Planet Fitness Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Bardesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2023 Planet Fitness Earnings Conference Call. At this time, 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

Earnings. Thank you. I will now hand the call over to Stacey Caravella, VP of Investor Relations. 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 reported for replay. Before I turn the call over to Craig, I'd like to note that we posted slides on our Investor Relations website this morning that summarize the updates that we will be discussing during our Hall.

Speaker 1

I'd also 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. 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'll turn the call over to Craig.

Speaker 2

Thank you, Stacy, and thanks everyone for joining us for the Planet Fitness Q3 earnings call. I'm honored to serve as interim CEO of such a truly unique brand with a strong track record of growth as we enter the next chapter of the Planet Fitness journey. As a board member and a Planet Fitness franchisee, I know firsthand the power of this brand, The strength of our team and our commitment to a welcoming non intimidating culture, all of which uniquely position us to continue to lead the industry. My priorities are to lead the team as we execute on the current strategy with a focus on enhancing store returns. Look forward to finding an outstanding CEO candidate to lead us and capturing the growth opportunities ahead of us.

Speaker 2

Let's move on to our results. We ended the Q3 with more than 18,500,000 numbers. System wide same store sales growth was 8.4%, primarily driven by new member growth and more than 19% adjusted EBITDA growth. As a result of our performance and given our outlook for the Q4, We're raising our full year financial guidance targets for revenue and adjusted EBITDA for 2023. Tom will go through that later on.

Speaker 2

We feel really good about our membership trends. We added nearly 110,000 net new members in Q3, outperforming net growth for the same period last year as well as 2019. We continue to see our strongest net member growth for Gen Zs, We now make up a quarter of our membership base. We believe we are unique among most multiunit brands And that the average age of our member continues to decrease. This was further enhanced by another successful high school summer pass program.

Speaker 2

We had more than 3,000,000 teens and 2,000,000 parents and guardians sign up for this year's program. At the end of October, our conversion rate of team participants to paying members is 5.5% versus 5% last year. More than 30% of our new joins in Q3 were previous members compared to about 20% pre COVID. We also continue to see higher overall visits per member as well as all age groups visiting more frequently year over year. We again experienced year over year improvement in our cancel rate as it continues its decline for the 9th straight quarter.

Speaker 2

Lastly, we opened 26 new stores this quarter, bringing our global store count to nearly 2,500. We've added 145 new locations since Q3 of last year, which is nearly 3 times the growth of the top 17 of our competitors combined. It was against this backdrop of industry leading performance that we met with all of our franchisees last month to review the updates we are making as part of what we call our new growth model. We all left the meeting even more excited for the long term opportunities that we have as a brand. We are addressing the biggest opportunities to further improve the Activeness of our returns for our franchisees as they manage their capital deployment and timing of their investments, While maintaining our strong focus on a great member experience, we believe it's a win for the franchisees and for us as the franchisor.

Speaker 2

First on pricing, we're proud that we haven't raised the $10 Classic Card price in 30 years. However, consumer expectations on price have changed in a highly inflationary world. We are exploring whether we have an opportunity to take price on our Classic card without SAC pricing member growth. To that end, we've been testing different price structures, messaging and price points in several markets around the country for more than a couple of months now. As we are a recurring revenue model, we plan to continue running these tests to understand the impact that increasing price has on membership growth.

Speaker 2

Now to our membership levels. Our membership recovery coming out of the pandemic closures has resulted in all time high system wide membership levels. Additionally, the stores that will mature as of March 2020 are back to pre COVID membership levels on average. And importantly, our 2023 cohort of new clubs is indexing very close to pre pandemic new store ramp levels. However, the cohort of nearly 700 stores that opened from 2019 to 2022 have experienced much slower ramps to maturity given that their early critical years of member growth were interrupted by COVID.

Speaker 2

This is nearly 30% of our system. These stores have not yet benefited from consecutive years of typical 1st quarters. As a reminder, 60% of our net member growth for the year historically occurs in Q1. We expect these stores to eventually grow to membership levels consistent with the rest of the system, but they will take longer and will likely weigh on the returns across a given franchisee's portfolio. The cost to build a new store continues to be approximately 30% higher than in 2019.

Speaker 2

The total CapEx cost today, which includes total cost to build, re equipment and remodel a Planet Fitness And while the pressures are primarily from external factors such as inflation, higher interest rates, we're addressing the things that are within our control and further enhance store returns and lessen the increased CapEx burden for existing stores. Our management team has been working on the new growth model for a good portion of the year, trying to balance improving new store returns without significantly impacting our P and L. Our plan is focused on reducing the capital requirements for opening and operating a Planet Fitness franchise. This includes making changes to the franchise agreement, Adjusting the timing for cardio and strength reequipse based on usage and committing to reduce CapEx for newbuild and remodel while also looking for ways to reduce operating expenses. We believe that the changes we're making will free up a significant amount of capital for our franchisees in the near term, providing them with additional flexibility and resources to build their store portfolios for the long term.

Speaker 2

Tom is going to walk us through the details momentarily. The new structure is standard for all agreements moving forward. Our franchisees can also take advantage of it for their existing stores. In closing, our management team has taken responsible and data driven approaches to adjusting our franchisee return model, which we believe set us up for sustainable growth. We recognize that the operating landscape has changed and therefore we are evolving for the long term sustainability of the model without compromising the member experience.

