Planet Fitness Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 12 speakers on the call.

Operator

Hello and thank you for standing by. At this time, I would like to welcome you to the Planet Fitness Q2 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. I would now like to turn the conference over to Stacey Caravella.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Speaking on today's call will be Planet Fitness' Chief Executive Officer, Colleen Keating 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 Colleen, 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 the 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 Colleen.

Speaker 2

Thank you, Stacey, and thank you everyone for joining us for the Planet Fitness Q2 earnings call. I'm thrilled to be here speaking with you. During the Q2, we eclipsed the 2,600 store mark, grew same store sales by 4.2%, delivered 5.1% revenue growth and increased adjusted EBITDA by 7.2%. As I considered the opportunity to join Planet Fitness, I was drawn to 2 things. 1st, growing businesses is one of my passions.

Speaker 2

I believed I could not only contribute to the tremendous potential of our next chapter, but that I could have a real impact on it. With 30 plus years of experience in franchise businesses, real estate, operations and marketing, I've led high growth consumer businesses at scale. I believe that I have a unique perspective on our growth opportunities and the actions we need to take to capitalize on them. And second was the franchise model and the opportunity to continue to work with franchisees. Throughout my career, I've worked extensively in franchise businesses within the hospitality industry.

Speaker 2

There are many similarities between hospitality and fitness. Foundationally, both are focused on bringing an experience to life for guests or members and that they leave feeling better than when they came. Since joining in early June, I've hit the ground running. I've already visited more than a dozen clubs across 6 states plus Spain, meeting with franchisees and interacting with team members, all with the purpose of listening, engaging and seeing how our members are experiencing our clubs. We are a 30 year old brand with a solid base of about 100 franchisees and more than 19,000,000 members.

Speaker 2

I'm proud to lead this special business and build on this foundation. As CEO, my near term focus areas are: 1st, defining our growth ambition. This includes all facets of growth from stores to members to profit to increasing shareholder value. We are building out our longer term strategy and how we're going to enable and accelerate healthy growth. On the store growth side, as shown by 2 third party studies last year, we believe we can double our footprint domestically to approximately 5,000 locations, up from the 4,000 target we set at our IPO in 2015.

Speaker 2

Importantly, we are 70% larger by store count than the next 15 high value low price competitors combined and we have nearly 7 times the membership of the next largest competitor. And we're in the early innings of international store growth as further evidenced by our first European club in Barcelona, Spain. I visited the club last week and saw firsthand our brand being brought to life in an authentic way. I also visited a number of other fitness brands operating in Spain today and this furthered my confidence that we have a highly differentiated offering and tremendous runway to grow to real scale and density in the Spanish market, where today only roughly 10% of the population belongs to a gym. I also toured our pipeline sites, visited 2 clubs under construction and a number of sites currently under consideration.

Speaker 2

These were thoughtfully selected sites in areas with strong population density and population growth. I had an opportunity to spend time with our team in Spain who have the right skill set, market knowledge and depth of experience to lead our growth on the ground. At the same time, we're ensuring that we're strategic and disciplined in our ambitions, prioritizing sustainable, profitable growth and the member experience. I see our growth ambition as an ongoing journey. I'm committed to continuously exploring and identifying new opportunities to accelerate our efforts while continuing to deliver value across our stakeholders.

Speaker 2

To that end, my second priority is delivering an unparalleled member experience. We hold a highly differentiated position in the high value, low price sector of the fitness industry. We are about bringing an experience to life and sharing a deep emotional connection with our members. We take care of people so they can improve their lives and well-being. I've been truly impressed by the interactions I've witnessed between our team and members during my many club visits to date.

Speaker 2

I experienced firsthand what's so special about this brand, the sense of belonging in a community you're proud to be a part of. You immediately feel the positive energy when you walk into one of our clubs. I've always been very passionate about having feet on the street, meaning spending time in our clubs and staying close to our members and our team members who deliver on our brand values every day. We strive to ensure that there is no gymtimidation in our clubs. We also need to make sure our current members have exceptional experiences both inside and outside our clubs, so they choose to stay with us.

Speaker 2

My third priority is to evolve our brand messaging. In 2023, along with our franchisees, we estimate that we spent more than $300,000,000 on marketing and advertising. Looking forward, we have an opportunity to further sharpen our brand promise and mission in our marketing efforts as we encourage members to choose us as they embark on their fitness journeys. We need to increase our emphasis on the high value part of HVLP by communicating the unique selling points of being a Planet Fitness member. Our clubs break away from the cheap gym perception by offering unparalleled experience and a sense of belonging.

Speaker 2

There are about 140,000,000 people who live within close proximity of an existing Planet Fitness location today who don't currently belong to a gym. That's who we're looking to reach in addition to our current and former members. There are more than 4,000,000 Gen Zs who become eligible for membership each year as they age. Gen Zs continue to make up the majority of our net new joins each quarter. To this end, we launched our 4th year of the high school summer pass program in June and have more than 2,600,000 teen participants to date, which is slightly less than we had last year at this time, but is highly encouraging given that we shortened this year's program.

Speaker 2

This has been an incredibly successful relatively low cost program that yields a 5.5% conversion rate to paying members last year. Across all demographic segments, we will be evolving our messaging of why Planet Fitness and what differentiates us from the competition. Our new brand messaging will start to show up later this year and importantly in the Q1 of 2025. And the 4th area of focus is underscoring that franchisee profit drives franchisor profit through product refinement and operational efficiency. I believe in creating a culture of accountability and in having a shared goal with our franchisees.

