location-wise for your lifestyle. Whatever it may be, it gives them that last chance to retain you as a customer.
So, being a low-cost gym, it begs the question of how they make money off of each of these members. And I alluded to earlier that Planet Fitness is a franchised model, they are, their average franchise owner has about 15 locations, but the value proposition isn’t just in building out more locations, doubling the number of locations, it’s actually having people pay up for that Black Card level membership. One of the key metrics we watch with this company is their average revenue per member, which we want to see ticking up quarter-over-quarter, year-over-year, because that would mean that people who come in as a basic $10/month, the lowest cost plan subscriber, could eventually make that decision to deepen the relationship they have with Planet Fitness and pay more per month.
Kline: And all it takes is one trip or one day, where you’re like, you know, I wonder what’s in that Black Card area. You ask for a tour, and you’re like, I’d sit in a massage chair. Like, you know, look, I own a massage chair. It’s a pretty good experience. Their massage chair is nicer than mine. I mentioned it before, Emily, I don’t like joining someplace and other people having perks that I don’t have. I have a Disney Platinum membership, because I don’t want to have blackout dates, I don’t have to think about whether I could go or not go at any given time.
And there is a little bit of it — now, it feels weird that you’re joining the elite part of something that’s a low-end player in the industry, but I found that, you know, when I was a member of a higher end gym, there needs to be a reason for that. So, in Connecticut, I was a member of LA Fitness, which is like a $40/month membership to be able to go to any of their clubs. I joined that gym because they had pools and hot tubs, which is something that, you know, in cold weather, an indoor pool is a nice thing, an indoor hot tub is a nice thing. When I lived in New York, I was a member of, like, $110/month — I think it was an independent gym — because they did your laundry. You could bring in laundry and they had a service, I mean, you paid for it, they had a service. Well, I lived in a studio apartment that was about 200 square feet, you know, didn’t have a washer/dryer, there was some benefit to that, so.
But where Planet Fitness operates is, they have these large gyms, they’re open all day and all night, usually, and they’re never very crowded. So, they make their money on getting you to sign up, enticing you to upgrade your membership, and if you work out for you don’t work out, they don’t care. In fact, they would rather that the person who is serious about working out, can get a treadmill when they want a treadmill. So, they actually aren’t necessarily — they’re not sending you a reminder, hey, Emily, haven’t seen you in a while, come back in.
Flippen: I’m chuckling here as you’re talking, Dan, because as I look at the notes that we laid out, one of the points I wanted to make was about that revenue per user, and about how that has been ticking up slowly over time. In the most recent year that was almost $17/month per user. And I noticed [laughs] that you added in a quick sentence here, you say, a bank account model that is smart, but evil, maybe you can elaborate.
Kline: Oh, I talked about that a little bit earlier. When you sign up, they take your routing number. Meaning that the normal divorce from — if I don’t go to a gym or I don’t use my account for whatever, the normal breakup period is when they go to charge me and it no longer goes through. How often do you change bank accounts, Emily? That’s not very often. So, I’ve never had this happen at another gym. And as I’ve mentioned, I’ve been a member of a number of different national and regional gyms. Maybe somebody else does this, but this is sort of, let’s call it a reverse Netflix. Netflix has actually gone to people and said, hey, you haven’t used your account in a year, unless you tell us something, we’re going to delete it, like, we don’t want your money, you’re not using the product. Planet Fitness is the opposite, and they’re the opposite to, I think, let’s call it a dangerous degree.
Because I understand not really pushing you to get back in the gym, but I do feel like if you’re in the gym business, maybe a once-a-week email, hey, Emily, we haven’t seen you, here are some encouraging things. Oh! And if you’re working out at home, here’s a link to our app and here’s a recipe for a smoothie. I feel like there should be that level, and there really isn’t. You’ll never hear from them again and they will — because I know four years, [laughs] it was literally four years, and I was a member of another gym for that whole time period. That, to me, I mean, I hate saying the word “evil,” because this is a company that’s largely doing good, they’re taking something that was not super-accessible — $10 is accessible to almost everyone, you know, there are very few people. I know there are people who can’t afford $10/month, but most people can afford $10/month. And the amount you get for that, you can go workout seven days a week, you could go eat on Pizza Friday and get a free bagel on Bagel Tuesday, or whatever day they do bagels. You know, that is a really good value.