Speaker 2

We believe we are pulling the correct leverage to drive the right earnings. Ultimately, increased returns for all of our stakeholders, both internal and external. Now, I will turn it over to Tom.

Speaker 3

Thanks, Craig, and good morning, everyone. Today, I'm going to address 3 topics. First, further details on how we're evolving our model as Craig referenced. 2nd, our Q3 financial results. And lastly, our 2023 outlook.

Speaker 3

We learned valuable lessons as the franchisor of a fitness brand during the pandemic, including the importance of building and maintaining a trusted franchisee franchisor relationship. We were nimble and quickly made changes to support our franchisees and their most pressing needs while our stores were temporarily closed. This included 18 month extensions for both new store obligations under area development and on re equipped cycles for existing stores. These extensions provided franchisees with greater flexibility and liquidity to help meet their various obligations while stores were temporarily closed and until membership levels began to recover. The result was that we did not permanently close any of our stores due to COVID versus the industry which experienced a 25% reduction of all gyms in the U.

Speaker 3

S. And in today's post pandemic world with persistent higher inflation that has significantly increased new store construction costs, We're using that experience to further refine our model and position us and our franchisees for continued sustainable growth. As Craig noted, this isn't just a win for our franchisees. It's also a win for us as the franchisor and we believe it is also in the best long term interest of our shareholders. As part of the plan, we're making changes to how we hold franchisees accountable to their new store build obligations as well as updating our joint fee structure.

Speaker 3

Let me walk through each of the five parts of our new growth model in more depth. The first component of our plan is to extend the length of our franchise agreement from 10 years to 12 years and to eliminate the initial $20,000 franchise fee. Franchisees will be required to remodel at the 12 year mark and pay a franchise fee at that time. The franchise fee change is meaningful to our franchisees who are required to pay the fee when the store opens, but less impact to our P and L as we recognize it over the life of the agreement. The second element of our new growth model is to extend The timing for Reequipse to achieve a system average of 6 years for cardio and 8 years for strength.

Speaker 3

Clubs that have higher than average usage will still be required to re equip at 5 7 years, while clubs with lower usage will be 7 9 years. As a reminder, all stores that were open at the end of 2021 received the previous re equip extension. So today, on average, those stores are on a 6.5 and 8.5 year schedule already. Therefore, we expect this change to have minimal near term impact to our financials. The second cardio reequip will coincide with the 12 year remodel requirement, reducing the number of disruptions to the club and its members from 7 to 6 in the first 24 years of operation.

Speaker 3

It eliminates 2 consecutive years that members have to deal with disruptions in today's model. For the 3rd component of the new growth model, we're targeting a 5% to 10% reduction to the investment required to build a new store without compromising within the member experience. In addition to value engineering the store build, this targeted reduction includes the Wave initial franchise fee and the changes to the mix of equipment, which we have been refining this past year as our members are consistently seeking more strength and less cardio. The latter has the added benefit of reducing CapEx investment and strength equipment costs less than cardio and we're also adding additional open spaces for stretching and working out. We expect that this will continue to be a headwind to equipment segment revenue.

Speaker 3

However, we will continue to examine potential adjustments for equipment pricing and margin as appropriate to protect our margin dollars per placement and re equip. The 4th part of our new growth model affects our area development agreements, where we will transition from grace periods to the more typical cure period mechanism, which will lead to greater clarity and alignment on our development pipeline. Grace periods allowed a franchisee an additional 12 months open location if there was a delay outside of their control. Franchisees will now enter a 6 month cure period if they are in default on a unit obligation, which is a more common practice in the franchise world. Now the 5th and final element of our new growth model is to shift from the franchisees paying us a fixed fee for online joins to a fee equal to a percent of members dues for all joins regardless of the join channel.

Speaker 3

This new structure allows us to participate in the upside on potential future price increase. There are many specifics and nuances that we are still working through as we transition to this new structure. As Craig noted, This is the model that we proposed to our franchisees and we are highly encouraged by their enthusiastic response to it. We expect most will accept it. Now I'll cover our Q3 results.

Speaker 3

All of my comments regarding our quarter performance will be comparing Q3 2023 to Q3 of last year, unless otherwise noted. We opened 26 new stores compared to 29. We delivered same store sales growth of 8.4% in the 3rd quarter. Franchisee same store sales grew 8.2% and corporate same store sales increased 10.1%. More than 3 quarters of our Q3 comp increase was driven by net number growth with the balance being rate growth.

Speaker 3

Black Card penetration was 62.1%, a decrease of 80 basis points. The decrease primarily reflects The continued increase in our Gen Z membership growth and the conversion of high school summer pass participants to paying members. For the Q3, total revenue was $277,600,000 compared to $244,400,000 The increase was driven by revenue growth across all three of the segments. The 21.6% increase in franchise segment revenue was primarily due to increases in royalties, web joint fees and national ad fund revenue. The royalty increase was primarily driven by same store sales growth, royalties on annual fees and new stores.

Speaker 3

For the Q3, the average royalty rate was 6.6%, up from 6.5%. The 12% increase in revenue in the corporate owned store segment was primarily driven by same store sales growth and new store openings as well as the 4 stores that we acquired in the Q2. Equipment segment revenue increased 6%. We completed 22 new store placements this quarter compared to 27 last year. For the quarter, replacement equipment accounted for 78% of total equipment revenue.

