Planet Fitness Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the conference over to Stacy Caravella, Vice President of Investor Relations. Stacy, you may begin your conference.

Speaker 1

Thank you, operator, and good morning, everyone. Speaking on today's call will be Interim Planet Fitness' Chief Executive Officer, Craig Benson and Chief Financial Officer, Tom Fitzgerald. Both will be available for questions during the Q and A session following the prepared remarks. Today's call is being webcast live and recorded for replay. Before I turn the call over to Craig, I'd like to remind everyone that the language on forward looking statements included in our earnings release also applies to our comments made during this call.

Speaker 1

Our release can be found on our investor website along with any reconciliation of non GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now, I will turn the call over to Craig.

Speaker 2

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q1 earnings call. We ended the Q1 of 2024 with approximately 19,600,000 members, same store sales growth of 6.2%, primarily driven by new member growth and nearly 18% adjusted EBITDA growth. Our system opened 25 new units and ended the quarter 2,599 Planet Fitness locations globally. Today, I'm going to address 3 topics. First, the headwinds that we faced in the Q1 that impacted our results.

Speaker 2

Second, our decision to raise the Classic Card price and third, the exciting announcement about our new CEO, Colleen Keating, who joins us on June 10. The increase of approximately 900,000 net new members in the Q1 was below our expectations for what has historically been our highest net growth quarter pre pandemic. The year began with national media headlines about the rising cases of COVID as well as RSV and other respiratory infections that may have made people hesitant to go to public places, including gyms, especially in the first half of January. In the typical January, fitness or gyms are among the top search Internet items. This year, while they were still among the top search items, both flu and savings related items were even higher.

Speaker 2

Additionally, an industry source noted that many brands in the fitness industry experienced a similar soft beginning of the year. We also had double digit decreases in our website traffic. While we continue to see more than 80% of our joins come via online channels during the quarter, we had fewer people visiting our website to potentially join Planet Fitness. Usage, which historically correlates with join trends, was the same on a quarterly basis year over year. However, it was down significantly in the 1st couple of weeks of January during the peak of our joint season.

Speaker 2

We also believe that a contributing factor to our lower net joints in Q1 versus last year was the effectiveness of our advertising campaign. We believe that this is due in part to the messaging not resonating as broadly as we anticipated as well as our strategic decision to not include price pointed offers as part of our nationally funded portion of the advertising. We made this decision because we are conducting pricing tests in several markets to inform our pricing strategy going forward. In a study that we commissioned to assess our Q1 campaign, consideration of Planet Fitness is trending upwards and is the highest it's been in years. However, the lack of a price point in our national funded January sale ads may have created less urgency for consumers to get off the couch and join.

Speaker 2

To a far lesser degree, the Q1 softness also derived from a reaction to an incident regarding our nondiscrimination policy. The isolated incident took place on March 11 in an Alaska gym. Media mentions relating to the incident peaked in the middle of March, which we believe contributed some of the softness we saw in joins for the balance of the month as well as some increase in cancels. This policy has been in place for more than a decade and is not dissimilar from other industry peers, including long time brands such as the YMCA. As a result of these headwinds we faced in Q1, we are updating our 2024 guidance targets to which Tom will cover.

Speaker 2

Now to our pricing tests. Last fall, we started testing 2 price points for the Classic Card, a $15 and a $12.99 in about 100 stores each. Both reverted back to $10 during the national sale periods and the advertising in those markets communicated a call to action with an explicit saving in monthly dues to join before the sale expires. We added an additional test in December to include the New York DMA, where we kept the price at $14.99 regardless of a national sale. We continue to run these tests through the April sale.

Speaker 2

We use disciplined data driven approach to determine the best balance between the higher dues while minimizing loss of membership. Based on our learnings, we decided to change the price of the Classic Card to $15 It drove the most significant increase to average unit volumes with the least impact to the rate of joints. The increase will be effective this summer only for new members. We continue to test different promotional strategies as I believe a good portion of our focus on innovation includes exploring pricing and amenities. To that end, we'll be starting black card price tests around the time the system migrates to the new classic card price.

Speaker 2

Tom will address more specifics on the rollout of the classic card price increase. Finally, we announced in April that Colleen Keating will be joining us as CEO next month. Her appointment follows a thorough extensive search process conducted by the Board and we could not be more thrilled to welcome her to Planet Fitness. She brings over 3 decades of experience across hospitality and real estate, as well as expertise in operations, franchise and brand management and leading consumer facing organizations. She's excited to join an industry leader that's had significant runway for even further growth, both domestically and internationally, and she's eager to get started.

Speaker 2

I will work closely with Colleen and the management team to ensure a seamless transition. Now for a quick update on our CFO search. The search is well underway. We have interviewed and are considering a number of promising candidates. Colleen will become involved once she officially starts us in June.

Speaker 2

Finally, last week, I had the opportunity to address our franchisee community at their annual conference in New Orleans. We had great conversations around new initiatives, including building clubs for smaller markets, which we kicked off a few months ago. We also discussed how we're ahead of schedule to reduce new unit and remodel build costs by at least 10% before the end of the year. Other aspects of the new growth model were part of the discussions which led to a real sense of excitement about a greater return on their investment and our long term store growth opportunity. I am grateful to have had the opportunity to serve as Interim CEO, especially during a period in which we put in place a number of initiatives that we believe will support the company's long term growth trajectory.