And I mentioned not wanting to take a shower there, but actually the other hidden benefit is, if you’re traveling cross-country and you’re on a crazy long drive, you can stop in a Planet Fitness and just go take a shower and change your clothes, like, use it as a locker room. Like, there are a lot of benefits to this. But that said, I wish — you know, 90% of their revenue is recurring, and that’s a great number, I’d be OK with them sacrificing a little bit of revenue for just a little bit more transparency on, hey, we’re a gym and we do actually want you to come workout.
Flippen: Yeah. So, let’s dig into competition, because as you alluded to, there are — this is common across the gym industry, which is actually a really fragmented industry. So, if you look at just Planet Fitness, I said earlier, they have over 2,000 locations, most of those are in the U.S., but they have some international exposure. Currently, there are a couple of gyms in Australia, as well as Panama. A handful in Mexico and Canada. So, there’s opportunity for them to expand internationally. But even if you just look at the U.S. markets, there are nearly 40,000 different health clubs just in the U.S. alone. Planet Fitness is only around 2,000 right now. So, there’s a good argument to be made that a roll-up in the gym industry is something that’s coming, that could potentially decrease the competition, while at the same time, we’ve seen a ton of influence from competition from just at-home workouts.
We’ve talked about Mirror, we’ve talked about Peloton in the past, these are businesses that could potentially threaten Planet Fitness. So, how does Planet Fitness stack up against the competition?
Kline: So, Emily, let me go in a different direction for at-home workouts. And we’ve talked about this, I think, in real life, maybe we were on a show, it’s all a show at this point. But I think it’s a benefit. I think if you buy a Peloton, you’re not going to want every workout you do to be on a bike. I think if you buy a Mirror, you’re not going to want everything to be through a class. So, if you’re looking and say, OK, with financing, I’ve spent $86/month for my Peloton membership and the piece of equipment. Am I going to go join a New York sports club for $90/month? — I don’t know what the number is, it’s probably less than that, but somewhere between $50- and $90/month — or am I going to join the $10 Planet Fitness?
I think the price point is ingenious in a couple of ways. It’s additive to the people doing home workouts. I think it might even be additive to the people who are joining a really fancy gym that’s near their house, but isn’t quite as national, and travels. Like, I think you could make a case of the guy who’s never missing his workout at an Equinox or at a fancy gym, might get a Planet Fitness membership for the time he travels, because the hotel gym isn’t going to cut it. And certainly, Airbnb has opened up. Most Airbnb houses do not have a gym [laughs] that you can access.
So, I actually like where they stand with competition, I think there’s some comarketing they could do. Now, is Peloton going to comarket with Planet Fitness? No, they’re not. One is a down-market brand; one is an upmarket brand. But can they talk to, like, an Echelon [Echelon Health & Fitness] or something like that that’s competing, and say, hey, we’ll give your customers a 25% deal on joining Planet Fitness for a year, but they have to commit to paying all-at-once or something like that. I think this is a really smart business to be in, because as someone who’s been to high-end gyms, I think you learn pretty quickly, Emily, that what’s most important is that it’s clean and that it has decent equipment, it’s not that important that a guy hands you a lemon water and a hot towel when you walk into the locker room.
Flippen: I’m going to use a convoluted example that you’ve made numerous times in the past. And at the risk of getting some [laughs] angry emails, I’m going to mention Luckin’ Coffee here. Before Luckin’ Coffee, as we know today, committed a fraud, you made a good argument against it, and for a company like Starbucks, by saying, Luckin’ Coffee is ultimately, the only thing they’re doing is creating demand for Starbucks, they’re introducing people into the world of coffee, and then making a much bigger addressable market for other coffee brands, Starbucks being one of them.