Speaker 2

The coach versus cop mentality allows us to continuously iterate on our fantastic model by working together with our franchisees as a team. If franchisees are successful, we will be successful. This will include refining our product offering and operational efficiencies to maximize the economic value proposition of our franchisees, while delivering the most relevant on brand experience for our members. In my interactions with investors since I joined Planet Fitness, there has been a focus on when we will get back to pre pandemic new store opening levels. It's a very different macro environment than before COVID and the cost to build a new location was up by more than 30% in 2023 versus 2019.

Speaker 2

The new growth model aimed at the biggest opportunities to further enhance the attractiveness of our returns is a key lever that we pulled to address unit economics. Additionally, on June 28, the $15 pricing for new Classic Card members took effect. Just a reminder, current Classic Card members who joined prior to June 28 are locked in at the $10 monthly membership fee. We expect that after 1 year of the price being in effect, existing stores will see a lowtomidsingledigit percentage increase to AUVs with an even greater impact to new stores as the majority of their Classic Card members will be paying $15 We also launched 2 Black Card pricing tests in select markets, 1 at $27.99 and the other at $29.99 If either of these tests prove successful, this increase could also further enhance store returns. We look forward to continuing to collaborate with our franchisees and we're excited to join them at our annual franchisee conference in September as we begin the next chapter of growth for Planet Fitness.

Speaker 2

And to capitalize on these opportunities, we need a great team that competes and wins. I keep a hard hat in my office to remind me that being a builder of Blue Ribbon teams is what drives the business forward. As such, a top priority for me is the CFO search and I've been working closely with the team to identify the best candidate for the future of our brand. The search process we are running is thorough and comprehensive and we're encouraged by the quality of candidates and the enthusiasm toward the role. The search process we are running is thorough and comprehensive and we're encouraged by the quality of candidates and the enthusiasm toward the role.

Speaker 2

As the search progresses, Tom has agreed to stay on as CFO until the end of the year. We believe this timing will provide for thorough onboarding and as smooth a transition as possible. We're grateful for Tom's ongoing support and commitment to Planet Fitness. Now I will turn it over to Tom.

Speaker 3

Thanks, Colleen. Before I get to our Q2 results, I'd like to address the debt transaction that we completed in June. The beauty of our asset light franchise model is that it generates significant free cash flow. This enables us to continuously assess the best use of our cash and how we can leverage our balance sheet to enhance shareholder value. Over the last two and a half years, we have completed 2 debt transactions.

Speaker 3

One that enabled us to acquire a top tier operator in the system as well as this most recent one that funded an accelerated share repurchase. Since 2018, we have returned more than $1,300,000,000 to shareholders via share repurchases. As part of this transaction, we refinanced approximately $600,000,000 that was due next year and we upsized the deal to $800,000,000 given the favorable rates compared to what we were anticipating. This included a $425,000,000 5 year tranche with a fixed interest rate of just under 5.8 percent and a $375,000,000 10 year tranche with a fixed interest rate of just over 6.2%. Our total long term debt, excluding deferred financing costs, now has 5 tranches of fixed rate securitized debt of approximately $2,200,000,000 We use the proceeds to repay the tranche due next year, which had the highest rate of our existing debt.

Speaker 3

And as a result, our blended interest rate only increased 50 basis points from 4.0% to approximately 4.5%. We were more conservative compared to historical refinancing levels this time given the current rate environment and the existing amount of liquidity already available on our balance sheet in the form of cash and marketable securities. We want to ensure that we have a sizable amount of cash on our balance sheet to weather any storm that may come along, which benefited us greatly when all of our stores temporarily shut down due to the pandemic. Additionally, we use the proceeds to pay costs associated with the transaction and also to fund the majority of the $280,000,000 accelerated share repurchase agreement that we entered into on June 12. The Board also approved a new $500,000,000 share repurchase authorization to replace the previous one upon completion of the ASR, which will occur before the end of Q3.

Speaker 3

Importantly, we have made changes over the past year to our underlying business to reduce the cost of owning and operating a Planet Fitness location as well as our recent Classic Card price increase, both of which enhance what were already very attractive store level returns. We believe the combination of our franchise model and strong unit economics sets us up to continue to take advantage of our long term growth opportunities. Now to our 2nd quarter results. All of my comments regarding our quarter performance will be comparing Q2 2024 to Q2 of last year unless otherwise noted. We opened 18 new stores compared to 26.

Speaker 3

We delivered system wide same store sales growth of 4.2% in the 2nd quarter. Franchisee same store sales increased 4.3% and corporate same store sales increased 4.0%. The Classic Card price increase, which went into effect on June 28 did not have any impact on our Q2 same store sales. Approximately 60% of our Q2 comp increase was driven by net member growth with the balance being rate growth. Black Card penetration was 62.4% flat to the prior year.

Speaker 3

For the 2nd quarter, total revenue was 300 $900,000 compared to $286,500,000 This increase was driven by revenue growth across the franchise and corporate owned segments. The 9.1% increase in franchise segment revenue was primarily due to increases in royalties, new stores and national ad fund revenue. For the Q2, the average royalty rate was 6.6%, up from 6.5%. The 10.3% increase in revenue in the corporate owned store segment was primarily driven by same store sales growth as well as new and acquired stores. Equipment segment revenue decreased 8.4%.