Speaker 2

I also look forward to returning to my role as a Board member and a franchisee with an even greater appreciation that I've gained for the Planet Fitness brand, our members, our franchisees, our leadership team and our shareholders. Now, I'll turn it over to Tom.

Speaker 3

Thanks, Greg. Before I get to our Q1 results, I'd like to cover our upcoming Classic Card price increase as well as our plans to explore refinancing a portion of our debt this year. As we said previously, we've been working on a number of initiatives to further improve our already strong store economics and new store returns. Our new franchisee growth model that we unveiled in Q3 of last year is primarily focused on reducing the capital requirements for opening and operating a Planet Fitness franchise location. For the past several months, we've had 3 different groups of stores testing 3 different prices for our Classic Card membership.

Speaker 3

Based on those test results, we have decided to increase the price from $10 to $15 to further enhance the average unit volumes for our stores. Our Classic Card membership has been priced at $10 since 1998, which based on inflation would be about $20 in today's dollars. As Craig noted, the price increase will go into effect this summer. Only new members who join after it goes into effect will pay $15 for a monthly membership fee. Current Classic Card members will continue to pay $10 for the duration of their membership.

Speaker 3

It will take some time for the benefit of the price change to expand our store level margins as the price increase will only be on new Classic Card memberships. Additionally, more than 60% of our members join as Black Card member. Now to our debt. We have a tranche of debt of approximately $600,000,000 that comes due in September of 2025, which we anticipate refinancing in the middle of this year subject to overall market conditions. Based on forecasted interest rates, we believe our overall weighted average interest rate for all of our debt would still be below 5% when we refinance that tranche.

Speaker 3

Now to our Q1 results and our revised 2024 outlook. All of my comments regarding our quarter performance will be comparing Q1 2024 to Q1 of last year unless otherwise noted. We opened 25 new stores compared to 36. We delivered system wide same store sales growth of 6.2% in the Q1. Franchisee same store sales growth increased 6.3% and corporate same store sales increased 6.2%.

Speaker 3

Approximately 70% of our Q1 comp increase was driven by net member growth with the balance being rate growth. Black Card penetration was 62.1%, an increase of 10 basis points. For the Q1, total revenue was $248,000,000 compared to $222,200,000 The increase was driven by revenue growth across the franchise and corporate owned segments. The 12.2% increase in franchise segment revenue was primarily due to increases in royalties, new stores and ad fund revenue. For the Q1, the average royalty rate was 6.6%, up from 6.5%.

Speaker 3

The 15.6% increase in revenue in the corporate owned store segment was primarily driven by the same store sales growth as well as new and acquired stores. Equipment segment revenue decreased 8.6%. The decrease was primarily driven by lower revenue from equipment sales to new and existing franchisee owned stores, which was driven by fewer new store placements as well as the shift to more strength equipment versus cardio. As we noted last quarter, the shift in the equipment mix brings down overall sales on a per store basis. We completed 14 new store placements this quarter compared to 18 last year.

Speaker 3

For the quarter, replacement equipment accounted for 59% of total equipment revenue compared to 58%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee owned stores, amounted to $19,000,000 compared to $19,400,000 Store operation expenses, which relate to our corporate owned store segment, increased to $74,400,000 from $66,000,000 due primarily to new stores opened or acquired. SG and A for the quarter was $29,200,000 compared to $27,800,000 Adjusted SG and A was 27,300,000 dollars This includes a $1,600,000 adjustment for severance related expenses incurred in connection with a reduction in force that we mentioned on our last earnings call, as well as a $300,000 adjustment for CEO transition related expenses. National advertising fund expense was $19,800,000 compared to $17,000,000 Net income was $35,000,000 adjusted net income was $47,300,000 and adjusted net income per diluted share was $0.53 per share. Adjusted EBITDA was $106,300,000 and adjusted EBITDA margin was 42.9% compared to $90,200,000 with adjusted EBITDA margin of 40.6%.

Speaker 3

By segment, franchise adjusted EBITDA was $76,100,000 and adjusted EBITDA margin was 73.2%. Corporate store adjusted EBITDA was $42,400,000 and adjusted EBITDA margin was 34.6%. Equipment adjusted EBITDA was $4,800,000 and adjusted EBITDA margin was 22.2%. Now turning to the balance sheet. As of March 31, 2024, we had total cash, cash equivalents and marketable securities of $486,400,000 compared to $447,900,000 on December 31, 2023, which included $46,200,000 $46,300,000 of restricted cash respectively in each period.

Speaker 3

In Q1, 2024, we used $20,000,000 to repurchase slightly more than 300,000 shares. Total long term debt, excluding deferred financing costs was approximately $2,000,000,000 as of March 31, 2024, consisting of our 4 tranches of fixed rate securitized debt that carries a blended interest rate of approximately 4.0%. Finally, moving on to our updated 2024 outlook, which we provided in our press release this morning, we're providing wider ranges for the targets that we are updating given the current choppy environment in which we're operating. We continue to expect between 140 and 150 new stores, which includes both franchise and corporate locations. We also continue to expect between 120 130 equipment placements in new franchise stores.