The reason why I use that as an example is because I happen to think that the explosion of at-home workouts, whether it’s Peloton or Mirror, I think just gets at the bigger problem that we’re seeing, especially here in the United States of a trend toward health and fitness. And I think that’s an industry that, with the rising obesity rates that we see, isn’t an industry that is going away, and it’s an industry that actually supports way more than one or two winners.
And in this case, I think you’re right on point with the idea that somebody can be a subscriber to Mirror or to Peloton, and still pay the totally reasonable $10- to $25/month fee to also be a subscriber to Planet Fitness.
Kline: Yeah. And you know, you make the Luckin’ Coffee, and that they were just giving away free coffee, people went, I like coffee, you know where the best place to get coffee is? Starbucks. That was what you and I didn’t like about their business model. We’re not going to rub that one in; we know a lot of people got hurt by that stock. That said, I think there will be a tiny percentage of Planet Fitness users that get really into the gym and go, wow! I want more free weights, I want that fancy sauna or locker room experience, or hey, I’m always going before work and I want my own stall and I want it to be more comfortable. That is a tiny percentage of people. And actually, I think Planet Fitness is happy to see that person go. The guy who is a resource hog, doesn’t fit their business model. The person who comes in and takes up a machine every day, they want the person like me who is going to go occasionally, in my case, because I’m using other gyms and paying a trainer, or in other cases, because they’re using Peloton, or the vast majority of Planet Fitness customers, because they know they should be a member of a gym, but they don’t go to a gym.
I’ll give a little fitness advice for Fools, just go. I don’t care if you stand on a treadmill and walk for two hours or for 30 minutes. Get in the habit of going to the gym. It’s intimidating, do a circuit, just do light weights. It gets easier. The first month after the pandemic, well, we’re still in the pandemic, but when gyms reopened and I was able to stop doing outdoor workouts with bodyweight and I hit back to the gym, I remembered every painful reason why starting at the gym, especially at my age, is difficult. Everything hurts, it hurts to brush your hair when you start working out with weights. But, Fools, go do it.
And joining Planet Fitness, I think it’s a great idea. It’s cheap. there’s a ton of them, there’s never a wait for anything, you know, I don’t know that I’d invest in this company, but I do like what they’re doing.
Flippen: That’s really interesting that you caveat the statement with, I don’t know if I’d invest in this company, which is, of course, ultimately the question we’re trying to answer here with this deeper dive. Now, before I get to that question and hear your arguments about why not, and I would say my arguments about why you should, let’s talk about something you alluded to in that last statement, which is, their response during this pandemic. I’m a subscriber, myself, that signed up a couple of weeks ago, as a result of the current pandemic and being stuck at home all the time, dying, itching to get at least a little bit of a workout in when it wasn’t 100 degrees [laughs] outside here in Maryland during the summer.
I would actually say that this pandemic, in some respects, has helped Planet Fitness. And the reason why I say that is because we’ve seen a lot of other gyms, Gold Gyms being the prime example, struggle during the pandemic, potentially go out of business during the pandemic, especially local gyms. Which could create demand for Planet Fitness.
But on a bigger level, I think as people start to work from home more often, even potentially long-term, post-pandemic, that also creates demand for Planet Fitness. So, let’s dig into some of the numbers that we’re seeing, and how Planet Fitness has held up during this pandemic and potentially leading into what we’re going to see them say tonight when they report earnings?
Kline: So, this is a company that has been largely closed for the quarter. They stopped taking payment. They also worked with landlords, but here’s the great thing about this business. This is a franchised business, so I don’t know what the Planet Fitness corporate headquarters looks like, but I picture six guys and a couple of calculators. I mean, obviously, that’s not true, because there’s national advertising, there’s national help picking a location, but franchise business, some of them are very, very scrupulous. And they will go in and they say, we know you want to open up in this small city, we looked at the market, there’s two gyms already, we don’t feel like you can succeed.