Speaker 3

Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee owned stores, amounted to $53,800,000 compared to 48 point

Speaker 2

$5,000,000

Speaker 3

Store operations expense, which relates to our corporate owned store segment increased to $63,100,000 from $57,900,000 SG and A for the quarter was $33,300,000 compared to 27,100,000 Adjusted SG and A was $30,700,000 This includes a $2,600,000 adjustment for CEO transition related expenses. National advertising fund expense was $17,600,000 compared to 17,000,000 Net income was $41,300,000 adjusted net income was $51,800,000 and adjusted net income per diluted share was $0.59 A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was $111,900,000 and adjusted EBITDA margin was 40.3% compared to of $93,900,000 with adjusted EBITDA margin of 38.4%. A reconciliation of adjusted EBITDA to GAAP net income can be found in the earnings release. And by segment, franchise adjusted EBITDA was $67,600,000 and adjusted EBITDA margin was 68.9%.

Speaker 3

Corporate store adjusted EBITDA was $44,400,000 and adjusted EBITDA margin was 39.2%. Equipment adjusted EBITDA was $16,400,000 and adjusted EBITDA margin was 24.8%. Now turning to the balance sheet. As of September 30, 2023, we had total cash, cash equivalents and marketable securities of $474,100,000 compared to $472,500,000 of cash and cash equivalents on December 31, 2022, which included $46,400,000 $62,700,000 of restricted cash respectively in each period. Year to date through September, we used $125,000,000 to repurchase shares.

Speaker 3

Total long term debt, Excluding deferred financing cost was $2,000,000,000 as of September 30, 2023, consisting of our 4 tranches of fixed rate securitized debt that carries a blended interest rate of approximately 4.0%. Now as a reminder, we don't have debt coming due until September of 2025. Finally, moving on to our updated 2023 outlook, which we included in our press release this morning. Historically, our new store openings typically skewed to the Q4 and in particular to December as franchisees work hard to open their new stores before New Year's Eve. However, similar to the past few years, we continue to experience unpredictable delays in the various steps to open a new store.

Speaker 3

Chief among them is the extended permitting timeline in many municipalities. With less than too much remaining in the year, we have narrowed in on a range for new store openings and franchisee equipment placements that we believe accounts for the things that we and our franchisees can control. We now expect between 150 and 160 new stores and between 130 and 140 equipment placements in new franchise stores. We continue to expect system wide same store sales growth to be in the high single digit percentage range given our strong membership trends. We now expect that re equipped sales will make up approximately mid-sixty percent of total equipment segment revenue for the year.

Speaker 3

Our franchisees continue to invest in their existing stores as evidenced by the fact that we expect our full year reequipped revenue to be greater than what we had originally forecasted. Given our strong sales during our re equipped promotions year to date, we expect light Q4 re equipped sales as franchisees are allocating capital to building new stores. This is the primary driver behind our revised expectation of approximately 14% revenue growth and approximately 18% adjusted EBITDA growth. We now expect approximately 33% growth in adjusted net income and adjusted earnings per share growth of approximately 35% based on shares outstanding of approximately $89,000,000 We continue to expect net interest expense to be in the low $70,000,000 CapEx up approximately 40% and D and A up in the high teens percent range. As we mentioned last quarter, we will revisit our 3 year outlook, which we initially provided back in November 2022, next year when we provide our targets for 2024.

Speaker 3

In the meantime, our teams are working with franchisees on their development, remodel and re plans for 2024 as they determine their near and long term capital requirements and priorities under this new structure. We believe our new growth model will further enhance franchisee returns, continue to increase our leading competitive position and deliver long term sustainable value that benefits our shareholders and our entire system. I'll now turn the call back to the operator to open it up for Q and A.

Operator

You may also submit your questions via the Q and A tool on the webcast. Our first question comes from the line of Randall Konik from Jefferies. Please go ahead with your question.

Speaker 4

Thanks a

Speaker 5

lot and good morning guys. Call. I guess, Tom, what would be helpful for us on the call is you talked about you're going to give us 'twenty four guidance in a couple quarters, but what would be helpful is just to get some perspective on how we should be thinking about directional change in unit openings going into next year and just like shaping of the curve around equipment revenues. I think you said there shouldn't be all that much change from a replacement perspective. So just help us think about puts and takes about just next year without obviously you're not going to give us specific guidance, but just framing out the kind of path from here would be super helpful going in for next year.

Speaker 3

Yes. Hey, Randy. Good morning and thanks for the question. I appreciate that there's a desire to know that. It is difficult to talk about at the moment because that's the work that's ahead of us, right?

Speaker 3

We did this we made these changes for a couple of reasons. 1, to free up the capital For franchisees, particularly the big move is to move the remodels that we're doing 2024 to move them out. Now some of those that are more brand damaging will have to get done, but ones that we can take a little time on, we will. And so that frees up the capital. So and then also making some other changes to improve the while we think the returns are strong, making them even stronger Should help drive some unit growth.

Speaker 3

How that plays out? How both of those things play out? In 2024, directionally to your question, Is the work ahead of us and our teams to work with our franchisees and really sort of play all this through, both in terms of how they See their pipeline, but also just executing the agreement changes. So anyway, Craig, go ahead. Yes.

Speaker 2

So So I just want to add one thing. I mean, as you know, we rolled this out 16th October to our franchisees. These are big organizations in many cases. And so it takes time for them to process these changes as well. They had no sort of inkling about what we're going to bring to the huddle.