Speaker 3

For the full year, we continue to expect that re equipped sales will make up approximately high 60% of total equipment segment revenue. We also continue to expect that this year will look more similar to 2023 in terms of the quarterly cadence for those sales as it was a more typical year versus the prior 3 that were impacted by COVID. As I noted earlier, the shift to more strength equipment versus cardio will bring down overall sales on a per store basis. During Q1, we continued to refine the mix that will result in slightly lower sales per store. We are maintaining our equipment segment profit dollars, so therefore margin rate will increase.

Speaker 3

We now expect system wide same store sales growth to be between 3% 5%. Previously, we expected between 5% to 6% growth. This reduction is driven by the factors that Craig noted earlier. All of the following targets are updated to reflect the changes I just mentioned and represent growth over fiscal 2023 results. We now expect full year revenue to grow in the 4% to 6% range.

Speaker 3

Full year adjusted EBITDA will grow in the 7% to 9% range adjusted net income to increase in the 6% to 8% range and adjusted earnings per diluted share to grow in the 7% to 9% range. We continue to expect shares outstanding to be approximately 88,000,000 which is inclusive of the repurchase of 1,000,000 shares over the course of the year. The amount we shared back at our Investor Day in November of 2022. And we continue to expect our net interest expense to be approximately $70,000,000 which assumes we refinanced the tranche I mentioned earlier at 6.5%. We will update any applicable guidance targets if necessary pending the completion of the anticipated refinancing transaction later this year.

Speaker 3

Lastly, we continue to expect CapEx to be up approximately 25% and D and A to be up between 11% to 12%. Now despite a challenging start to the year, we believe that the changes we have made as part of our new franchisee growth model, along with the upcoming price increase, improve our store economics and enhance our differentiated brand and market leading position. We continue to be a highly attractive franchise system that generates strong and stable free cash flow for long term sustainable growth and increased shareholder value. I'll now turn the call back to the operator to open it up for Q and A.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Simon Siegel with BMO. Please go ahead.

Speaker 4

Thanks. Hey, everyone. Good morning. Hope you're all doing well. I was hoping you guys could elaborate a little bit on the lower guidance, particularly just in light of what looked like a pretty solid quarter for member growth and top line ex equipment.

Speaker 4

So is there anything you've been seeing since the start of the quarter to raise that concern, any uptick in churn or anything like that? I guess I'm just trying to understand your characterization of the disappointment in the quarter. I guess that member growth was slightly below the last 2 years, but still seem pretty solid. The comps were encouraging and you had the new members. So I just I guess I would have thought this was a pretty good quarter excluding equipment miss.

Speaker 4

So any color you could give there? And then Tom, does the number does the guidance include any of the lift or assumptions from the price hike to 15? Thank you.

Speaker 3

Yes. Hey, Simeon. So in terms of the quarter, we did add we did have decent member growth, 900,000. It wasn't where we expected it to be. And some of the things we mentioned on the call, we knew when we had our earnings call in February and we provided our outlook.

Speaker 3

I think what we didn't know is sort of what happened in March. 1st part of March was pretty good. Joins and cancels were pretty good. And then once social media sort of blew up with our over our policy issue, we definitely saw a change in the results in the back half of March. Joins and cancels were fairly significantly affected.

Speaker 3

Now the good news is and we're not going to provide a lot of color on Q2, but at a high level just to provide some perspective. The good news is we've seen joins and we've seen the joins rebound, but cancels have remained elevated. So that's really principally what we have seen and therefore factored into this latest revision in our outlook. There were some things in Q1 early on that we talked about in January. Our business is definitely probably way more sensitive to what happens in those 1st couple of weeks of January than most other ones.

Speaker 3

So we talked about that. But then things definitely were getting better across the back half of January through February and in the first half of March as I described. So the good news is the joins have bounced back. And while we're never totally pleased with what we're seeing, it's better for sure. It's the cancels that have remained elevated.

Speaker 3

And the second question, yes, the price increase won't have a huge impact. As you know, our business, it only is affecting new members and with it coming in the back half of the year, it's not going to have a huge impact, but it is factored in.

Speaker 4

Within the pricing sorry, yes, Craig. Sorry.

Speaker 2

Just let me add, one of the benefits that Planet has for its members is the price for life and we've never made a big deal about that. But as part of this price change, we're going to highlight it much more. And so we ought to get the benefit of a subscription based business that doesn't change pricing on people in the middle of their usage of those services or what have you. So we're going to start to really trigger that as well. Sorry to cut you off, Samir.

Speaker 4

No, that's great. That's what I was going to ask. I was going to ask if you in the test, if you saw and you have a churn bid again, where people want to keep their original grandfather price in there.

Speaker 3

Yes. We're not going to get into all the sort of all the different metrics, Simeon, that we saw in the test. But definitely, as you know, we read it for a long time, read all of the tests for a long time and feel really good about seeing those same results when we roll it out because of how thoroughly it was tested.

Speaker 4

Great. Thanks so much guys. Best of luck for the rest

Speaker 5

of the year.

Speaker 3

Yes. Thank you, Sameer.

