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In an extraordinary turn of events, this week witnessed a deluge of unexpected departures and dismissals, showcasing four unusual resignations that have raised eyebrows and intrigue.
This week, we’ll explore Planet Fitness (PLNT), a fitness chain co-founded by the Grondahl brothers, Marc and Michael, known for their distinctive practice of offering free pizza to gym-goers every month and providing memberships for just $10! The Board decided to remove Chris Rondeau from his position as CEO the same day it was announced. Interestingly, the Grondahl brothers initially hired Mr. Rondeau while he was still a college student in 1994, placing him at the gym’s front desk.
Welcome to edition 59 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.
Sudden Departures
Planet Fitness (PLNT): $46.70
Key Insights
Planet Fitness is one of the largest and fastest-growing franchisors and operators of fitness centers in the United States, with over 18.4 million members and 2,472 stores spanning 50 states. The company functions across three primary business sectors: company-owned stores, franchising, and an equipment division.
Planet Fitness, also considered as a leader in High-Value Low-price (‘HVLP’) gyms, provides a unique fitness experience at an affordable $10 monthly fee for its standard membership for 30 years!
This value proposition is aimed at a wide audience, including infrequent gym-goers and around 80% of individuals aged 14 and above in the U.S. and Canada who are not currently gym members, especially those deterred by intimidating fitness club environment.
Planet Fitness also offers the PF Black Card at $24.99 for premium services which is quite reasonable if you look at the competitors’ pricing strategies below.
(The Chart below represents annual membership costs for a single person membership in various fitness centers)
We wrote the following about Xponential Fitness (XPOF) back in August in our Insider Weekends post titled ‘An Xponential Flip Flopper‘:
Xponential Fitness is a boutique fitness company that franchises brands focused on specialty fitness interests such as pilates, cycling, rowing and yoga.
Xponential checked a large number of boxes in my mental checklist including a founder at the helm, a rapidly growing company that appeared profitable, free cash flow above reported net income numbers, raised guidance, insider buying and a buyback announcement to the tune of $50 million.
The third thing I kept thinking about was my back of the envelope math on franchisee earnings. If on average revenue was $462,000 for franchisees, then a 25% operating margin works out to $115,500 in operating earnings before taxes and interest. This might be considered a well paying job by some folks in certain low cost areas but is hardly a business franchisees could get excited about.
Planet Fitness CFO Tom Fitzgerald mentioned during the Q2 2023 earnings call, that the company is exploring strategies to increase revenue at the $15 per month pricing outside of promotional periods, while maintaining a $10 price during sales events.
Business Model
Planet Fitness has been using a franchise business model since 2003 to expand its network of new stores, capitalizing on the ownership and local market expertise of entrepreneurs.
The company is guided by the principle of creating a “Judgement Free Zone,”. This environment is designed to make individuals feel at ease as they pursue their fitness objectives. The company discourages “lunk” behavior, like weight dropping and grunting, using a “lunk alarm” system.
Pricing Strategy
Planet Fitness can sustain its pricing strategy because it caters to the 80% of Americans without a gym membership. The $10/month rate is ideal for this demographic, striking a balance between affordability for attracting new members and cost-effectiveness to prevent cancellations.
According to WSJ, Planet Fitness does oversell their gym space that occupies 20,000 square feet of space and has around 7,500 members, knowing that around 60% of them won’t visit the gym within a 30-day period. The company intentionally makes membership cancellation process difficult, mandating an in-person visit or a certified letter, rather than email or phone cancellations.
Planet Fitness directly owns approximately 200 out of its 2,500 locations, with the remainder being sold to franchisees. These franchisees typically invest between $1.5 million and $5 million in setup costs to operate a Planet Fitness location. The revenue from franchisee is generated from multiple sources, including gym membership royalties at 7%, and the sale of PF-branded equipment.
According to Planet Fitness, Franchise owners are required to update their cardio equipment every 5 years and their non-cardio equipment every 7 years. Planet Fitness provides an estimated cost range of $314,000 to $922,000 for the complete replacement of both cardio and other exercise equipment. Upgrading or renovating the facility is required every 5 years and the cost can range from $70,000 to $600,000.
Challenges Faced
1. The company’s initial plans to open 600 new stores by 2025 may run into challenges. According to Mr. Rondeau, the four challenges impacting franchisees include:
2. The Bear Cave released reports that exposed various concerns regarding the fitness franchise. These reports brought attention to consumer complaints related to issues such as overcharging, fraudulent transactions, high fees, difficulties in canceling memberships, and investigations initiated by several State Attorneys General Offices. Both Portnoy Law Firm and The Law Offices of Frank R. Cruz have initiated an investigation into possible securities violations.
3. Back in 2012, Mr. Craig Benson acted as an “informal advisor” to Ex- CFO Jayne Conway who had been terminated, informing her that the company wasn’t financially stable. Ms. Conway accepted $500,000 as part of her termination in 2013 but later received a $5.3 million award from a Massachusetts jury in 2019. Litigation continued on appeal, with Co-Founder Michael Grondahl challenging the entire award. Ms. Conway argued for a Massachusetts law-based 12 percent prejudgment interest rate, winning, and ultimately securing a $9.4 million award.