Speaker 3

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 18 new store placements this quarter compared to 26 last year. For the quarter, replacement equipment accounted for 84% of total equipment revenue compared to 79%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee owned stores was $51,900,000 compared to 59,500,000 dollars Store operation expenses, which relate to our corporate owned store segment increased to $70,200,000 from $58,900,000 due to higher operating expenses in existing stores, primarily due to a timing shift in marketing spend from Q1 to Q2 of this year, as well as the impact of new and acquired stores.

Speaker 3

SG and A for the quarter was $31,600,000 compared to $32,600,000 Adjusted SG and A was $30,100,000 which includes a $1,300,000 adjustment for CEO transition related expenses compared to $31,400,000 which included a $1,200,000 adjustment for severance related expenses. National advertising fund expense was $20,100,000 compared to $17,900,000 Net income was $43,900,000 adjusted net income was $62,200,000 and adjusted net income per diluted share was 0 point 71 dollars Adjusted EBITDA was $127,500,000 and adjusted EBITDA margin was 42.4% compared to $118,900,000 with adjusted EBITDA margin of 41.5%. By segment, franchise adjusted EBITDA was 77 point $5,000,000 and adjusted EBITDA margin was 71.9%. Corporate store adjusted EBITDA was 49.6 6000000 dollars and adjusted EBITDA margin was 39.5%. Equipment adjusted EBITDA was $18,600,000 and adjusted EBITDA margin was 27 point 4%.

Speaker 3

Now turning to the balance sheet. As of June 30, 2024, we had total cash, cash equivalents and marketable securities of $447,700,000 compared to $447,900,000 on December 31, 2023, which included $47,800,000 $46,300,000 restricted cash respectively in each period. In Q2, twenty twenty four, we used $280,000,000 to repurchase and retire approximately 3,100,000 shares to date, which is approximately 80% of the stock that we expect to repurchase under the ASR with any remainder to occur as part of the completion of the agreement in the Q3. Finally, we are reiterating our outlook for 2024 including the targets we updated in June as part of the announcement of our accelerated share repurchase program. We continue to expect between 140 and 150 new stores, which includes both franchise and corporate locations.

Speaker 3

We also continue to expect between 120 and 130 equipment placements in new franchise stores. For the full year, we continue to expect that re equipped sales will make up approximately high 60% of total equipment segment revenue. Let me address the quarterly timing of both replacement equipment sales to existing franchise locations and equipment placements in new franchise clubs. During Q2, we sold more replacement equipment to existing franchise stores than we expected, which shifted those sales into the second quarter and therefore we do not expect those sales in the second half of the year, particularly not in the Q4. In terms of timing for placements in new franchise stores, we continue to expect them to be weighted to the second half with a significant SKU to Q4.

Speaker 3

As a reminder, we are maintaining our equipment segment profit dollars for new placements. With the mix shift to more strength and less cardio, therefore, we expect that margin rate will continue to be higher in the second half of the year versus last year. We continue to expect the following targets that represent growth over fiscal 2023 results. Same store sales growth to be between 3% 5%, revenue to grow in the 4% to 6% range. Adjusted EBITDA will grow in the 7% to 9% range, adjusted net income to increase in the 4% to 6% range and adjusted earnings per diluted share to grow in the 7% to 9% range based on adjusted diluted weighted average shares outstanding of approximately $86,500,000 inclusive of the shares expected to be repurchased as part of the ASR agreement.

Speaker 3

We also continue to expect net interest expense of approximately $75,000,000 excluding the write off of deferred financing costs associated with our debt refinancing transaction. Lastly, we continue to expect CapEx to be up approximately 25% and D and A to be up between 11% to 12%. Now I'll turn the call back over to the operator to open it up for Q and A.

Operator

Thank you. And the floor is now open for your questions. Our first question comes from the line of Randy Konik with Jefferies.

Speaker 4

Yes, thanks a lot and

Speaker 5

good morning. I guess, Colleen, what

Speaker 4

would be really helpful for us is maybe give us some perspective on your prior leadership roles and different industry experiences and talk about some of those and how you're going to apply some of those learnings to to strategies at Planet? And something also that would be really helpful is you highlighted in the script the kind of emphasis on the HV over the LP and HVLP. Maybe kind of give us an added kind of thoughts around what that means to you and how do you want to accentuate that part of the business?

Speaker 2

Thanks. Hey, Randy, nice to hear from you. Sure, happy to. So I think, to the first part of your question about kind of background and prior roles, as you know, I spent most of my career in the hospitality space and the hospitality industry and in really brand led organizations. A large part of my career with Starwood and then several years with InterContinental Hotels Group.

Speaker 2

And then more recently in the real estate space in the single family home rental space. And at the end of the day, there's a lot of similarities between my prior experience and the fitness space. We're really bringing to life experiences for our members here at Planet Fitness. And I often say in hospitality, we were the home away from home for weary travelers and wanted our guests to leave feeling better than when they came. And I think, what we're offering in at Planet Fitness is quite similar.

Speaker 2

Our members enjoy a great high value experience in our clubs. And let's face it, who doesn't feel better after a great work out or when you have a great work out in the rearview mirror. So, we welcome people into our clubs in a bright, friendly, engaging and very clean environment, with a plethora of equipment, and really able to help them wherever they're at in their fitness journey, their wellness journey and then have them leave our clubs feeling better than when they came. One of the other things I think that's relevant in the hospitality background versus what we're endeavoring to do at Planet Fitness is the opportunity to extend the experience outside the four walls of the club through our app, through loyalty programs and partnerships and even our Perks program. We just had a great month in June, with PERKS utilization.