Operator

Your next question comes from the line of Chris O'Cull with Stifel. Please go ahead. Chris O'Cull from Stifel, your line is open.

Speaker 6

Thanks. Sorry about that. I was on mute. Craig, the company has had issues with marketing campaigns or media buying during the more important New Year's Eve membership season in the past few years. I'm just wondering what's the company doing to ensure a higher probability of success going forward?

Speaker 2

Well, as you know, Chris, we are really aggressively chasing a brand identity strategy that we've not had in the past, which will help us with marketing, because we will have, as we talked about just a minute ago, Price for Life is an example. We've never talked about that. And then some of the other benefits we offer our membership, whether it's perks or opportunities to use different clubs with the black card and that kind of thing, bring a friend. We don't talk about that stuff and we don't put it in the context of our brand identity. So we have had issues in the past with different people we work with.

Speaker 2

That's been pretty much fixed. We're down to 2 agencies now for the entire LAF system. We used to be as high as 16. For 1 year, we went to 1, and now it seems to have settled out. So I think we're doing better on that front.

Speaker 2

I think the real challenge is hitting the market with a real branding effort to talk about the benefits of Planet Fitness beyond just price and offering that to our membership for two reasons. 1 is to get them to join, but the other is to get them to stay. And so if we could kill both of those birds with 1 stone, that'd be great.

Speaker 6

You guys called out a lot of different factors affecting joins during this quarter, everything from the weather to the situations with the bathroom incident. I mean, I'm just curious, how confident are you that the pricing test did not have effect on the joints and the new membership trends in the markets that you were testing the higher prices?

Speaker 3

Yes. It's a Go ahead. Yes. Hey, Chris, it's Tom. It's a good question.

Speaker 3

And just to clarify, we did not cite weather as a subscription business. Thankfully, it's never typically a big impact for us. So many other things and as you know, it's never one thing. It's usually a combination of things. So we try to highlight what we thought were the larger things that would impact it.

Speaker 3

To your question about the price test, we feel very good because the results that we saw through the decision that we took as a team here to change the price, those results were sort of consistent with what we had seen in the prior month. So essentially what we saw was not an isolated or geographic impact. It was more broad more comprehensive. So the result of that was that we feel good about the fact that the results moved the way we expected and saw in the previous months in the test. So no concern with this particular incident, which we hope is behind us affecting the veracity of the test results.

Speaker 3

And Chris,

Speaker 2

the other thing is, as you probably know, but I want to make mention of it, we always have a control group to match up against the test group. And the control group is very similar to the test group in the types of clubs, location, it's that kind of stuff. So we have controls built in to be able to see anomalies between pricing changes and other things, including things like weather, which Tom said we didn't measure, but there may be periods of time where it gets a little busier than others because people can get out or they can't. And so we do a pretty thorough job of controlling the data from the test and with another group that's not involved

Speaker 4

in the test.

Speaker 6

Okay, great. Thanks guys.

Speaker 3

Thank you, Chris.

Operator

Your next question comes from the line of John Heinbockel with Guggenheim Partners. Please go ahead.

Speaker 7

Hey, guys. Wanted to start with, I think, Tom, you said, I don't want to paraphrase, but something about the right having that social media stuff not behind you, but having seen the worst. So I guess it's not your assumption is it's not getting worse. I guess built into the guidance is that it will not improve. Correct me if I'm wrong, right?

Speaker 7

Your assumption is that it will kind of stay the same. And then how do you address that, right? How do you address that issue without drawing more attention to it? And it seems like very difficult to do that.

Speaker 3

Yes, John, just to make sure I'm clear, what I was talking about was really the social media mentions on that. Hopefully, it's kind of dying down. It was certainly not broad scale, but it definitely had an impact. And what I would say is and why we talked about providing the wider ranges. It is an election year.

Speaker 3

There are things that swirl around and it's certainly been a choppier 1st few months than we expected coming into the year. So I think it's with that in mind that we provided the wider range to ensure that some of what we're seeing is factored into our outlook and to the degree that that ramps up or down a little bit is why we broaden the range. In terms of how we're thinking about the rest of your question, I'll

Speaker 2

pass it to Craig. Yes. So I think we've done a good job of navigating through this whole incident, including involving federal authorities in some of the work that needed to be done. And so I go on and get take my hats off to all of our franchisees and the employees here for navigating through this difficult period of time and hopefully getting to a better side.

Speaker 8

Okay.

Speaker 7

And then maybe the other question with regard to pricing, right? So $15 is a decision been made on you'll still run promotions. Do you run them at 10? Do you run them at 15? 15 becomes the new 10, right?

Speaker 7

I guess, with no money down. And then you also referenced Black Card, right? So I don't think you want to promote that. So that's really a study on like you had in the past, whether you take that up a buck or 2 or you're thinking about something different?

Speaker 2

Yes, we're going to test a couple of different versions of the Black Card with pricing. We're also going to try and rejigger some of the amenity portions of it if possible. So there may be a few different iterations here of being able to test Black Card. We do put Black Card on sale from time to time. So it's not that we only put the White Card on sale.