Planet Fitness, I don’t know if they’ll give you that information, but based on where some of their gyms are, I don’t think they’re forcing you to not open. I think if you have the money to open and you meet their financial test, they’re willing to fail, because there are absolutely Planet Fitnesses that go out of business. How do I know this? Well, I’ve seen a few. And also, if you go on Facebook Marketplace and look for exercise equipment, you often see purple exercise equipment, it’s like when they un-paint the police car, you still know it’s a police car. So, as a company, a franchise model is a great model to be in during a pandemic, because you don’t have a lot of expenses.
Flippen: Yeah. And I’m going to quote some numbers from a shareholder call they had, I believe on June 10. And these are the only updated numbers that I know of, before we head into earnings. And one of the things that management pointed out was that the usage rate for the stores that have started to reopen is around 60% of what it was pre-COVID. So, you’re right to point out that the stores, or the gyms in this case, have largely been closed, slowly reopening, with obviously, enhanced social distancing and hygienic measures taken in place, but ultimately, we do see people coming back. And what I thought was really interesting is that they didn’t actually see cancellations, or they were only slightly higher than where they were for the year-ago period. And a lot of that is because, [laughs] as you pointed out, some people are not aware they’re paying for the membership or just simply don’t go, so they’re not likely to cancel. But at the same time, I think the fact that Planet Fitness did the right thing during the pandemic and stopped payments, right, so if your gym was closed, Planet Fitness just automatically cancelled that payment for you, most other gyms didn’t do that. So, in my opinion, I think that probably contributes to the relatively low cancellation rate, when Planet Fitness does the right thing during hard times.
Kline: I also think, well, I think they maybe were a little bit publicly shamed into doing that. But that said, when you’re sitting down and making your budget, let’s pretend, you know, God forbid, you didn’t work for a great company like The Motley Fool and you were out of work, and you’re going to sit down with your boyfriend and you’re going to look at your monthly expenses and you’re going to, OK, we don’t have a car, so there’s nothing we can do there, we have to live someplace and you know maybe in six months when our lease is up we could move to wherever my new job is but right now that’s not an option, hey, we’re spending $180/month on cable, maybe we could get rid of that. And by the time you get to your $10 or your $23 Planet Fitness membership, you’re probably not going to cut it, because you know where you’re going to have more time, you’re going to have more time to work out, you still don’t have a job, and you’re going to need diversion and entertainment.
I feel like this is one of the last expenses to go. And some of that is what works in favor. If you’re not watching Netflix, it’s pretty easy to say, I’ll shut off Netflix, I’ll get it again when there’s something I want to watch. If you’re not working out, unless you’ve made a pivot to, you’re running now or you’re doing something you really love, outdoor workouts. And I live in South Florida, so outdoor workouts are not all that viable much of the year, or you get into hiking or whatever it is. And you’ve said, you know, I don’t need Planet Fitness because I’m fit otherwise, most people are going to go and they say, you know, I haven’t gone, but I really should go, I could get into better shape. That is the No. 1 driver for this company.
And it’s just the ethics of it that I wrestle with, [laughs] you know, in terms of whether I want to own this company or not. They’re experiencing uptick in new people joining as they reopen post-pandemic, and I think there’s a couple of reasons behind that. I think one of them is just flat-out, a lot of home gyms are closed, a lot of building gyms or community gyms, even people who are members of, like, expensive CrossFit studios, those are closed. So, anybody who joins during this, they might have a slightly higher churn rate as other things reopen, but I think, again, people are going to see the value of this being an additive membership.
You know, when I went to a yoga studio that cost $100/month for unlimited classes, which is very low for a yoga studio, by the way, it made sense to be a member of a gym, because yoga wasn’t the only workout I wanted to do. I wasn’t a Planet Fitness member, because it didn’t make sense on my drive, I was a member of a more expensive gym. But I think this is a company that eventually is going to come out of this in stronger shape than when it went in.
Flippen: So, I don’t want to give my opinion without hearing your opinion first, [laughs] so I’m going to be in an enviable position of being second to go here and give my opinion second. But as you said earlier, I’m not sure I would be interested in buying shares of Planet Fitness today. Tell us why? Is it just the ethics?
