Planet Fitness, Inc. (PLNT) Earnings Call Transcript & Summary

All right, we're going to get started. This is the Planet Fitness session. I'm John Heinbockel at Guggenheim. I have with us Chris Rondeau, CEO; Dorvin Lively, President; and the newly onboarded CFO, Tom Fitzgerald, in the front, is here as well. And we'll go through one of the more interesting and dynamic business models in the consumer space.

So let me start with -- I know you had, back in the fall, the annual franchisee conference. So curious, what did you take away from the franchisee groups? And what would they like to see Planet do differently or better, if there's such a thing, going forward?

Yes. I think the one thing with the franchisee, the franchise system is super collaborative. And we have committees in our franchise group that is on every -- whether it's operating committee, marketing committee, development committee. And we have a group of really well-seasoned franchisees. Today, we almost bring in no new franchisees. It's all with the existing franchisees. Even all new unit sales are with the existing groups. We still have over 1,000 in the pipeline committed to grow over and above the 2,000 already open. So it's really a collaboration. And they're a smart group of individuals that we get a lot of ideas from them and streamline and make better everything we do: marketing, development, operations. So it's more a collaboration.

Yes. If you think about -- so you took $1 price increase, right, on the Black Card. I know the first one, the $2 increase a couple of years ago, was no impact on joins. I assume this one, same thing, seeing no impact. And then if you think about the upper limit of Black Card pricing, assuming you don't fundamentally change the amenities on the card, where do you think the upper limit is?

Sure. So right now, we're about 62% Black Card penetration out of the 14 million members. Still growing slightly, even with the price increase, which I'm happy to see. So no pullback on acquisition there. Reciprocity is the #1 function of the Black Card. There's many perks: guest privileges, hydromassage beds, massage chairs. But reciprocity is the #1 feature. And in the 2,000 stores, it continues to become more and more valuable. And we'll have that in our back pocket every 2 or 3 years as we seed and develop stores. The last 2 years alone, we've opened almost 500 locations. So we'll constantly look at that. The big question is, we almost strictly advertise the $10 membership. It's really a curiosity number to get people off the couch, "I can give this a shot." And almost 40% of our members never belonged to a gym in their entire life. So we're truly expanding the market and getting people off the couch. So the question is, even though they come in thinking they're going to spend $10, 62% end up paying more than double, which is great. Is -- if it gets too high, is that spread too wide? One thing with the Black Cards, we'll never raise price just to raise it without more value, whether it's reciprocity or a new hydromassage bed or a new perk that's included. So fair question is, as that goes higher, does acquisitions start to come backwards? And then I think when that happens, it may be a situation where there's a middle-tier membership that maybe is a $17 or $18 or $19 price, but maybe has 1 or 2 perks in it, not all the perks. But time will tell when we get there.

You're not testing the mid-tier today, are you?

Well, we have a $15 membership, which is essentially the same White Card. It just has got no commitment on it as opposed to the commitment, but it is actually a type of membership.

Right. I mean what do you think -- I don't know if you hear from members, what amenities would they want inside the box that's not there today?

We test things a lot. We test like meditation pods, different types of hydromassage type options there. But we're always looking for new perks in that sense. In South America, believe it or not, we have free haircuts, and it works out great. There's a line out the door. But the code here in the States is a little bit different than South America, but we're constantly looking at what are ideas that we can put in the box. Outside of that, technology-wise, we have our app that we launched Q3 that -- it's just the beginning, version 1.0, but we took it in-house. It was off-the-shelf. We had no -- we couldn't really change it much. But I'm feeling a little -- it gives us a lot more flexibility in what we can offer as amenities for Black Card options, for example. We're testing in 2 clubs today that when you're on the cardiovascular equipment in the store, once you get off and by time you're at the front desk, your data is on your app. And as a Black Card perk, that's your benefit is you actually can track your data on your app because right now, you get off of equipment in the gym, data just disappears when the next person gets on the treadmill. Now it goes to your app. So we're looking at ways we use technology to offer benefits. In the future, we look at options like maybe premium content, workout classes whether in-club or at-home or maybe nutrition diet counseling as well through the app.

Well, that begs the question. When you look at the 14 million members and growing, right, we've talked about this a lot in the past. When -- at what level of membership are partners, retailers, other companies interested in accessing that membership for some type of -- I don't know if it's a discount or offering. You would think there's a way to monetize that membership. I know it hasn't happened. Is that -- do you have to get to a certain level of membership?

Yes. I think we're kind of right on that tip right now. We're starting to have a lot more inbound calls are coming at this point. We've done a deal of Reebok for a long time. If you're a Black Card member, you get a discount. 1-800-Flowers is another one. Trial with Audible. Now we have vacation clubs through Interval with the Black Card membership. But I think more and more incoming is starting to happen. And I think, yes, we get to the point now of 14-plus million members and growing that we can start to move the needle for others. I think it'd be great to kind of get something that's more consumables, whether it's discounts on Starbucks or Dunkin' or gasoline. I mean everybody needs that. If you're a Black Card member, you get $0.03 off a gallon, something that people really have a long perceived value of that even if you're not using the facility this month, you're getting discounts.