Speaker 2

And so they're processing this as well. So it's going to take us a little bit of time To get it through their organizations, much less through our organization. So that's I think a big portion of what Tom is talking about.

Speaker 5

Got it. And then would you so then to handicap it, would you think that the updated unit guidance you gave for this year would be Kind of the floor or close to the floor, based on the pipeline you kind of have that you can see. Call. And then just on top of that, just kind of elaborating, Craig, you talked about some of the pricing change work or at least testing you've been doing, I believe, on the white card. How do you what have you learned so far in those tests?

Speaker 5

Maybe give us a little flavor there, So we can get some perspective on what's been changing in those tests, price elasticity, price sensitivity, so we can get a feel for Just how high the probability is that you could lift off that $10 a month white card price point? Thanks guys.

Speaker 2

I'm going to let Tom talk about the pricing, but I just wanted to sort of talk about where we are as far as store openings go. Listen, Tom said it right at the beginning of the call. It has become increasingly difficult to forecast openings because of changes, especially in the permitting and the entire process of inspections and getting a certificate of occupancy. And so What used to be a little more straightforward or maybe a lot more straightforward has changed for the worse. And so we're dealing with that the best we can.

Speaker 2

And our franchise is working very hard and trust me, I'm one of them. So I get what's happened in the marketplace. And it is Frustrating as I'll get out to have things ready to go, but not be able to complete the opening.

Speaker 3

Yes. And Randy on the pricing one, As you know, with the subscription model, we have to read it longer than you would a typical QSR retail test. And so we're reading it through we've got roughly 100 stores in a few different DMAs in the $15 test. And So it's $15 when we're not on sale, it's $10 on sale. So we're reading it both in those sort of sale periods and what we call the evergreen non sale periods.

Speaker 3

And at the end of the day, our criteria is we don't want to sacrifice member growth. We think like a retailer or restaurant transactions for them, member growth for us is the sustainable lifeblood of this business. If we can maintain that while adding some deuce upside, then we will. But we don't want to say given we're trying to get people off the couch And cost is a barrier to getting off the couch. We just want to be very careful about how we learn our way into what is a better place than where we are today.

Speaker 3

It may take us a little time and these tests may prove to be that or they may prove not to be that. We have to run some other tests, but It's definitely not something that with only 2 price points, we can't bet punches on hunches. We got to scientifically figure out what's better Than

Speaker 2

what we have and if we find something we'll move to it. And then I just want to add one thing. Part of ours is not just the entry price, It's the length of time somebody stays a member. So to the extent price influences that in a dramatic way, That's harmful to our business. We're looking at the lifetime value of a member.

Speaker 3

Which is part of that member growth that we're talking about. Yes. That's right.

Speaker 2

Okay. Thanks, Randy. Understood. Thanks, guys.

Operator

Thank you. Our next question comes from Simeon Siegel from BMO Capital Markets. Please go ahead with your question.

Speaker 6

Thanks. Hey, everyone. Good morning. Hope you and your families are in these challenging times. So can you guys just talk a little bit more?

Speaker 6

You got to decision to change the store level return model. I guess is there an agreement as to what the save dollars will be used towards? Are you going to ask for a commitment towards the new gyms or something else? Or is this more to help their returns. Is this a concession or are you seeing a change in the structural requirements to run gyms?

Speaker 6

So Tom, I think you and maybe seeing a way to improve the margins for your own equipment. So kind of thinking that through and then just really just thinking through if replacements and remodels were historically necessary to keep Jim's fresh. How do you ensure that loosening these restrictions won't hurt that customer experience? And then just lastly sorry, Lastly, I guess, do you believe this is the end of the negotiations? Or is there anything else to expect to come for franchisee benefits?

Speaker 6

Thanks, guys.

Speaker 3

Yes, Simeon, you're setting a record there. Okay. I think so and we've been working on this for months with the Board and with the leadership team here looking at Various things that we could consider. I think we've talked about on some calls when we've been asked, is there anything you can do? Earnings.

Speaker 3

And we thought this was kind of the sweet spot of all things that helped them on the liquidity side recognizing the higher cost Inflation sorry, what inflation has done to the build cost and the remodel cost. Give us some time to value engineer those remodels. If they are brand damaging, then they have to get them fixed, whether that's a corporate store that we acquired from somebody else or a franchise store. At the end of the day, this is still member first in our thinking. But there are cases where We're moving away from a one size fits all to a little bit more of a variation and that really goes to the reequips, right?

Speaker 3

So if you have A store that's got a lot more members than the average, you're going to have to re equip the cardio on the 5 year cycle. And you probably in some cases may want to do that even earlier if it's getting beat up. And the same with strength, if your store is not quite As strong as you thought or just has less membership, then you would do it on a 7 year cycle and everybody else would be on the 6 year cycle. So it is taking some of that into account so that the member experience is considered based on the usage essentially. And trying to get the sort of store growth As increased store growth as I'll call it a quid pro quo, not your terms mine, but it's difficult to do.

Speaker 3

We can't really rewrite the ADA and the pacing of the ADA. This is to recognize and it's also harder to find real estate. I think CBRE said it's the 4th year in a row of really record lows Center Growth. So I think we're trying to factor in all those dynamics and really work with our franchisees to figure out what is the best combination of changes, Well, also on the get side, we want to move away from these grace periods. They're uncommon in franchising and going to more of a cure method Allows us to Craig's point to have better visibility and control over the pipeline.