Speaker 2

So there's an opportunity for us to really leverage, our very broad membership base and our high app utilization through partnerships and bringing additional offerings to our members that they value even outside the four walls of the gym. And when I think about high value, low price, certainly our pricing does make fitness accessible to most. At the same time, I really think about leaning into the HV of HVLP. And I often say to the team here, I think about the HV in capital letters and the LP in lowercase letters. And that really is about the value offering that we're bringing to our members.

Speaker 4

Super helpful. And I guess just lastly for Tom. I think it was mentioned that there's a test going on for the Black Card $2,799,000 $2,999 Can you just elaborate a little bit on when would we potentially hear about any fruits of that labor, those tests in terms of potentially implementing a price change on the black card? And then back on the white card, with that $15 now price versus $10 should we be thinking about an incremental impact being or like a noticeable impact occurring in, let's say, the front half of next year or the back half of next year? Just kind of thought process of when that kind of would flow through the numbers would be super helpful.

Speaker 4

Thanks.

Speaker 3

Yes, sure thing, Randy. So on the first part, we have 2 Black Card tests running. We actually rolled those tests into new markets where we weren't testing the classic card changes prior. Right at the time that we raised the classic card price from $10 to $15 So that's like June 28 is when those were effective. So they've only been in place about a month.

Speaker 3

And as you know, with our business, we need to let them run for a while. So we expect to run them through the better part of Q3 and maybe even into Q4 before we determine whether or not we have enough information to make a call. And if one of those beats what we're testing them up against, we're pretty thorough on how we do all that with control stores matched up, etcetera. Then we'll make a change. If it doesn't beat, then we'll stick with what we've got.

Speaker 3

So time will tell, but it takes a few months to let those run. In terms of the Classic Card, yes, that's effective for new members. As you know, it doesn't apply retro. So as new Classic Card members join, they're joining at 15 and they'll feather in over time. Now that they're only about 40 ish percent of our membership base.

Speaker 3

So it's the minority of our members, but it will affect each quarter more so than the prior quarter. And we'll talk about more what that means for 2025 when we get there. But you're kind of thinking about it right in terms of how it feathers in.

Speaker 4

Great. Thanks a lot guys.

Speaker 3

Okay. Our pleasure.

Operator

Our next question comes from the line of Simeon Siegel with BMO Capital Markets.

Speaker 6

Thanks. Hey, everyone. Congrats and welcome, Colleen.

Speaker 2

Thank you.

Speaker 6

Obviously, early recognizing it would be a small sample size of heart, but just any initial learnings you're seeing from the price hikes on the rest of the business, Curious if there's any benefit to churn? Maybe how is the black card penetration for new members that face that higher price? And then, Tom, nice to see the higher margin equipment come through. Can you elaborate a bit how go forward in terms of the trade off between revenues versus profit dollars because you're now showing us that you're realizing the benefits you were talking about earlier on? Any color there would be really helpful.

Speaker 6

Thank you.

Speaker 3

Yes, sure. Thanks, Simeon. So on the Classic Card impact, we're really only talking about Q2 here. So given that it happened at the very end, we'll have more to say on that next time. So appreciate your patience on that, but we want to stick to only talking about the prior quarter.

Speaker 3

In terms of the equipment, yes, so as we talked about the Q1 results, we didn't see the full margin increase or saw very little margin increase because some of those orders were placed before the pricing changed. And really what we're trying to do here is we remix into having less cardio in any new store and more strength equipment based on what folks want to do in terms of their workout and just rebalancing our mix in the stores. That lowers the cost of the equipment for the franchisee or the revenue for our segment. So we raised our prices so that the margin dollars that we get on a per placement basis would be equivalent to before we made the mix change to more strength less cardio. So you're seeing that.

Speaker 3

The short answer is the cost per placement for a franchisee is down high single digit, low double digit And the margin improvement is roundabout 300 basis points when it's all said and done.

Speaker 6

That's great. Thanks. And then just lastly, Colleen, any higher level thoughts on the right corporate versus franchisee ratios from your perspective?

Speaker 2

Yes. I think we believe strongly in our asset light model. Our corporate clubs, corporate owned clubs give us a great test opportunity, test and learn opportunity and we think that the 10% or ish about 10% is the right ratio. That said, as you're aware, we just launched Spain and opened our first club in Barcelona earlier this month. And we are leveraging our balance sheet to enter the market.

Speaker 2

We think there's an opportunity to get a market started using our balance sheet there and then recycle that capital with the franchise partners we continue to grow the market.

Speaker 6

Great. Thanks, Sakai. Nice job again and best of luck for the rest

Speaker 3

of the year.

Speaker 2

Thank you, Sami.

Operator

Our next question comes from Sharon Zackfia with William Blair.

Speaker 7

I guess, Helane, a question for you just given your background. I mean, clearly, everybody would love to see Planet grow its franchise unit development at a faster pace, I'm sure including yourselves. What kind of timeline have you seen historically in your prior experience on kind of what lag would incur to see that kind of growth start to accelerate?

Speaker 2

Yes. I think what I'll say, 1st and foremost is having the right team and the right infrastructure to position ourselves to accelerate growth. With that in mind, we're about to go out to search for a Chief Development Officer. So I think 1st and foremost, and you've heard me touch on the importance of having, I call it a blue ribbon team and I use blue ribbon because blue ribbon means you're winning. So really getting the right infrastructure so that we're set up for growth and we're developing the relationships to be able to accelerate our growth.