Speaker 2

With regards to that, we're still working through, as you know, we're a promotional brand. I don't like to get away from some of the promotion we've done in the past because it's been 100% promotional based. But there's more levers to pull as far as promotion goes, whether it's free months or other things that we could put into the mix that we haven't thought of doing in the past. And I think you'll see more variety of that and just how it rolls out and what we do is undefined at this point in time. We know we want the system to shift up to $15 and use that price as the price going forward if possible.

Speaker 3

Yes. And John, I would say, by an undefined, it's really for competitive reasons, we don't want to signal what we're going to be doing promotionally and when we're going to do it. So but again, we feel good about it. And as Craig has pushed, we want to continue to test and learn our way into finding things that are accretive. And as you know, we take the black card price up every couple of years.

Speaker 3

The last one was May of 'twenty two. So there's certainly, we think room to test different options here as we move the Classic card.

Speaker 9

Thank you.

Speaker 3

You got it.

Operator

Your next question comes from the line of Megan Alexander with Morgan Stanley. Please go ahead.

Speaker 10

Hi, good morning. Thanks very much. I wanted to come back to just the comments on member growth. I guess you did talk about a consumer looking for savings. We've heard from a lot of companies.

Speaker 10

There's been a lot of bad messages about the consumer, particularly the low end consumer. So I guess how do you reconcile what we're hearing a bit in the broader market just about the consumer environment with maybe what you've seen from a membership perspective, understanding you've had some noise? And then how do you think about raising price into the summer months when the summer pass member typically joins that high school member typically joins at the white card? And there was an article yesterday in the journal about how Gen Z seems to have more credit card debt than generations before. So just trying to understand whether there's anything there from just a low end consumer perspective that might be perhaps pressuring things and how you're thinking about it as we head into the high summer pass period?

Speaker 10

Thanks.

Speaker 3

Yes. Hey, Megan, it's Tom. I'll start that. So I think broadly, we all see the same things. I think the consumer is definitely squeezed with multiple years of heightened inflation, higher interest rates, if you got a mortgage read recently mortgage payments were up about a third from when rates were a little were lower.

Speaker 3

When we look at our results from a joins and cancel standpoint across several different income brackets, household income brackets, there's very little deviation. So it's not like we're losing the low end or gaining the high end. It's you could throw a very small blanket across all those numbers when you index them. They're really quite tight. So we think it's probably a bit broader in that sense.

Speaker 3

The high school summer pass, we love that program. We're doing it again. It exposes our brand to so many people for free. That's really the benefit and the fact that we get a few 100000 teams to then subsequently join, we think is great. But I think repeatedly now this will be our 3rd straight year, 4th in total of running high school summer pass.

Speaker 3

This is a great thing for our brand and to help kids, if they're not already doing it to start living a healthier life. So we think the pricing change that we're talking about here, again, we haven't talked specifically about the timing and how that affects high school summer pass. But we think whether that affects this year's group or next year's group, it's still a heck of a value for $15 And to Craig's point, probably not emphasizing in our 32nd spots, the pricing messages can sometimes drown out all the other benefits or crowd out all the other benefits that we're trying to convey. So by better balancing that message, we think the value will increase, which should drive more demand. But it's not just about price, it's about the rest that we offer.

Speaker 2

And I just had 2 things, Megan. I don't think we've gotten credit price or summer pass in the ways we should. This year we're going to give 3 months to every member if we get $3,000,000 like we had last year. That's $90,000,000 worth of value that we're putting into the marketplace to allow teens to feel better physically and mentally. And so it's important to highlight, I think for the world that Planet Fitness is putting its money where its mouth is by inviting young people who've been through a difficult period of time, both in their school lives and outside lives to use exercise as a way to help them deal with mental or physical challenges they may have.

Speaker 2

And I think the other thing that's important, rolling out prices, Tom mentioned last time we did it was May 2022. And the reason we like to do it in the slower summer months is because any price change takes a while to burn in. And so we use the slower months as a burn in period of time for new pricing. It generally allows us to get through that change period and come back out the other side before we get into the busier time of year for us.

Speaker 10

Got it. That's helpful. And then maybe on the unit opens just as a follow-up. Can you talk a little bit about how $25,000,000 in the quarter came in perhaps relative to your expectations? You maintained the year.

Speaker 10

I think maybe puts and takes rates are a little bit higher. Maybe you can give us an update on the real estate availability and how that looks and just your overall confidence level in that placement outlook? And do you expect the pricing perhaps isn't going to have an impact on your top line or bottom line results this year. But is that something that should start to impact the development outlook for franchisees this year? Is that more of a 25% story as well?

Speaker 2

I think franchisees take in consideration all the different things we've done as to their outlook. I mentioned in my opening remarks, I just came back from the conference in New Orleans. We couldn't talk about price changes there. And so they weren't privy to that. But clearly, that was one of the things that was top of mind for them.

Speaker 2

And so we spent a lot of time talking about the new growth model and some of the progress we've made on cost cutting and that kind of stuff and in fact smaller clubs in markets that can sustain a 20,000 square foot box. CBRE came out with a statistic I think fairly recently that said the amount of available spaces roughly going to be half of what's able to be taken down this year. So it continues to be challenging for us. Clearly, there's been some retailers that are running through difficult times. We're trying to be all over that as ways to sort of mitigate some of those challenges.