Speaker 3

And so we have to transition from where we are Where we want to go and it will take probably a few months to do that, but that's the intent and we think ultimately this was the best set of changes that we could develop to improve to free up some cash to invest in new store growth, improve the store returns of those new stores. We're excited about it. And so far, the reaction from franchisees has been quite enthusiastic. Now we have to go through And see how all that plays out and how many convert. But we feel that economics are compelling and will end up in Most saying yes.

Speaker 3

Is there more to come after this? I think we think this is a big set of changes that's going to sit for a while. And we'll continue to evaluate how the world changes, how the economy changes and how our business moves. I'll tell you, what we don't want to get lost in all this is our business is performing well. Member growth is strong, profitability is up.

Speaker 3

We've got some timing on equipment that's impacting us across the quarters when compared to last year. But Overall, I feel really good about the fact that 3 quarters of our same store sales growth is driven by member growth. We're opening orders of 2 more stores than our competitors. So it's just a we feel good about a lot of things in this business. And ultimately what we created, we think is a win for us, a win for our franchisees and a win for our shareholders.

Speaker 7

Perfect. I think that was well said. Thanks a lot guys. Best of luck for the rest of the year.

Speaker 3

Thank you, Simeon. Yes.

Operator

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

Speaker 7

Thanks. Hey, guys. Good morning. I guess first question and I think I know the answer to this, but is there anything you guys can do on the permitting and inspection side To accelerate that or is it really out of your hands and it really just depends on a particular town?

Speaker 2

It is completely dependent upon where you're trying to locate. Some towns are very cooperative and other towns are very slow. And it starts with just getting the permit to start And it goes all the way through the inspections. My last second and last club I just opened a month and a half or so ago, the guy decided the building inspector decided to go to Italy for a month And didn't tell anybody. And so we couldn't get in.

Speaker 2

We sat for a month waiting for him to come back from his trip that was unplanned. And so since COVID, Some of the departments in some of the towns have taken on a new personality as far as Expediting permits and inspections and certificates of occupancy. So it's You go in and you don't even know what you're going to deal with till it starts. That's the other thing, because in my case, if you're going into a new town, you don't know what to expect until you're in the process and you hope for the best, but sometimes that doesn't happen. Other towns are great, but it's you don't know.

Speaker 2

So it's difficult to project and different portions of the permitting process and inspection process are run by different people, so that one section may be fine and another section may not be as fine. So it is all over the place.

Speaker 3

Yes. And Joe, maybe one thing to add on that. In permitting some cases, you can use an expediter and franchisees really They want like Craig, want to get the store open. So they'll do whatever they can on inspection not so much. I mean that's there's nobody going to fast track that.

Speaker 3

It is definitely more difficult

Speaker 2

than it's been. And it's difficult on us too because we have free rent periods. But if you're stuck not opening, those free rent periods expire. And you're not even open to enjoy the benefits of free rent.

Speaker 7

Got it. Okay. And just maybe on the timing of a new CEO, I know it's obviously early, but how do you see that playing out? And what are you guys looking for In terms of qualifications, is fitness experience a must or not necessarily?

Speaker 2

So from what I hear, it's early. The process is going well. We're attracting some good interest. As far as the qualifications go, clearly fitness, we're pretty well I don't think there's anybody any bigger than us in fitness. So we can't attract somebody from a bigger company, fitness company at least that would know more than what we know.

Speaker 2

But Certainly, international experience is important to us, consumer branding is important to us, consumer marketing is important to us, and perhaps understanding Globally, how we do all this, obviously, our public company experience is important to us as well.

Speaker 8

And would you expect someone

Speaker 7

to be in place before you provide guidance for next year or after?

Speaker 2

That might be a bit tight, but maybe. I don't know exactly how fast this is proceeding, but I know that the Board who is running this process is Very focused on doing a good job and moving it along.

Speaker 3

It's always hard to predict, Joe, as you know. And I think to Craig's point, this is an attractive role, Hard to find a place where you're 8 ish times bigger than your next competitor with lots of growth opportunity. But it is an important job obviously to make sure we take our time. I think We're providing guidance at the end of February. I think that's as these things go pretty tight to Craig's point.

Speaker 3

But I think the Board's moving with urgency, But not hastily.

Speaker 7

Okay. Thank you, guys.

Speaker 3

You bet. Thank you.

Operator

Thank you. Our next question comes from the line of John Heinbockel from Guggenheim Partners. Please go ahead with your question.

Speaker 9

Tom, can you talk about the mechanics of shifting from the grace period, right? Meaning, so if I'm on one now, Does that continue? When do you transition over? Is it January 1? And then do you think does that have any impact you think on cadence of openings One way or the other, pull it forward, push it out.

Speaker 9

And then relatedly for Craig, right, as a franchisee, what do you think You need to see, others need to see, to want to step up again, is it because maybe returns will never be what they were 5 years ago. That's fine relative to other alternatives. Do you just need to see stabilization and some modest improvement?

Speaker 3

Yes, I'll take the first one there, Joe. So we're sorry, John, my gosh. We're moving through Those changes here in all the documents, it's going to take a little while. We expect by January, we'll be Moving through that transition process by which the grace whatever if a store is in a grace period today, it will move to a cure method. And our intent is not to have a meaningfully different timeline for that Particular store then would exist under the grace period.