Kline: Yeah, for me, like, I like the community of a gym, I like the fact that in my building gym, except for there’s one gentleman who seems very angry when anyone else is there. All the gym people know each other, not by name, but, hey, I see you in the gym and I’m going to give you a nod in the hallway. And that starts to happen at any good gym. And Planet Fitness isn’t fostering that community. Like, we joke about Pizza Day, I’m not sure you should be doing Pizza Day, maybe you should be doing bring in, you know, from your local grocery chain. Here’s how to make a great-tasting, healthy recipe and there will be samples. Like, I think there’s ways to not just, like, flout, absolutely spit in the face of what you’re doing as a business and create that community. Look, would I want my Planet Fitness to be crowded when I walked in? No. But would I want them to use events to get people in at times of day where they’re never going to be crowded. Gyms are never going to be crowded at three o’clock in the afternoon. You know, even in this nontraditional work cycle most people are busy, the gyms are going to be busy from 6:00 to 9:00 in the morning from five o’clock to seven o’clock at night, maybe in some locations they will be busy for an hour after dinner. I just don’t like that they don’t view themselves as a fitness company, they view themselves as a membership company.
And frankly, once you join, they don’t care. Like, if all the equipment in your gym disappears, they don’t care. And that, I don’t know, I don’t like that. I like their marketing; I like the business model. I think just personally, I probably wouldn’t be a shareholder.
Flippen: That’s really interesting, because I think I had a lot of the same impressions before I started to do some digging for this episode of Industry Focus, and I will say, I think my opinion changed during research for this. And what I will say is, I, of course, think there are things they could be doing better, having half of your membership base not come in in any 30-day period, to me, says, A. you either need to take the Netflix model of canceling their memberships for them, or B., the more likely scenario, you need to work on addressing the issues about why members aren’t coming into the gyms. Polling people, is it because you’re using other gyms and this membership is just supplementary for when you travel, as you might have mentioned? Or is it because you don’t want to work out and there’s something we can do that will help to encourage you to do so? There’s always things that businesses can be doing better.
But I think Planet Fitness fills a really important need, which is the accessibility of gyms to people who do not have the ability to afford very expensive gym memberships. I think the median gym membership is something, like, $80- or $90/month, that is not affordable to a large number of people. I think having an accessible and affordable gym is an important market in an increasingly unhealthy country.
And what I will say is, I like Pizza Day, I like Bagel Day. The reason why I do is, because I think it goes into the Planet Fitness model of saying, everything in moderation, including moderation. When you are a Planet Fitness member, you are not going to be the person who is there for 15 hours a day, at least that’s not the person they want to be there for 15 hours a day because you are going to be a personal fitness trainer and fitness is your life, you go there because you live an otherwise healthy lifestyle, which includes occasionally having a slice of pizza, occasionally engaging in some sort of bagel eating activity. To me, that fits in with the model that it has.
Ultimately, I think there’s an opportunity for them to grow, not just in doubling their store count, like they think they can, but also reinvesting into their app. And again, I told you, this is really unfair, I’m going second, [laughs] I’m kind of undercutting your argument here.
And I will quickly mention their app. Their app is something they’ve been investing into since this pandemic began. And they’re working on ways they can engage Black Card members with their app, whether that be through hotspots, so you can see the live membership at your club at any given time, so you know if the treadmill is going to be open when you want to go in. There are things they can do to increase their engagement and get people to upgrade to the slightly more expensive, but still totally affordable membership, that I think can fuel growth for them long into the future. It is not a growth-style company in my opinion, but it is a company that I think is making the world better, and I think they will continue to grow, which is why I like them.
Kline: I’m not as negative as I once was. I do like what they’re doing with the app. And I’m not saying they have to become, you know, weightwatchers, where it’s a supportive community that, sort of, you know, both encourages you and shames you into going. It’s literally just like, how about a once-a-week email, which they’ve been doing during the pandemic, you know, when you can’t go to a gym. Just being like, hey, you know, if you want to come in, that’s great, here’s a couple of tips, here are some links to classes. Hey, if you upgraded to a Black Card, here’s what you’d get.
