Updated on July 28 to include additional details about the IPO.
NEW YORK (TheStreet) -- Planet Fitness could be one pumped-up IPO.
On Monday, the discount discount gym known for its endless rows of no-frills cardio equipment, multiple tanning beds, and "judgment free" workout zones, released more details about its planned IPO. The company said it plans to raise about $216 million in its IPO, up from $100 million in June when it first registered its IPO. Planet Fitness will offer 13.5 million class A shares to be priced at $14-$16.
The increase in the expected amount Planet Fitness will raise suggests the gym chain's business prospects are being met with enthusiasm by investors, which could mean a hearty valuation on the first day of trading. No date for the initial public offering was set.
Planet Fitness, which is seeking to list on the New York Stock Exchange under the symbol PLNT, does have several red flags for investors to consider.
First, the company has loads of debt, which could be linked to the fact that it's in its early stages of growth. Planet Fitness opened a robust 169 new stores in 2014, its most in the past three years, after opening 143 in 2013. Total debt as of March 31, 2015 tallied about $506.4 million relative to a mere $12.4 million in total equity.
Second, as result of its debt burden, Planet Fitness is restricted by its creditors from distributing dividends. So, for investors to get compensated for their risk taking, Planet Fitness will have to deliver pumped up profits that send the stock higher.
Finally, the discount gym industry is becoming fiercely competitive. Retro Fitness, a competitor to Planet Fitness on the East Coast, now has 132 locations in operation and plans to open 50 to 100 more each year. Meanwhile, Anytime Fitness is the largest discount gym worldwide with over 3,000 locations in all 50 U.S. states and in 20 international markets. The company intends to open 350 new locations per year for the next six years.
But, in the end, TheStreet's review of Planet Fitness' prospectus yielded multiple reasons for investors to get energized by the gym chain's IPO, in spite of the above concerns. Here are the top three.
1.Planet Fitness' membership base continues to swell.
The health of a gym chain is measured by how well it can retain its membership base, recruit new members and trade them up to premium services. Planet Fitness is excelling in these areas. As of March 31, 2015, Planet Fitness boasted 7.1 million members, up 24% year over year. Since the start of the year, the company has added 1 million members.
Planet Fitness' "PF Black Card" membership, which costs $19.99 a month versus the base membership fee of $10 a month, as a percentage of total membership has increased from 38% in 2010 to 55% in 2014. Average monthly dues per member have subsequently increased from $14.22 to $15.45 over the same period.
The "PF Black Card" allows a member unlimited access to all Planet Fitness gyms, the ability to bring a guest on each visit, and access to exclusive gym areas. Allowing premium members to bring a guest for free provides Planet Fitness an additional opportunity to attract new members, which looks to be working given the improved average monthly dues per membership metric.
2. Planet Fitness has a well-defined new store development pipeline.
As of March 31, 2015, Planet Fitness franchisees have signed agreements to open more than 1,000 additional stores over the next seven years, including roughly 500 over the next three years. And these new locations aren't being opened by rookie operators.
About 87% of Planet Fitness' new stores in 2014 were opened by the company's existing franchisee base. That suggests good relations with franchisees -- McDonald's (MCD) - Get Report and its frayed relationships with franchisees this is not. Moreover, 22 new franchisee groups opened their first Planet Fitness in 2014, likely attracted by the company's strong financial track record in recent years and future growth prospects.
In addition, new sites for gyms continue to be easy to find and secure, and are likely affordable due to the shakeout in the retail sector that has led to the closures of off mall retailers such as Circuit City, Blockbuster and Border's Group.
"For us, the expansion side of things is great, the landlords are looking at us more as a traffic-driver and anchor," said Planet Fitness CEO Chris Rondeau in an interview with TheStreet back in October 2014. Rondeau added that Planet Fitness is also eyeing store openings in malls, as "rents are becoming real good and the malls are being repurposed."
3. Planet Fitness' financial results are good and getting even better.
The company has posted an unworldly 33 straight quarters of same-store sales growth. Last year, Planet Fitness had a same-store sales gain of 10.8% -- its best showing in the past three years. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) have increased fourfold dating back to 2011, reaching $100.6 million in 2014. Same-store sales have risen by a faster rate each year since 2011.
In the first quarter, Planet Fitness' same-store sales rose 10.9%, while total revenue and EBITDA increased by 33.5% and 29.5%, respectively.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.