Speaker 3

We need to work through each case individually, but that's essentially how we see it. So we don't think it will Affect the timing of new store that are in process now. It's just a matter of transitioning from 1 to the other. I'll maybe defer to Craig on the question. Yes.

Speaker 2

Yes. No, no. So thanks for the question. I love Planet as do All of our franchisees. And maybe I'll take you back to the huddle where I talked about the 4 pillars of what we need to do together to Make this brand even stronger than it is.

Speaker 2

And it starts with being aligned with our franchisees and having buy in from both sides and frequent Work together to enable us to be able to deal with this inflationary environment. It's not going to go away, at least not And so we need to work together on different aspects of this model to ensure that we do the best we can. So one of those areas is leverage. Our size is so big that we've never done a really good job of leveraging that for pricing, for opportunities to work with people directly. Some of the promotional things we're doing within clubs now, we're starting to see vendors that want to come to us to sell their merchandise and consumer brands that never would have happened before, but our scale has changed at 18,500,000 members, 2,500 locations.

Speaker 2

I'm going to harken back to my insurance bill that Tom likes to laugh about, but I got paid $425,000 last year for business insurance. And my quote that came in 4 days before I was due to renew came in at $850,000 Total claims over the last 5 years is less than $800,000 So But with 23 gyms, I don't have the leverage to lean on an insurance company and say that's not acceptable. But with 2,500, We've got an opportunity to work with some of these people to get the best product at the best price and that goes across all different things. So that's leverage. The other thing that we need to do a better job with is marketing and that we talked about earlier is branding as well as promotional marketing.

Speaker 2

We need to do that to make sure that we have an opportunity to get our story out there because these Gen Zs and what have you are much More into value, but also into what do you stand for. And that brand is very important to us. So those are just some of the things we need to do a bit better job in order to really grow this brand. So I am a big believer in this brand and we have to be really innovative In the way we look at putting new things in clubs, testing our pricing, different iterations of our pricing To make sure that we're getting the maximum value that we can to augment the customer experience. So those are some of the things we need to do.

Speaker 2

And if we do those well, this brand will be around for at least another 30 years.

Speaker 9

Hey, guys. One quick follow-up since you brought up marketing, right? That's always looked like an opportunity, right, as you get to 300,000,000 Of spend and higher, right, to restructure that more national, maybe provide relief to franchisees, right, they can spend 100 basis points less.

Speaker 3

How do you think about that? Is that

Speaker 9

not a near term opportunity? It's down the road.

Speaker 2

It's we need to grow into this Brand thing a little bit better. We're not ready right now. At the hub, I talked about changing the mix. And I said it's coming, Because we have to be much more about branding and a little less with promotion. And by the way, we're going to probably spend closer to 400,000,000 Share.

Speaker 2

So it's getting to be a big time. And we need to spend it effectively. We are by far the biggest spender in marketing of anybody else. And we've $0.09 of every member dollar goes into marketing. So it's a big expenditure, but it's also a big opportunity.

Speaker 2

Chris used to call it the flywheel. I'm not sure I'd use the same term, but what the term I use is we have some ways to communicate with people that nobody else does.

Speaker 3

And John, that discussion that

Operator

Craig

Speaker 3

is mentioning, that was just merely taking the 9 and remixing it, not lowering it. We still think there's a lot of Folks to get into fitness before we start thinking about reducing the rate.

Speaker 2

Okay. All right. Thank you. You bet.

Operator

Thank you. Our next question comes from Rahul Kothirapalli from JPMorgan. Please go ahead with your question.

Speaker 8

Good morning, guys. Thanks for taking my question. Tom, can you just like clarify what your comments meant to the equipment margins? I know you talked about protecting the dollar profits in the segment. Is there a way where you can probably pass through the cost You buy the equipment from to the franchisees at least on a case to case basis or is it something differently how you're thinking about it?

Speaker 3

I think what I was trying to convey there is as we continue to evolve the mix of equipment, You may have heard us talk about where Gen Z clearly seems to prefer Strength and Functional Workouts versus Cardio. Treadmill still get about the Same use, but things like elliptical and bikes are getting far less use. So we've been we took a first swing at this to readjust the mix To adjust the mix to have less cardio, more strength. We're now taking a bigger move on that because it's just it's Given Gen Z's are 25% of our member base and millennials have similar habits though not quite as not quite the same. That and because strength costs less than cardio and because in some cases the functional areas just have more open space so people can work out.

Speaker 3

Overall, the revenue per new store will come down. And so what we've done is adjusted our margin that we charge, so that the dollar margins that we earn on that new store placement are roughly the same. That's what I was trying to convey. Now, So we've done that historically. We'll continue to do that and we'll see how it all evolves.

Speaker 3

But that's what I was trying to convey.

Speaker 8

Got it. And on a follow-up on the changes to the growth model. So looking at the math here, it looks like the uplift and cash on cash returns over the life of the period is close to up 200 bps and it's translating close to $500,000 per new store in terms of present value of savings. So is it fair to expect that this improves the visibility by like 15 to 20 stores each year at least on back of envelope. Is this the right way to think about it?

Speaker 3

Yes, I think there are 2 different things, right. One is the CapEx dollars. As you know, this model is a CapEx heavier OpEx way lighter model compared to most. Our flow through and all that and margins attest to that. But we've In light of the inflation and higher interest rates and the usage patterns that have changed in our stores, We thought it was appropriate to look at the reinvestment cycles, cardio and strength reequips and also remodels.