4. Co-Founder Michael Grondahl took to twitter to express discontent in a series of tweets and replies about the company and the Board following the CEO transition announcement:
Board Removes CEO
On September 15, 2023, the Board of directors announced a transition to new leadership, resulting in Chris Rondeau’s departure as the company’s CEO, effective the same day. Craig Benson, a former New Hampshire governor will assume the role of CEO on interim basis. Craig Benson is a franchise owner of both Planet Fitness and Dunkin’ Donuts and has served on Planet’s Board for six years.
While serving as CEO, Mr. Rondeau led Planet Fitness through its IPO and managed to triple the number of club locations from approximately 700 to about 2,400.
Mr. Rondeau took over as CEO in 2013, when private equity firm TSG Consumer Partners invested in the business. Simultaneously, the Grondahl brothers stepped back from the business.
While he will maintain his role as a member of the Board, Mr. Rondeau will also offer advisory assistance to ensure a seamless transition, as stated by the company.
Planet Fitness interestingly agreed that it will renominate Mr. Rondeau for an additional three-year term as a director at the company’s 2024 annual meeting of stockholders.
In connection with the transition, the Board is engaging a leading executive search firm to assist in a comprehensive search process to identify a permanent CEO, with both internal and external candidates being considered.
Valuation
Planet Fitness, currently trading at $46.65, has seen a decrease of 40% in its stock price since last year. The company has a market capitalization of $4.10 billion and an enterprise value of $5.93 billion with net debt of $2.02 billion. The forward EV/EBITDA ratio is 13.87 and forward P/E is 28.60.
Q2 2023 Earnings (Press Release) (Investor Presentation)
In August, Mr. Rondeau announced that Planet Fitness was revising its 2023 outlook for equipment placements in new franchisee stores to around 140, down from the previous range of 160. Approximately a quarter of Planet Fitness’s revenue comes from the sale of its branded fitness equipment to franchisees.
Share Repurchase and Cash Equivalents
Conclusion
Planet Fitness is grappling with the challenge of adapting to a high-interest-rate environment, with rising debt servicing costs creating frustration among its franchisees. To effectively manage the impact of increasing inflation, the company may need to reevaluate its approach of offering exceptionally low prices.
Given all the negative news, we decided to check the puts options for Planet Fitness for January 2024, and surprisingly the near-the-money $45 strike options are only about $3. The premium works out to 6.6% and the short interest of the company is also low at 6.07%.
The options market is telling us that most of the bad news is already factored into the 40% drop the company experienced this year. I will be watching the company to see who it appoints as its permanent CEO and if any other issues arise.
Appointments
1. ODP Corporation (ODP): $46.09
Effective September 18, 2023, the Board of Directors of the company has appointed Joseph S. Vassalluzzo, the company’s non-executive Chair of the Board, to assume Chief Executive Officer Gerry P. Smith’s responsibilities as interim until Mr. Smith returns from his medical leave.
| MarketCap: $1.75B | Avg. Daily Volume (30 days): 359,583 | Revenue (TTM): $8.30B |
| Net Income Margin (TTM): 2.30% | ROE (TTM): 15.71% | Net Debt: $554M |
| P/E: 9.79 | Forward P/E: 8.77 | EV/EBIDTA (TTM): 6.91 |
| P/S (TTM): 0.25 | P/B (TTM): 1.51 | 52 Week Range: $34.55 – $53.59 |
2. Planet Fitness (PLNT): $46.70
On September 15, 2023, the board of directors of Planet Fitness appointed Craig R. Benson, a member of the company’s Board, as Interim Chief Executive Officer, effective immediately.
| MarketCap: $4.12B | Avg. Daily Volume (30 days): 2,063,879 | Revenue (TTM): $970.02M |
| Net Income Margin (TTM): 12.83% | ROE (TTM): -61.11% | Net Debt: $2.02B |
| P/E: 31.74 | Forward P/E: 19.57 | EV/EBIDTA (TTM): 14.79 |
| P/S (TTM): 3.79 | P/B (TTM): N/A | 52 Week Range: $45.58 – $85.91 |
3. Kemper Corporation (KMPR): $45.68
On September 15, 2023, Kemper Corporation announced the appointment of Bradley T. Camden, Senior Vice President and Treasurer, as Interim Chief Financial Officer and the company’s principal financial officer, effective September 13, 2023.
| MarketCap: $2.93B | Avg. Daily Volume (30 days): 380,564 | Revenue (TTM): $5.35B |
| Net Income Margin (TTM): -5.98% | ROE (TTM): -11.93% | Net Debt: $1.38B |
| P/E: -9.13 | Forward P/E: 9.97 | EV/EBIDTA (TTM): 169.39 |
| P/S (TTM): 0.55 | P/B (TTM): 1.16 | 52 Week Range: $39.69 – $66.92 |
4. Primerica (PRI): $202
On September 14, 2023, the Board of Directors of Primerica appointed Tracy Tan as Executive Vice President, Finance beginning on October 16, 2023.