Speaker 2

But I think all in all, I was very pleased again based on the comments I made in the opening script With the tone and tenor of New Orleans conference, pretty much everybody was there And I got a lot of time to spend with the different franchisees, both 1 on 1 and in a group setting. So I feel very good about this company and where it is right now. I still think we have work to do for sure, But there's really great opportunities.

Speaker 10

Awesome. Thank you so much. Best of luck.

Speaker 3

Thanks. Thanks Megan.

Operator

Your next question comes from the line of Rahul Krasupalli with JPMorgan. Please go ahead.

Speaker 8

Good morning, guys. Thanks for taking the question. This is on franchise leverage in the system. Certainly, the pricing decision should alleviate a lot of narrative continued to be key, but it's something not under your control. How has the sentiment been in the convention specific to the leverage concerns?

Speaker 8

And Craig or Tom, is your sense that franchise consolidation here, given the transactions we are seeing out there will help some of these large franchises to compete better for the targeted real estate opportunities? And I have a follow-up on marketing.

Speaker 2

Sure. We are so fortunate that we have now under 100 franchisees. And the reason I say that is because as you know I'm part of the Duncan Group too and we have 2,000. So you can get to a conference in New Orleans and really get some face time with all these different factions. So we have really sophisticated operators in the system.

Speaker 2

Clearly, by now, we expected interest rates to at least be headed in the opposite direction of where they have been headed in the last couple of years. That is not happening. But most of our operators are sophisticated, have sufficient capital and not huge amounts of leverage. So they're able to sustain their business without a lot of problems. And so again, I feel really good about where we are with price changes as far as taking costs out of clubs and looking at different things that we've done with the new growth model to help them through the difficult times of inflation, which this company has never really had to deal with having been founded in 1992.

Speaker 2

I'm old enough to remember inflation in my 16% home mortgage back in the day. And this company has not had to face that, but I think we've hit square on with now pricing changes and changes CapEx and build outs and remodels and re equips, so that we are really working as a partner with our franchisees to keep this ball rolling.

Speaker 8

Thanks for the color there. On the marketing mix, would you take this opportunity based on your prior comments on the call to revisit the national versus local mix? And also do you think approaching with a clean slate, focusing on the price point promotions and whatnot would make a lot of sense at this time?

Speaker 2

Yes. So Raul, I think marketing needs to be addressed in the way that you talked about as well as other ways in the messaging we're putting out. So I think it's a whole different look at things. I in the first time that I met with the franchisees in October, they had separate conference, talked about rejiggering the NAF and LAF, which is National Advertising Fund and Local Advertising Fund. We didn't get into any specifics, but they clearly understand that over time we're probably going to have to relook at the way we do it and reallocate resources so that we can have a branding campaign nationally that's consistent, concise and more cost effective.

Speaker 2

And so there's a lot that needs to be done and I do think over time we will start to shift.

Speaker 3

And Rahul, I think Colleen coming in as our new CEO with both franchise multiunit hospitality and marketing experience will help shepherd that journey.

Speaker 8

Thanks a lot for the color guys and good luck with everything.

Speaker 3

Thanks, Rahul.

Speaker 9

Your next question comes from the line of Sharon Zackfia from William Blair. Please go ahead.

Speaker 11

Hi, good morning. I kind of want to make sure everyone understands the arc of membership. There's a lot of moving parts this year. I guess you talked about obviously what happened with the social media noise in March and it sounds like rebounding joined subsequently, but elevated attrition. Are you looking at the Q2 having attrition outpaced joins?

Speaker 11

Are we going to see a sequential kind of down quarter in membership?

Speaker 3

Yes. Hey, Sharon, it's Tom. I appreciate the question. As you know, we don't guide on membership. And I think what I would say is all the things that we expect to happen in membership, and again, it's a forecast, right?

Speaker 3

We don't know are factored into our same store sales which is the primary driver there. As you know member growth is still typically 70 ish percent of our same store sales growth. So while it's still positive, it's definitely called down and also with a wider range, because it is a little bit more difficult to predict and we certainly have seen a fairly consistent trend in cancellations Year on year, we had a number of quarters with year on year improvements in attrition. More recently, I think in Q4, it was more flat. And in Q1, in the early part, it was kind of a similar trend.

Speaker 3

And then it definitely elevated in the back half of March through more recent days. So that's factored into how we adjusted our outlook for same store sales and the cascading effects or ripple effects on all the other metrics.

Speaker 11

Thanks for that. And then I just want to talk about kind of timing of the Classic card increase. I mean, I think in the press release and in this call, you talked about consumers looking for more value. It does seem like an odd time to take a 50% price increase on the Classic Card. I understand why the franchisees would want it.

Speaker 11

But I'm also curious competitively where you ran these tests and there are going to be regions where you're not the lowest price anymore. So how do you think about that and how do you think about the messaging associated with that price increase?

Speaker 2

Sharon, I'm not sure that what competition may or may not do. There's also a school of thought that if we move, other people moved, it's sort of been waiting for us to do something. We haven't touched the Classic Card since 1998, dollars 10 as Tom said in his opening remarks, I think it's worth about $21 $10 worth around $21 now. And we've seen in every industry people moving price. So it is not going to come as a shock to anybody that we are moving a price that's been in effect for a long, long time, 25 years.

