Regular exercise helps improve peoples' overall health, fitness, and quality of life. It also helps to prevent chronic illnesses, such as type 2 diabetes and heart disease, and obesity. Covid-19 has further increased the awareness of the benefits associated with exercising, as it can cause more severe symptoms and complications in people with obesity-related conditions.
We recently added Planet Fitness, a leading fitness chain operator in the US with an expanding global presence, to our portfolio. By making fitness more accessible to all and encouraging heathier eating, the company can improve life expectancy and quality, thereby creating positive impact.
Planet Fitness has a unique value proposition in the market, with its average membership rate only 25% of the industrywide average. The group operates 2,059 stores (as of 30 June 2020), offering personal fitness training programmes for its members as well as providing sauna and massage facilities. Planet Fitness has a leading market share in the US, accounting for 5% of about 40,000 health clubs and 22% of health club members, and it plans to increase its store count to 4,000 in the US and 300 in Canada to help broaden access to fitness[1]. In the next three years alone, it has committed to opening 500 new stores. Together, its attractive pricing points as well as its large and growing unit presence make the company's business model highly attractive and defensible, thereby making fitness more accessible.
In 2019, the group recorded revenues of just under $700m, an increase of $280m on the previous year, and its membership doubled from 7.1m to 15.2m (as of 30 June 2020)[2]. It is a highly cash generative company with a strong balance sheet ($424m in cash as of 30 June 2020), which should help it grow its market share as it navigates the Covid-19 crisis.
The future of fitness
In the last decade, global fitness industry revenues have grown at a compound annual growth rate of 3%[3]. In the US, this figure was 6%[4]. By 2018, there were over 180m global health club memberships, and over 60m in the US. Global revenue industry-wide totalled $94bn in 2019[5] - and this growth is expected to continue once trends normalise and gyms reopen as coronavirus lockdown measures lift around the world.
Planet Fitness is likely to emerge from the current coronavirus-induced downturn stronger than before. That's because the fitness industry has proven resilient during recessionary periods in the past, recording revenue growth of 2% in the US during the Great Recession in 2008-2009, as people tend to exercise when they are out of employment or suffering from increased stress levels[6]. What's more, in 2017, Planet Fitness was forced to close 11 gyms for up to six months owing to the impact of Hurricane Maria. During that period, members were not charged, the company had few cancellations, and, within 12 months, these locations had generated higher monthly revenues than before they closed[7]. During the current period of uncertainty, the group could also benefit thanks to its attractive pricing as other gym-goers may look to trade-down. Planet Fitness also moved quickly to freeze memberships when lockdowns were enforced, which should help it to retain its members.
We believe that Planet Fitness is well-positioned to benefit from any material dislocation in the fitness space as a result of Covid-19. While the virus creates a headwind for all gyms, those businesses lacking strong cash balances may be forced to shutter their doors permanently. In turn, this could present opportunities for Planet Fitness: its franchises could acquire more stores and, should its membership model resonate with value-oriented consumers, gym-goers could look to trade-down from boutique and high-end gyms. Indeed, this could help Planet Fitness increase its market share substantially from its current level of 22% to close to 30% in next few years.
Beyond the coronavirus pandemic, we believe Planet Fitness has a durable franchise model with the potential to sustain its normalised earnings per share growth, driven by strong double-digit store expansion, margin expansion and healthy cash returns.
Read our full Federated Hermes Impact Opportunities Fund H1 2020 report, to find out more about our recent activity and performance, our engagement progress, and how we have been investing in pandemics through our impact themes.
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1,3,4,5,6 "Research note: "In A Universe Of Black Holes, This Planet Will Continue To Shine," published by Jefferies in April 2020
2 Source: Planet Fitness, as at 30 June 2020.
7 Research note: "A Planet for the Taking - Highlights from Mgmt Call," published by Jefferies in April 2020.from Mgmt Call," published by Jefferies in April 2020.