Speaker 3

And back what I was saying before, Raul, on the cardio, not all stores are created equal either when it comes to remodeling. Prior to 2016, we didn't really have a design standard. And then 2016 and forward, the stores that were built look like stores we're building today, much closer to them. So the cost to remodel those prior stores is going to be more than the cost to remodel the stores that were built 2016 and forward. So Again, we can't apply one size fits all, but there are some stores that frankly when we go in them, we're not happy with them.

Speaker 3

So those stores will still need to be remodeled and that's what we're Calling sort of brand damaging, but you can't really translate the improved store returns and improved economics, Immediately starting from a pretty darn strong price place to begin with, to new store incremental new store units. That's the work that's ahead of us working with our franchisees as Craig and I talked about earlier.

Speaker 2

And Tom, I just want to bring up one thing that maybe not clear to everybody. Remodels. There's no margin in it at all for corporate. So, yes, it's a nice new box. It looks nice and We attract more members and therefore we get better royalties from that, but there's no direct margin that comes from our remodel.

Speaker 3

There's no revenue or margin implication.

Speaker 8

Yes. Thanks guys.

Speaker 3

Okay. Thanks Raul.

Operator

Thank you. Our next question comes from the line of Chris O'Cull from Stifel. Please go ahead with your question.

Speaker 10

Thanks. Good morning, guys. Hey, Tom. Hey, Tom. Can you quantify the impact on the cash on cash returns you're expecting from this new growth model changes.

Speaker 10

And also can you describe what changes are being made to reduce the $3,000,000 investment by 5% to 10% beyond just the elimination of the initial franchise fee.

Speaker 3

Yes. So it's a target, Chris, and it's not a one and done, Right. We want to continue to challenge ourselves to now and going forward as we have historically, maybe a little more Urgency for lack of a better term given the higher cost of everything now to build. The way we've modeled it, we think the returns move up pretty nicely. It depends on obviously the store and how many members they project and so on and so forth.

Speaker 3

But on average, it's an improvement that we think may take folks from thinking about Should I get ahead of my schedule again and maybe saying no historically with the current environment. But now in this new model, this new growth model, Maybe that no turns to a yes. And that's really the intent that we're after. And I think once we work through all these changes and so on. I think folks will do the math themselves and hopefully come to that same conclusion.

Speaker 10

Okay. And then Craig, we saw that the Flynn Group's recent announcement that it made a significant investment in the system. Can you help us understand how much interest you're fielding from Experience franchise operators from other industries and whether there's a meaningful opportunity to bring in new franchisees with scale and And a desire to grow into the system.

Speaker 2

I mean, as you know, I have interest in Dunkin' Donuts as well. And we have about 2,000 franchisees at Dunkin' Donuts and we have just about 100 here. So many of our franchisees have scale and they are big operators. We're excited The Flynn Group wants to participate with us. I think they can help be helpful to the system as a whole because of their experience in other franchise models.

Speaker 2

But clearly, we've had interest from a number of different sources over the past And this brings a different dynamic. So, anxious to see what it brings for us and the opportunities to learn from somebody else that comes in the system. But we have some pretty strong large operators in this system right now.

Speaker 10

Okay, great. Thanks guys.

Speaker 3

And Chris, just one thing on that too. They're investing in the operators rolling. In the case of The Flynn Group, like in other situations. Yes. That makes sense.

Speaker 3

Thank you.

Operator

Call. Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Please go ahead with your question.

Speaker 4

Hi, good morning. I guess kind of going back to development and appreciating all the challenges there. I'm just curious What you can do to maybe bring more into the top of funnel to help buffer against the kind of delays that are not Within anyone's control, I mean is that anything that you can do for that top of funnel? And then Secondarily, if these changes to franchisee capital requirements do free up more capital to develop, What would be a logical lag time there? I guess, I'm just these will be adopted theoretically in the not too distant future by franchisees.

Speaker 4

Is it too late for that to really impact 2024 just given the timeframe that now is extended to open a club?

Speaker 2

Yes, it's a good question. Again, we don't know all the answers because our franchisees just got this information less than a month ago now. But There's a few other issues associated with development and Tom mentioned one which is real estate availability. And so you heard me talk about leverage earlier. Again, we haven't employed leverage for our scale in the way we should have years ago.

Speaker 2

And I think we need to work the real estate Industry just as hard with the scale that we bring. We're the 3rd largest retail Consumer of Space, TGX and all their concepts is 1, Dollar General is 2 and we're 3. But I don't think that we've employed that leverage and scale to be able to take advantage of that. So the first thing is finding a site. And from then on, it's all the other things you have to go through in order to do it.

Speaker 2

And so, Tom also mentioned that CBRE You said that the amount of development has gone down consistently over the last 4 years. So we're fighting a few different dynamics, but our scale should help us And we're trying to really push that, to help us get into places that maybe in the past we wouldn't have got into. And then the permitting, I mean, We can learn from each other and find better ways to try and get through the process, and I think we need to do that. But at the end of the day, bureaucracy is bureaucracy in some of these towns. And Tom mentioned the expediter.

Speaker 2

I had an expediter in Jersey City. It took me 3 years open that club. And so it was unbelievable. And so it Sometimes it is what it is and you just have to cope with it.