Speaker 2

So I think first step is we're about to go out to search for a Chief Development Officer. And then as I indicated in my remarks, really helping to refine and define our growth ambition is work that's begun and that we'll do in partnership with that Chief Development Officer when they are named.

Speaker 7

Thanks for that. And then I think it's an opportunity

Speaker 2

for us to accelerate growth, I guess, is what I would say.

Speaker 7

Thank you. Tom, just a quick question on G and A. I mean, I know you guys have been really good with cost controls, but it's kind of been, I think, better than most people have expected the last few quarters. I mean, how are you thinking about full year G and A? And what's the long term kind of dollar growth rate that you look to beyond this year for G and A?

Speaker 3

Yes, Sharon, it's a good question. I think for this year, what we saw happening in the early part of the year that we talked about on our last call. We knew it was going to provide some headwinds for the top line. So we wanted to make sure we were appropriately tightening our belt and offsetting that. What we couldn't offset at all wanted to be prudent how we thought about our investments and really prioritizing and making some changes.

Speaker 3

I think as we evolve the strategy that Colleen has the team working on, I think that will determine where we want to make investments and where we maybe have some opportunities to redirect where we've spent money before and that will shake out. But we're this is a growth business as you know. It's got a lot of opportunity ahead of it. And I think we want to be thoughtful about our continue to be thoughtful about our investments, but not we're not trying to save our way here. This is about funding the journey to grow the business where we want to accelerate the growth and questioning where we have investments that maybe we thought were important before, maybe aren't anymore and just really sort of reevaluating everything and stack the chips where the growth opportunities are and but not really talking about what that means for 2020 5 beyond.

Speaker 3

I think we'll cross that bridge when we get to that outlook early part of next year.

Speaker 2

Okay. Thank you.

Speaker 3

You bet.

Operator

Our next question comes from Jonathan Komp from Baird.

Speaker 8

Yes. Hi, good morning and Colleen, welcome.

Speaker 2

Thank you.

Speaker 8

I want to ask a question to you Colleen. You clearly sound excited by the opportunity to leverage plan at scale. But the business certainly is showing some of the slowest unit growth and member growth in its history here. So I'm curious maybe if you could share more of your early views on the opportunities. I don't know if that's marketing or other areas and really the feedback that you're hearing from franchisees in terms of leveraging the scale for new growth opportunities?

Speaker 2

Absolutely. So yes, I'll touch on 2 things. So when it comes to unit growth, we're really just getting our CLEGS with the new growth plan that was rolled out earlier this year with our franchisees and then also the new pricing that is certainly going to factor into their economics. So I think some of what we've identified in the new growth plan, as well as the infrastructure that we're building and as I mentioned a few minutes ago, Chief Development Officer, someone who wakes up every day and thinks only and exclusively about unit growth. I think that will help fuel the unit growth, and also expanding into new geographies, going into Spain.

Speaker 2

And I will say with the international growth, what we're not about is flag planting. What we are about is getting to real scale identifying markets where we believe we can get to real scale and real density. And that is the case with Spain. So I think both of those things, new markets and accelerated growth with our franchisees by keenly focusing on their unit economics will be the keys to unit growth and then making sure that we're resourced appropriately here to drive that growth. And then on the member growth side, I think it's really it's multipronged, but I'll start with 2 things.

Speaker 2

And 1st and foremost is the member experience. You've heard me talk about that. We need to make sure that we're continuing to refine and modernize our brand for today's customer, and deliver on their fitness expectations, particularly as we're seeing Gen Zs as the fastest growing segment of our member population. So member experience is at the core of that. And then also our marketing and I touched on it a little bit, but we're doing some work on kind of refining our brand and our brand promise, again, to make sure that we're staying relevant and current and that our marketing is really landing.

Speaker 2

So the brand work that we're doing now will help inform the marketing that you'll start to see at the end of 2024 really going into Q1 of 2025.

Speaker 3

And I think John maybe just to add one thing to that is what you mentioned scale. I mean our marketing spend for the system is roughly $300,000,000 a year annually. That works based on our measurement what our next largest competitors spend combined still dwarfs it. So I think it's a matter of what have we not said to get more people to start their fitness journey and continuing to target the 80% who do not have a gym membership in the U. S.

Speaker 2

I'll also just add that, in addition to the CDO, another role I think is critically important, for which we'll be going out to search is a Chief Marketing Officer. I very much believe in an integrated approach to top line strategy and making sure that as we do our brand work and the brand positioning work and refine the brand promise that we're pulling that through in an effective way in our marketing to really reach our target customers. So as Tom talked a little bit about it, he touched on it, kind of we call it funding the journey, but making sure that we're looking at our resource allocation and have the right leadership roles to help fuel our growth in these critical areas for our business.

Speaker 8

That's great. Certainly looking forward to seeing progress on those fronts. If I could just ask one follow-up to Tom. The adjusted EBITDA outlook for the year implies further deceleration in the back half after the first half was very strong, up 12%. So could you maybe just review the factors that you're looking forward in the back half and whether there's any conservatism in that outlook?

Speaker 8

Thank you.

Speaker 3

Yes. Hey, John. So I think part of the beat in a big part of the beat in Q2 was the timing of some of the replacement of equipment that we had projected in our original outlook to be in the back half of the year. The promotion that we ran, we always run a promotion twice a year with our franchisees to do the reequips. We did that.