Ms. Tan to serve as an executive officer and to be appointed as Chief Financial Officer no later than April 1, 2024.
| MarketCap: $7.22B | Avg. Daily Volume (30 days): 146,337 | Revenue (TTM): $2.80B |
| Net Income Margin (TTM):14.26% | ROE (TTM): 21.08% | Net Debt: $1.60B |
| P/E: 18.74 | Forward P/E: 11.44 | EV/EBIDTA (TTM): 12.22 |
| P/S (TTM): 2.72 | P/B (TTM): 3.58 | 52 Week Range: $119.24 – $219.30 |
5. LiveWire Group (LVWR): $8.24
On September 14, 2023, Tralisa Maraj, Chief Financial Officer of LiveWire Group, was appointed to the additional position of Chief Accounting Officer, effective immediately.
| MarketCap: $1.67B | Avg. Daily Volume (30 days): 31,961 | Revenue (TTM): $38.71M |
| Net Income Margin (TTM): -271.89% | ROE (TTM): -73.35% | Net Cash: $213.24M |
| P/E: -14.94 | Forward P/E: N/A | EV/EBIDTA (TTM): -14.00 |
| P/S (TTM): 43.08 | P/B (TTM): 6.70 | 52 Week Range: $4.20 – $12.50 |
1. Bausch Health Companies (BHC): $8.34
On September 18, 2023, Tom Vadaketh informed Bausch Health Companies of his decision to resign as Chief Financial Officer of the company effective October 13, 2023 to pursue another opportunity.
| MarketCap: $3.04B | Avg. Daily Volume (30 days): 3,049,916 | Revenue (TTM): $8.35B |
| Net Income Margin (TTM): -2.23% | ROE (TTM): -72.14% | Net Debt: $19.5B |
| P/E: -16.29 | Forward P/E: 2.13 | EV/EBIDTA (TTM): 8.64 |
| P/S (TTM): 0.36 | P/B (TTM): N/A | 52 Week Range: $5.57 – $10.23 |
2. ODP Corporation (ODP): $46.09
On September 18, 2023, The ODP Corporation announced that Gerry P. Smith, the Chief Executive Officer of the company began a temporary medical leave of absence to undergo a medical procedure that requires several weeks of recovery.
| MarketCap: $1.75B | Avg. Daily Volume (30 days): 359,583 | Revenue (TTM): $8.30B |
| Net Income Margin (TTM): 2.30% | ROE (TTM): 15.71% | Net Debt: $554M |
| P/E: 9.79 | Forward P/E: 8.77 | EV/EBIDTA (TTM): 6.91 |
| P/S (TTM): 0.25 | P/B (TTM): 1.51 | 52 Week Range: $34.55 – $53.59 |
3. Planet Fitness (PLNT): $46.70
On September 15, 2023, Planet Fitness announced Board decided to transition to new leadership, resulting in Chris Rondeau’s departure as the company’s CEO, effective as of September 15, 2023.
| MarketCap: $4.12B | Avg. Daily Volume (30 days): 2,063,879 | Revenue (TTM): $970.02M |
| Net Income Margin (TTM): 12.83% | ROE (TTM): -61.11% | Net Debt: $2.02B |
| P/E: 31.74 | Forward P/E: 19.57 | EV/EBIDTA (TTM): 14.79 |
| P/S (TTM): 3.79 | P/B (TTM): N/A | 52 Week Range: $45.58 – $85.91 |
4. Kemper Corporation (KMPR): $45.68
On September 15, 2023, Kemper Corporation announced Chief Financial Officer James J. McKinney steps down and will serve as a senior advisor to the company to support a smooth transition. effective September 13, 2023.
| MarketCap: $2.93B | Avg. Daily Volume (30 days): 380,564 | Revenue (TTM): $5.35B |
| Net Income Margin (TTM): -5.98% | ROE (TTM): -11.93% | Net Debt: $1.38B |
| P/E: -9.13 | Forward P/E: 9.97 | EV/EBIDTA (TTM): 169.39 |
| P/S (TTM): 0.55 | P/B (TTM): 1.16 | 52 Week Range: $39.69 – $66.92 |
5. Kennedy-Wilson (KW): $15.77
On September 14, 2023, Kennedy-Wilson Holdings announced that effective as of September 29, 2023 , Mary L. Ricks will retire as the President of the company.
| MarketCap: $2.20B | Avg. Daily Volume (30 days): 825,307 | Revenue (TTM): $570.40M |
| Net Income Margin (TTM): 12.15% | ROE (TTM):3.88% | Net Debt: $4.90B |
| P/E: 58.43 | Forward P/E: 19.61 | EV/EBIDTA (TTM): 37.47 |
| P/S (TTM): 3.94 | P/B (TTM): 1.61 | 52 Week Range: $13.35 – $18.34 |
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