Speaker 3

Yes. And Sharon, maybe to add to that, We do back to your top of funnel point, some of the big brands like Bed Bath and Beyond, more recently Rite Aid, We do come at those folks to try to get a number of sites to be able to come our way. We're actually opening a couple of stores in our corporate segment that are former Bed Bath and Beyonds over time here. So I think that's another opportunity, But it is trickier given the vacancy rates are tougher. The other thing I'd say in some cases we have exclusionary clauses where people don't allow fitness centers into the space.

Speaker 3

Another retailer will block it. And so our real estate team and the leadership team there are doing top to tops with some of those brands to see if we can get around those exclusions because as you've heard us say, we're very different than the typical gym or fitness center in that Our traffic patterns are flipped from what the center usually experiences. Our busiest days are Monday Tuesday, not Saturday Sunday. So it's a lot of work and a lot of activity, but we're fighting the fight on all fronts.

Speaker 4

Okay. And then you mentioned Clayne, with the White Card membership, so you're doing some tests there. Are there other ways you're looking at monetizing the membership base beyond just You know it's been changing price points of members. I mean you've been very disciplined in the past about kind of keeping the revenue just coming from equipment And really, the dues and the royalties associated with that. I mean, is there are there other ancillary streams of revenue that you could introduce that wouldn't Increased franchisee complexity.

Speaker 2

So we you heard me say earlier about innovation and innovation includes price. And so we're getting a lot of information and using the Flynn Group as an example, they may be helpful in figuring out how to be Even more creative in the way we go to market. And so we're going to be testing things And I've got a lot of franchisees that have some experience here as well in looking at it, but our first foray is what we've already announced. But in the longer run, we're going to be constantly innovating in different areas, including price to see if we can't find the sweet spots of places that we need to be. But at this point in time, there's no add on service or something like that we're looking at.

Speaker 1

Okay. Thank you.

Speaker 2

Thanks, Sharon.

Operator

Thank you. Our final question comes from the line of Alex Perry from Bank of America. Please go ahead with your question. Hi.

Speaker 11

Thanks for taking my questions here. Just first, how are you thinking about Black Card penetration from here? Sort of what gets that going in the right direction? Does the potential move to a higher pricing tier on Classic Card sort of help narrow the gap between the two pricing years. Just how are you thinking about Black Card?

Speaker 11

Thanks.

Speaker 3

Yes. I'll start that and maybe Craig will answer or add to it. So I think Alex, you probably heard us talk about. We think the Black Card mix being down year on year is due to a couple of things. One is the Gen Z penetration.

Speaker 3

They have a lower Black Card mix. The second thing though and we feel this may be actually bigger than the first part Last year in Q2 sorry, in Q1, Omicron was hitting. So our Classic Card sale was really muted. So our penetration or the mix Of Black Card to Classic Card in the first half of Q2 was really unique and that Black Card It was a bigger part of the mix and that's what we've been up against and that carried through the rest of the year. So I think we'll get a better gauge on all of that When we are in Q1 of next year, assuming everything's okay and our January sale is not affected by anything like it was in 'twenty two.

Speaker 3

So I think that'll be a truer read up against this year's Q1, which was much more typical. In terms of the spread between Black Card and Classic Card, that's clearly something we're looking at in the test. As you can imagine, Our goal in test is to raise the member dues versus the control stores, but in a way that doesn't sacrifice member growth as I mentioned earlier. And so we're looking at the joint trends, the cancel trends to Craig's earlier point as well as the Black Card mix and how that changes. So There's a lot to factor in there.

Speaker 3

And up until now, we've had an increasing gap between Classic Card and Black card, but the Black Card amenities were so attractive that enabled 6 out of 10 people who thought they were going to come in for a $10 membership come in for The Black Card membership at one point it was $19.99 and made its way all the way to $24.99 So we'll see how the test goes and continue to evaluate That and other options to see if we can find a better mix of price points to drive more dues, but also without sacrificing member growth.

Speaker 11

Perfect. And then just my final question. Are there any sort of quick modeling implications with the transition to the new Store Growth Model that you think would be sort of helpful for people on the call just in terms of like It sounds like some of the near term impacts are pretty muted, but is there anything that we should be incorporating in our models as we move forward. Thanks.

Speaker 3

Yes. Sure thing, Alex. And maybe just the high points here. So any stores that were built 2019 and prior, they all got an 18 month extension on their re equipped cycles. And any stores that were built in 2020 2021 as we're making our way through those changes, they got a 12 month extension on those cycles.

Speaker 3

And then anything built in 2022 forward, they go back to the 5 7 years. So those are the stores that are changing to what we described 6 and 8 on cardio and strength. So really the way we see it is The impact isn't until 2026 when some of the stores that were on cardio in 2021. That would be due in 2026, that's the 5 year cycle. But now they're being pushed a year.

Speaker 3

So that's really the first impact there. So it's not I think if you work through your modeling and what stores opened when and It's not always exact, but it will get you close enough on what that impact might be. And then it carries forward from there. But we think in the trade of what we're talking about here In the new growth model that was the best way to sort out how we could Free up some cash and liquidity for reinvestment, recognizing not one size fits all, recognizing equipment usage is changing and shifting from cardio to strength and all the things we talked about. We thought at the end of the day, the outcome, the benefits far outweighed the re equip impact in the out years.

Speaker 11

Perfect. That's incredibly helpful. Best of luck going forward.

Speaker 2

Okay. Thanks, Alex.

Remove Ads
Powered by Quartr
Earnings Conference Call
Planet Fitness Q3 2023
00:00 / 00:00
Remove Ads