Speaker 3

It had better uptake than we thought and more of it came into Q2 than we expected. So that was a big part of the beat. So it's really that equipment segment can really move around in terms of timing and that's really what's affecting the change in the growth rates on a year to date basis versus the rest of the year that you're referring to. But we feel good about the full year outlook and therefore felt good about reiterating it. But that timing does affect what you're getting at.

Speaker 3

But appreciate the question.

Speaker 8

Great. Thanks again.

Operator

Our next question comes from Joe Altobello from Raymond James.

Speaker 9

Thanks. Hey guys, good morning and welcome, Colin. Hey,

Speaker 2

Joe. In terms of

Speaker 9

the new growth model, what's the timing on when we should start to see the impact of that?

Operator

I think it takes, correct me

Speaker 9

if I'm wrong, 12 to 14 months to open up a new store these days. So if you launch it late 2023, is the impact more early 2025?

Speaker 3

Hey, Joe, it's Tom. Yes, so I think you may recall, we always sort of labeled this year as a transition year. Franchisees were able to opt into this new growth model, which I think all but 2 of them did and they each are in 1 or 2 stores. So it's pretty much systematically a resounding yes to opt into this. But there's they had to work through the documents and ultimately sign them through Q1.

Speaker 3

So we always thought it would have an impact on subsequent years less so than it did in 2024 for the reasons you're mentioning in terms of development cycles being longer than they were pre COVID. But having said that, we feel really good about what it's done to the economics of the business and improving what were already pretty strong returns. The changes in the growth model where we targeted a 10% reduction in the cost to build a new planet plus some other changes we made on timing of replacing equipment, help to improve the unlevered IRR. If it was pre COVID in the 30 ish percent range with higher cost to build and other changes that probably got down to the low 20s. So the changes in the growth model kind of close half that gap and then we believe that once there's a full year of the Classic Card price increase of $15 feathered in, that adds a couple of 100 basis points more to that unlevered IRR.

Speaker 3

So now between the growth model and the Classic Card price, we're pretty much back to pre COVID IRR. So there's certainly great incentive for franchisees to build the stores because they produce great margins and unlevered IRRs. It's just a matter of all that working its way through and people cranking up their pipelines. So we'll talk more about 2025 when the time is right, but we always thought this year would not have a big impact from the changes.

Speaker 9

Understood, very helpful. And then maybe just a follow-up on that. I'm curious how you guys view the member growth in Q2. It's a bit below what you've historically done in the Q2. I know it's a relatively small quarter and I recall it got off to a slow start.

Speaker 9

But how did you guys see trends throughout the quarter? And maybe more importantly, what are you seeing in July after the Classic Card impact?

Speaker 3

Yes. Hey, Joe. So I think you're right. This year, while we don't project membership growth kind of where we sit today is below where we thought we would be. And I think it's for a couple of reasons.

Speaker 3

One, we talked about Q1 being kind of soft. It seems like forever ago, but in the early part of January there, there were still some noise about COVID and flus and RSVs and all that. So we really had a softer early January than we expected. And then we had that incident that impacted us for a short period of time on joins in March in the back of the quarter had a longer had a bigger impact on cancel. So that has improved across the quarter and still elevated, but definitely better.

Speaker 3

Those cancel rates are definitely better than what we were seeing and get better across the quarter. And we're really not talking about Q3 at all, but I think based on where we are and how the team managed all of that, I think we came through we're happy where we came through. We were just talking to some of our big franchisees recently. They're happy with how all that played out and how the team handled it. But it definitely impacted where those two things really impacted our membership levels compared to where we thought.

Speaker 3

But I think we have the time now to gear up for the back half of the year, particularly December leading into January and cranking up for what should be a great Q1.

Speaker 2

I'll just add to that. We saw some increase in joins in late June. Now granted some of that was driven by the Last Chance sale, right, at $10 And then I think the branding work that we're doing now to help inform the marketing is really our goal is to have that ready to be in flight by December and then going into Q4 going into Q1, So as the marketing really lands and affects our joints going into the important Q1.

Speaker 9

Got it. Great. Thank you.

Speaker 3

Thanks,

Operator

Joe. Our next question comes from Chris O'Cull from Stifel Financial Group.

Speaker 5

Thanks. Good morning and welcome, Colleen.

Speaker 2

Thank you.

Speaker 5

I have a question about the ADA requirements. I know Tom at one point the company had communicated that franchisees would need to open roughly 500 units, I think between 23 25 to comply with the minimum specified in their ADAs. I'm just curious, could you give us an update on that? And or at least do you expect franchisees to still kind of meet that minimum ADA requirement?

Speaker 3

Yes. Hey, Chris. So yes, so the one change from what we said a while ago at our Investor Day in late 2022, I think that was, It's by changing the growth model, we went from what was somewhat of an idiosyncratic mechanism called cure periods for any delays within your ADA development to what is a more common practice of cure periods. The primary difference being the duration of the window to fix it and also the number of development opportunities that are applied to. So with the cure periods as part of the new growth model, all stores in the pipeline have the ability to extend by 6 months if there is a delay in something that is beyond the franchisees control, permitting or landlord work that gets delayed for reasons outside of their control.

Speaker 3

So that does affect the timing. All of that is factored in as we see our pipeline for the year and the reaffirmation of our outlook of 140 to 150 new stores this year. And I think when we get to our February call for Q4 of and provide the outlook for 2025, we can talk more about how we see that pipeline for next year. But it is kind of a big change. But the ADA requirements that you're describing have not changed.

Speaker 3

We have not altered those. It's just a matter of the timing and the new mechanisms we have versus what we had before.

