Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Planet Fitness ads try to lure regular folks with the promise that their clubs are a "Judgment Free Zone." Seven months after the gym operator's initial public offering, investors have made clear that Wall Street doesn't share the same sentiment. 

The stock sank almost 10 percent to $13.35 in intraday trading on Wednesday after Spruce Point Capital Management's Ben Axler published a research report elaborating on a short recommendation that it revealed at a conference late Tuesday. 

Feel the Burn
Planet Fitness slid after Spruce Point Capital disclosed its short case and said its price target range is between $4.65 and $12.
Source: Bloomberg

Spruce Point believes Planet Fitness could be worth as little as $4.65 a share for a number of reasons, including aggressive growth forecasts, questionable accounting practices and governance concerns.

Many of the criticisms appear valid, but some are less hard-hitting than others. Take for instance heightened competition. While it's true fast-growing budget gym operators like Crunch, YouFit and Blink Fitness are vying for Planet Fitness's customers, such an audience is less likely to dramatically increase their $10 to $20 monthly spend to upwards of $100 for indoor cycling, barre, yoga, bootcamp and other classes either directly from boutique fitness studios or through services like Classpass. So while these higher-end offerings are gaining in popularity, they aren't as a big of a threat as Spruce Point is making them out to be.

Also, the firm said Planet Fitness's margins are unsustainable, in part because such a large portion of revenue comes from the sale of equipment to franchisees. But so far, there's no evidence that franchisees will renege on agreements to replace equipment every four to seven years.

Heavy Lifting
Spruce Point believes Planet Fitness franchisees that are marginally profitable or even unprofitable may negotiate their way out of periodically replacing equipment.
Source: Bloomberg, company filings
*Franchisee-owned stores are required to replace their equipment every four to seven years based on the life of the specific equipment.

On the other hand, Spruce Point posed questions that deserve to be answered, like why Planet Fitness stopped disclosing the number of members in its most recent annual report and whether placement revenue -- the amount charged for assembling and placing cardio and strength equipment into gyms -- should really be classified as franchise revenue. Also, if rivals like Town Sports International and Life Time Fitness have been willing to disclose periodic attrition rates (a measure of membership cancellations), is Planet Fitness not following suit because it has something to hide? 

Another eyebrow-raiser is Planet Fitness's belief that there's potential to quadruple the number of its U.S. clubs to over 4,000, a number Spruce Point believes was arbitrarily chosen to "sell a fairytale." The company has said in filings that its franchisees have signed area development agreements to open more than 1,000 new clubs in the next five years, which is a start -- it gets them at least halfway to its goal. Although it's no wilder than SoulCycle's view that there's opportunity to grow to at least 250 studios in the long term from a base of around 50 today, it's hard to see how either company hits those targets without cannibalizing existing locations. 

Strength in Numbers
Most Wall Street analysts hold a "buy" recommendation on Planet Fitness.
Source: Bloomberg

And while it's notable that 12 of 13 Wall Street analysts surveyed by Bloomberg have a "buy" recommendation on Planet Fitness -- giving it an average price target of $20.40--  it's not entirely surprising. Eight of the 12 work at firms that were involved in the company's IPO. But it's the acceptance of their analysis that has seen Planet Fitness's shares -- until now -- trade well above 13 times forward earnings before interest, taxes, depreciation and amortization. That's in line with other franchise-focused companies, many of which are restaurants. 

Exact comparables are hard to find because there aren't any other sizable publicly-traded sports club operators: Life Time Fitness was taken private last year for 8.7 times its estimated 2016 Ebitda, according to data compiled by Bloomberg, while Town Sports International has shrunk to a market cap of just $46 million. 

Private equity firm TSG Consumer Partners still owns roughly two-thirds of Planet Fitness's voting shares, and the firm's profits are a little less healthy following this increased skepticism. As with any private equity-backed IPO, it will sell out eventually. Spruce Point's thesis has just pushed out its finish line. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at