That Black Card is a great business; it’s basically pure margin. I don’t know what their expense is on upkeep on the equipment, and I know since I’ve been — I haven’t been in a Planet Fitness since I joined, because again, my building’s gym did reopen, so I’ve been there since that happened, because we had a hurricane scare, which sort of messed up my weekend. But that said, that extra $13 is basically all profit. So, the fact that 60% of their cardholders hold that, is absolutely a stellar number. I wonder if there’s a tier above that. I wonder if they could come up with an even — you know, where you get access to something even more premium, like, personal training. And they have, sort of, like, free group personal training or things like upscale classes, like, Pilates or barre or yoga. And they probably have some yoga classes.
But I think there’s other ways they could grow their business, and I’d like to see maybe, you know, run a contest with franchise owners where they try different things and anything that works. So, I’m not against investing in this business, I just personally don’t want to invest in this business.
Flippen: Now, before I let you go, Dan, I want to remind everybody listening that we’ll be back tomorrow with a special bonus episode where we’ll talk about Planet Fitness’ earnings, which are going to be released later today, potentially by the time you’re listening to this, they may already be out. We, of course, couldn’t change our own schedule, but we will have a bonus episode where Dan and I will come on tomorrow and talk about their earnings. But, Dan, I also want to ask you a question, because you didn’t say this while we were recording, but you told me before we started, the intention was next week to have a conversation about your trip to Vegas, which now seems like that may not be happening, is that right?
Kline: Yeah. So, my wife is a little bit nervous about the flying issue. I was going to take my 16-year-old, and she’s not worried about my behavior, but she’s worried that while I’m recording, and I was going to work a couple of hours each day over the weekend, two with you on Sunday, that my son would go down in the hotel to go to Starbucks and he wouldn’t necessarily pay attention to social distancing or having his mask on. So, I was more or less, given the notion of either, hey, don’t work while you’re there or keep him in the room, which wouldn’t really be fair to him. So, probably we can absolutely talk Vegas on the show in a couple of weeks, but that said, my Vegas adventure will probably be delayed to mid-September when I was planning to go for work reasons. And now, there’s no longer a work reason, but I’m going to go anyway.
My wife doesn’t ask for much, in fact, I travel a lot by myself, because she doesn’t like to travel. I thought she would be like, hey, you’re taking our son, this is great. It was on the calendar; she hadn’t really noticed until we turned the month over. So, it’s not a done deal and it could change, but it seems like we’re going to maybe head back to the Keys or do something else for the weekend. So, I’m a little bit sad about it, I’d like to get behind a blackjack table, I really wanted to check out the beach complex at Mandalay Bay. But you know, as you know, Emily, you’re in a partnership, I’ve been married for almost 20 years, it’ll be 20 years in September, you know, you have to have those conversations and you have to listen if the other person isn’t comfortable with something.
Flippen: Well, it sounds like that’s for the best. And maybe we do a Vegas-themed episode anyway. I goofed up at the beginning of this episode referring to Planet Fitness as Planet 13, which is not the same business but is a business that’s in Vegas that I could make some loose arguments, is a consumer goods-focused companies, so maybe we come back at some point in the future and do that episode.
Kline: When do they report? I would absolutely love to dive into that. That’s a company we both like. And maybe we can talk about, you know, tourism that isn’t necessarily tied to the traditional reasons, use that as a jumping off point.
We are always open to your ideas. Emily, how can people email us?
Flippen: Yes, definitely. As we say at the end of every episode, you can always reach out to us if you have any ideas, by shooting us an email at IndustryFocus@Fool.com, or just reaching out to us on Twitter @MFIndustryFocus. We love your ideas, most ideas are not made on-the-fly like this, but if you have any pitches, definitely let us know, leave us a review as well, if you like the topics that we’re covering. Those feedback that we love to receive. And, Dan, as always, thank you so much for joining. I know we went long on this one, but it’s always a fun topic and it’s fun to chat when you’re around.
Kline: Yeah, it was fun to do it. Thank you, Emily.
Flippen: As always, people on the program may own companies discussed in the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for his work behind the screen today. For Dan Kline, I’m Emily Flippen, thanks for listening, and Fool on!
— to www.fool.com