Speaker 5

So that's kind of been pushed out 6 months, I guess. Is that the way to think about it?

Speaker 3

Not comprehensively, but it could be for some stores.

Speaker 5

Okay. Okay. And just one other question. I was hoping you can maybe I know you talked a little bit about the classic or the black card membership pricing test. But can you give a little more color as to how you decide whether to implement that price increase for the Black Card.

Speaker 5

I'm just trying to understand what KPIs you're looking at to determine whether or not it's a go or no go. Is it just come down to whether or not it raises the monthly membership or raises your average monthly ticket or average dues? Or is there some other mechanism or KPIs you're looking at to determine whether this is a good idea to make this change?

Speaker 3

Yes, it's a good question and somewhat unique to our business compared to the typical multi unit QSR like business where it's traffic transactions ticket. With ours, we have to measure there's no one single metric as you can appreciate, Chris. We have to look at a bunch of them. One of which is the cancel rate. Do people sign up for the higher priced black cards in these tests and then cancel sooner.

Speaker 3

That's something that we don't want to have happen. We also look at the mix between the black card and the classic Card at the time of join. And we still want the majority of our members to sign up as they do today for the Black Card because it's such a great value even though it's priced higher. So and then also the impact on classic card. So there's a lot to look at, but ultimately what we're trying to do is raise the AUV of the units once more members feather in at the higher prices, where we're confident that it's a sustainable increase in AUV.

Speaker 3

And by that we mean it's not all rate driven, but there's still member growth. We want to have a good balance, always have a want to have a good balance of more member growth and rate growth. I describe it from an old life of we're more of a fast nickels than a slow dimes business. We like volume. We like member growth.

Speaker 3

That's what we think is the sustainable way to continue to grow the business and has been it's typically been 70% plus of our member of our same store sales growth is member growth. And so we want these tests to be accretive, but in a sustainable way. So hopefully that helps.

Speaker 5

It does. Thanks.

Operator

Our next question comes from Rahul Gautamani with JPMorgan.

Speaker 10

Good morning, guys. Pauline, good to meet you here.

Speaker 7

Can you

Speaker 10

discuss your philosophy on the marketing for the brand? I wanted to specifically dig on your comment regarding sharpening the €300,000,000 spend, given the importance of this for not only the gross adds, but also improve the churn. Any preliminary thoughts or specific steps or probably I shouldn't be calling low hanging fruit, but in that context, how do you also view the current 2 to 7 national local structure split? And if you think this is optimal for the new growth model?

Speaker 2

Yes. So let me touch on a couple of things. First, you mentioned churn, and I think I'm going to take that one first just because I really think churn is really indicative of member experience. And that's why we're really doubling down on the experience that we're providing for our members, both inside and outside the four walls of our club. When our members see a tremendous value, for the low price of entry point of $15 a month, that reduces churn.

Speaker 2

So we believe member experience is what's going to enhance our stickiness and continue to further our relationship with our members. And now to the marketing, I think we work very closely with our franchisee partners and their marketing teams to make sure that we've got an integrated strategy. And I think 1st and foremost is getting our brand promise and the brand positioning right. And this is not a wholesale change. It's really it's a refinement and evolution and really modernizing our messaging so that it lands.

Speaker 2

I think we shared perhaps it was the last earnings call that we didn't that our Q1 marketing didn't land as effectively as we had hoped. So, refining that brand promise and then making sure that we're pulling it through the marketing and we're clear about what we stand for and who we're targeting, that's 1st and foremost to make sure that we that what we're marketing is really effective and is going to generate the joints that we're anticipating. And then I think there are some things inside the club, and I think we're not ready to share what those are yet, but you'll start to see them emerge in late Q4 and early Q1, really the signals of changed in how we're modernizing and evolving our brand and then pulling that through both in the club experience and in the marketing. As for the 2.7 split, the thing that I think that's most important is that we're taking an integrated approach with our franchisees and that there's alignment between our national marketing and our local marketing and that we're helping our franchisees have access to the marketing products that can be used in the local spend, to really bring our brand to life in an effective way.

Speaker 2

And I think about this, this is all products, all mediums of marketing, including our digital marketing, which is a focus area for us as well, especially as Gen Z is our fastest growing segment of membership. So it's for the 2seven split. I think the thing that's most important right now, 1st and foremost, is that we have an integrated approach and that we're able to really highlight the value proposition, that really differentiates Planet Fitness, makes us different and special, and attractive to a very broad base of customers and prospective customers, who could consider joining Planet.

Speaker 10

That's really a great update, Colleen. Thank you. I wanted to also pick up on the real estate side of the business. Given your background and then also the kind of elevated constraints in retail space availability we have been seeing in the past few quarters. I'm just curious about how you think about the lay of the land.

Speaker 10

There has been I mean, there have been a bunch of like bankruptcies closures among retail brands. How do you think you can flex PlanetScale to basically take advantage of some of these openings and then also working with franchise communities when it comes to the real estate planning?

Speaker 2

Thank you for that question, Rahul. I'm glad you asked it. I think I touched on a little bit of it when I made my remarks about Spain, but I think and I think this is relevant across all of our geographies. When I walked the sites we're considering as well as the sites we have under agreement in Spain, we looked at things like population density, population growth in those markets. And I'll stop there because I don't want to signal all the secret sauce of our playbook, but I will say we do have a playbook when we're looking at opening new sites.