Speaker 2

And so we again tested it pretty rigorously in multiple markets with good control groups and again saw positive results. We think that this is the right time to do it. We also think it's the right time to look at different options on the black card, which may or may not change, but we have to be aggressive in testing and innovating amenities and pricing. And so we're going to do that. OpEx and CapEx are 2 ingredients for running a successful club and some of these price changes do change some of the OpEx calculations that's going on whether it's changes in pay scales and or it's changes in rent or it's changes in depreciation schedules, they all have changed.

Speaker 2

And so we need to recognize that.

Speaker 3

And Sharon, maybe just to add a couple of things to Craig's comments. As you know, about 60% of the people who join, join as Black Card members. So that is an important point for those who aren't familiar. I know you are. And I'd say the second point back to what Craig said, we're a promotional brand.

Speaker 3

We're trying to get people off the couch. 40 ish percent of our new members have never belonged to any gym in their life. So I think it's just a question of the messaging and the types of promotions, but we're not saying back in the day, we're not doing a JCPenney of walking away from all the promotions and going to full price. That's too abrupt. I think it's just a matter of changing the elements, but still not taking our foot off the promotional accelerator.

Speaker 11

Thank you. That's helpful.

Speaker 9

Thank you. Your next question comes from the line of Joe Altobello from Raymond James. Please go ahead.

Speaker 5

Thanks. Hey, guys. Good morning. So first question on the price change. I understand you couldn't share the $15 level with franchisees ahead of time, but I'm sure you've gotten plenty of feedback during the test.

Speaker 5

So what does that look like? And has it been uniform or does it vary by market since $15 in one geography is a lot different than $15 in another for example?

Speaker 2

Yes, but the interesting part is that we look to test across different demographics, markets, and again with controlled roofs and matched up pretty well. And we were able to say that the price change to this $15 level would work across the board. And so we did take all that into consideration. Again, we spent a long time on this test. You recall, Joe, that we started the first set of tests last August and they progressed through the fall and all the way to almost April.

Speaker 2

And so we do have a lot of test data by markets. It just it seems like the right time to do what we did and the right messaging and again the feedback from New Orleans again we couldn't tell them, but a lot of talk about needing some relief on the pricing front.

Speaker 5

Okay, Very helpful. And then maybe a second question on the advertising campaign. You mentioned it wasn't as effective as you would have hoped. Was the big issue the inability to highlight a uniform price, which I guess now changes going forward?

Speaker 2

Well, it's a factor. It's not the factor. And so the last portion of the advertising in that Q1 is 5x ish more than the national advertising. So it's a big thing. And the local advertising did have a pricing element, the national did not.

Speaker 2

So but again, I go back to the fact that we have to be more than just about price. Tom's point about promotion is we'll always be a promotional brand, totally get it. But we need to be also talking about all the other benefits we bring to the market. And I think that creates stickiness. And having a brand allows us to be more targeted towards reinforcing a message that we've found to be successful versus not having a successful brand where you're taking potshots at what might work and what might not.

Speaker 2

And so and it's always anchored around promotion. So I think Colleen is going to come in and do a great job of this because as Tom mentioned earlier, she's in her past has juggled 10 brands simultaneously and you can't step on one's toes for the benefit of the other and you have to clearly create market space for each one of them with a differentiated message. So she knows way more about this than I do by a long shot. So I'm looking forward to her coming in.

Speaker 5

Got it. Okay. Thank you.

Speaker 3

Thanks, Jeff.

Speaker 9

Your next question comes from the line of Max Ratlanko from TD Cowen. Please go ahead.

Speaker 12

Great. Thanks a lot, guys. First, can you remind us how many members gyms open with these days? And what does the member waterfall look like over the 1st few years? And then you previously noted that the 5 point growth plan would contribute about 500 basis points to IRRs.

Speaker 12

So curious, what about this? How does this price increase compare? And then when you combine the 2, does it get franchisees IRRs potentially quite close to back in line with pre pandemic levels?

Speaker 3

All right, Max, you won the award. So the first one is on the ramp. So I think in terms of how stores open. So we measure it through presale periods day 1 and then subsequently. And I think the good news is we continue to see through Q4 and the early part of Q1 here very similar ramps that we saw pre COVID, not quite back to where they were, but definitely much closer than we've seen in the prior years.

Speaker 3

Certainly, in aggregate, the trends that we're talking about that are affecting our outlook will affect some of that ramp a little bit, but hopefully, again, that's temporal in nature. I would say that the moves that we made in the new growth model to get it somewhere between a 5% 10% cost reduction in the cost to build. We're ahead of schedule as Craig mentioned in his prepared remarks there. And the team is continuing to look at ways to find more savings that do not affect the members experience.