Speaker 2

And as it relates to retail space availability, I think there are 2 things to consider. 1 is the space availability and then one is the price per square foot. The price per square foot gets to kind of the unit economics of our franchisees and Tom has touched on that a lot. So I won't repeat all of that. But we are really focused on unit economics, so that even with a recent over the last couple of years price escalation in real estate, the economic model still works and we can get back to pre COVID IRRs for our franchisees.

Speaker 2

At the same time, you appropriately noted that there have been many retail tenants, anchor tenants that occupy space that has square footage very similar to what we would look for, that have had bankruptcies. And that could and should be an opportunity for us. The other thing that I think about is the fact that throughout the pandemic, we did not have one club permanently closed for financial or economic reasons. So if I'm a developer, if I'm a landlord and I look at some of the retail bankruptcies that have been experienced with some of the big box retailers or midsized box retailers over the last couple of years. And then I look at I look at Planet with no club closures throughout the pandemic.

Speaker 2

We should be in the pole position when space becomes available in for retail space. And I think the durability of our cash flows and the resilience of our business is something that we have an opportunity to further promote when we're seeking space when we're seeking retail space for new clubs.

Speaker 10

Thank you.

Operator

Our next question comes from Max Rygielka from TD Cowen.

Speaker 11

Great. Thanks a lot and congrats Colleen.

Speaker 2

Thank you.

Speaker 11

So with the Black Card pilot now taking memberships to $30 in some markets, How are you thinking about the ceiling to where prices can go? Seemingly, maybe tough to get above mid-30s in the construct of HVLP 1.0 box. So just Colleen, if you can touch on a focus that you discussed earlier of having an unparalleled member experience. What can be done and what can be tweaked in a capital light way to improve it, which would allow for a bit more pricing power?

Speaker 2

Yes, I think a couple of things. So we touched already a little bit on the mix of equipment. We're seeing a greater demand for space, for strength. We still want our members to walk into a Planet Fitness and see that beautiful bright sea of equipment and know that they're not going to have to wait. At the same time, we are optimizing the mix.

Speaker 2

So HVLP maybe 2.0 is really what we should be talking about and how we are evolving the equipment mix for today's consumer. I will also say we're continuing to look at low cost amenities to continue to offer the greatest value, whether it be for a Classic Card member or a Black Card member. And, I touched on this a little bit and that is some of the amenities and the value proposition that we can bring to life through the app, adding value for our members, both in the gym experience or in the club experience, and outside the four walls of the club. I often talk about my AAA membership and my car comes with roadside assistance, but I don't cancel my AAA membership because, even if I don't immediately need to tow, I know that I'm getting so many more amenities for that relationship. And I think leveraging our nearly 20,000,000 member base, we saw one of our greatest participation rates with the PERKS program in June.

Speaker 2

I think there's an opportunity to continue to leverage our member base to bring additional offerings that add value for that membership. And as we think about Black Card pricing, we're also thinking about the Black Card experience and what we're delivering for our Black Card members.

Speaker 11

That's very helpful. And then just a quick one, but can you provide an update to progress in rolling out the Media Network? If you could speak to the opportunity conceptually with where you are in the medium term path? And then just how should we think about the revenue opportunity as well as margins, because it has historically been quite a high margin business for others?

Speaker 3

Yes. Hey Max, it's Tom. I'll take that one. I would say we're still in the sussing out stage on that one. I think we see it as a potential opportunity.

Speaker 3

We want to make sure we do it the right way. So I think we're not yet at a position where we're going to go full throttle on that nor sort of project what we think the impact could be. We think it's a nice opportunity to make to enhance the broader economic model, but we're still working our way through that one.

Speaker 11

Great. Thanks a lot and best regards.

Speaker 3

Yes. Thanks, Max.

Speaker 2

Well, thank you for all the thoughtful questions and thank you for the warm welcome. I'm about 8 weeks in and continue to be just so excited about the opportunity to lead this brand as we enter our next chapter of growth. As you heard from us today, our team and I are very committed to further defining our growth ambition and to capitalizing on really meaningful opportunities across the industry, both in the U. S. And internationally.

Speaker 2

We'll maintain a clear eyed focus on delivering an unparalleled member experience, evolving our brand messaging and operating under the principle that we can enhance the economic value proposition for all stakeholders from the franchisor to the franchisees, to ultimately deliver significant value for our shareholders. So thank you for your time today.

Operator

The meeting is now concluded. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Planet Fitness surpassed 2,600 clubs in Q2, delivering 4.2% same-store sales growth, 5.1% revenue growth and a 7.2% increase in adjusted EBITDA.
  • New CEO Colleen Keating outlined four priorities: defining a growth ambition to double domestic locations to ~5,000, enhancing the member experience, evolving brand messaging to sharpen the HVLP promise, and boosting franchisee economics.
  • The company opened its first European club in Barcelona, citing only ~10% gym penetration in Spain and a pipeline of strategically selected sites in high-density markets for international expansion.
  • Membership pricing actions include a $15/month Classic Card for new members (existing members remain at $10), expected to raise average unit volumes low-to-mid-single-digits after one year, and Black Card price tests at $27.99 and $29.99.
  • Leveraging its asset-light model, Planet Fitness refinanced $800 million of securitized debt at a blended ~4.5% rate, funded a $280 million accelerated share repurchase (3.1 million shares) and secured a new $500 million buyback authorization, while shifting equipment mix to more strength gear to lift segment margins ~300 bps.
AI Generated. May Contain Errors.
Earnings Conference Call
Planet Fitness Q2 2024
00:00 / 00:00