Speaker 6

So I

Speaker 3

feel really good about the progress the team has made on that. And combine that with the changes we made in the CapEx obligations both extending the franchise agreement from 10 to 12 years, adjusting the strength in cardio mix and all the rest that you know moving re equipped cycles out on average a year. We believe we'll definitely get us back to sort of closing more than half of the gap that we've had in our IRRs recently versus pre COVID. This pricing test, we believe, it takes a while for the members to feather in at $15 As we model it based on the results we saw over the many months of testing, we believe that after a year or so when the membership has more mixed in at $15 that there's probably a low to mid single digit improvement in AUV, which will certainly help improve the IRR. It may not get it depending on the circumstance, it may not get it back all the way to pre COVID, but further helps chip away at the remaining gap that we talked about.

Speaker 3

So where the pre COVID an unlevered IRR would might be in the low 30s, more recently it'd be in the low 20s. The changes in the new growth model get it to the mid plus 20% range. So this would just be even more accretive. May not get back to the low 30s, but we're continuing to find ways to reduce the cost which should continue to close that gap as well.

Speaker 12

Got it. That's helpful. And then this one should be a little more qualitative. But can you speak to the competitive environment? Some of your HVLP peers have been seen pretty significant growth in the opening.

Speaker 12

It seems like they might have had bit of a better Q1. A lot of those boxes are almost twice the square footage of your gyms. So just curious how you're thinking about the competitive set and whether that may have driven part of the weakness here in 1Q? And then just bigger picture, the competition today is certainly stronger than previously. It's better financed.

Speaker 12

So definitely going to be something to watch going forward. So curious how you're thinking about where the biggest opportunities are for you guys to step up your own execution because this might become a bigger risk going forward?

Speaker 3

Yes, Max, it's a good question. And I think you're right. Certainly in pockets both geographically and competitively brands, there are pockets that are stronger than others. Crunch definitely took down quite a bit of space in 2023. And some of that is where they have franchisees that are PE backed and a bit more aggressive kind of like some of our folks.

Speaker 3

There are some other bigger boxes like EOS and VASA that offer a much bigger box and a whole lot more inside of it, whether it's a pool or classes or the theater cycling rooms that some of them have. I'd say what they all don't do is provide a non intimidating environment. We still think that's the thing that sets us apart from the rest. Some use the words, but if you go in there, it's kind of loud because people are banging weights and grunting and doing all kinds of things that if you've never been in a gym is going to intimidate you. So we still think that's an important part of what we do that others don't do and really can't do based on the member they attract.

Speaker 3

So I think back to what Craig was saying about the brand, the positioning, the projection and the messaging, that's got to come through probably stronger and many people that's way more important than whether we're 10 or 15 based on some of the research we've done. Because if you've never been, we used to say people get to the parking lot and they're afraid to go in the front door because they're not sure what's on the other side. So we to the extent that we can ease that anxiety, we don't think our competitors will. Will there be more so I think they're still going after the 20%. We're still going after the 80%.

Speaker 9

And your next question comes from the line of Corrine Wolfier from Piper Sandler. Please go ahead.

Speaker 13

Hey, good morning, guys. Thanks for the question. I'd like to touch a little bit on first the international expansion. I know we've been focused more on U. S.

Speaker 13

Today, but if you could provide an update on efforts internationally and the Spain efforts, that would be great. Thanks.

Speaker 2

Yes. So we are aggressively going after the Spanish market as we speak. And as you know, made our own investment in Spain to help speed that up. We would like to get a partner to come in and help us, but we're learning a lot by being a part of this whole process and we're learning where we can be successful and what tweaks and so on and so forth we need to make in order to make the club more suitable for the marketplace in the Spanish marketplace. And then from there that will allow us to look at other European potentials to be able to leverage what we've done in Spain and the investment that we've made.

Speaker 2

So we're pretty pleased with how it's going and look forward to some short term learning and benefits to the betterment of the entire system.

Speaker 3

Yes. And it's Tom. We're looking we're targeting our first store to open Q3, hopefully the early part of Q3. And to Craig's point, we'll learn a lot and we'll affect the subsequent openings, but we've been reviewing a lot of sites. We have some in the pipeline in various stages of negotiation.

Speaker 3

So we feel good about the progress there.

Speaker 13

Great. Thank you. And then now with a new CEO hiring, I know she's still yet to start. But is there any update on progress with the CFO search? I know you had wanted to get the CEO before the CFO, but any update you can provide on the CFO search and what kind of criteria that the team is looking for?

Speaker 13

Thank you.

Speaker 2

Yes, the team started already interviewing. We look forward to Colleen coming in and helping. We've identified some internal candidate as well as external candidates and we've already started interviewing. So it is moving. Colleen will be and is hopefully slated to June 10 when she starts start in with that process as well.

Speaker 3

Yes, maybe just one more. I think we're probably in the 3rd inning or so. And hopefully, we're by the time Colleen arrives, she's got a short list of candidates to interview and make a selection from. We feel good about the progress we've made. And that will still give some time for transition based on that timing.

Speaker 13

Great. Thanks so much.

Speaker 8

Okay. Thank you.

Speaker 9

And that concludes our Q and A session for today. I would like to turn the call back over to Craig Benson for closing remarks.

Speaker 2

Great. We very much appreciate your time and patience with us today. Again, this company is, I think, well positioned based on the changes that have been made and change in leadership that's forthcoming. So I want to thank you again and look forward to talking to you soon.

Speaker 9

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.

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Earnings Conference Call
Planet Fitness Q1 2024
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