Well, what about the drug retail, nutrition?

Yes. That would be something too, website -- different website, e-commerce that you get discounts on. Zappos, things like that.

Right. The -- if you think about marketing in 2020, right, so obviously, we're just coming off one of your biggest marketing events of the year. Aside from that, how do you think -- you've got The Biggest Loser coming up. What else do you think, as an impact, either for 2020, and anything around the Teen Summer Challenge?

Yes. So Teen Summer Challenge is a great event. We will launch that again this year for the second year in a row. Last summer, how that worked is, any high school age teen, 15 to 18, we allowed to workout for free all summer long. It kind of was on the heels of really our Judgement Free Generation with Boys & Girls Clubs of America, STOMP Out Bullying, build self-esteem, self-confidence, teach people about fitness, nutrition, for example, and get people into the stores, but the brand affinity is really built for us. So we had over 900,000 kids in 90 days activate, log over 5 million workouts, free of charge. And 75% of those kids were from homes that the parents weren't members. They had to literally come in and sign the waivers to get them started up. So great exposure for the brand. I think it will pay us dividends in the future for sure there. From a marketing standpoint, we changed a lot around, started to in the third, fourth quarter, last year from a lot of data and research we did. It looked like over the years, as the marketing budget grew, which is at 9%, 7% local, 2% national of every membership dollar goes back into marketing. And we were overallocating more and more money to digital and not growing the TV network and cable, quite frankly, at the same pace. So we retooled some of that in Q3 and Q4, saw some great results and look forward to continue to drive that for the rest of this year. New Year's Eve was another great promotion. It was our fifth year in a row. About 170 million people in the U.S., it's really our Super Bowl. It's hours of just us. Four of five hours of just Planet Fitness night. And we renewed that contract for another 2 years. And The Biggest Loser is coming back on the USA, and it's going to start in about 2 weeks. Really interesting thing just ironically, one of the celebrity trainers on the show happens to be a Planet Fitness member who's lost 100 lbs or so in our store and she's come onboard actually as -- to be some social posting for us as well. So I look forward to that starting.

When do you -- when you think longer term, the right structure of marketing, right, between local, national, if you think about 9% spend -- I know you can probably get more efficiency nationally, but when do you shift the focus to a little more national, a little less local? And what's the right amount of spend?

Yes. That a good question. I don't think it'll flip 7% to 2%, 2% to 7% overnight, but I do believe that we can get that to flip over the next probably 12 or 24 months. Takes a vote from the franchisees, [ about ] 60%, but we continue to drive same-store sales. Third quarter was our 51st great quarter, positive comps for over 12 years of averaging over 12% same-store sales comp. So we just need to perform, get their buy-in. I think we can move it over. I'd love to see like a 5 and 4, something like that. I think we'd be a lot more efficient on the marketing and do bigger, bolder things, much like New Year's Eve but more of that type of stuff.

The -- when you think about where we stand with -- and this goes back to sort of Black Card, corporate partnerships. But in particular, like we've talked about insurers, employers actually having a vested interest in driving membership to you. Are we getting closer to that point? Because I know in the past, there's been some work with insurers, but their level of mandated dependence is too high. So are we making progress in that regard?

Yes, it's -- we work with most every insurer out there today. And the way it works today is the member gets reimbursed directly from insurance company. So in most aspects, we don't even know because of HIPAA rules. But I think more to your question, we tried to kind of break it down from the top-down, going directly to Optum or going directly to some of the Blues. And as you make the point, they really want you to work out 10, 12, 14 times a month. And for our type of member, they're not going to work out that many times, typically. So I think that at least in today's world, healthcare, there hasn't been kind of that mandate, if you will, between the company that's providing and then the insurer because a lot of -- most of the times they're self-insured, bigger companies and it's just an extra cost they're going to have to pick up. So to this point, we haven't seen that. I think over time as healthcare costs will probably continue to increase and hopefully, with the size and scale and the footprint we have and the value proposition we have, if it comes a point of needing a 4-wall box to go and workout in, I think we could very likely be the one that they'd want to partner with. But at this point, insurers really haven't gotten to that point.

The -- I think you touched on this a little bit in one of the breakout sessions, but when you think about, one of the big opportunities, right, to impact [ commit ] net membership for comps, eating into that churn, right? But there hasn't been the silver bullet. Is there -- and as you think about it, is there something -- and I guess, you can do more digging on why people quit. Something that can move the dial on churn over the next year or 2 or 3?

Yes. I think we look at churn in different ways. One is voluntary and involuntary. And involuntary is more from a billing practices, which is why we take checking account only for draft. So we don't bill credit cards. You look at things like credit card for a minute for an EFT business like ours and recurring is the day somebody joins, you guarantee you're going to lose them when the credit card expires. So -- and then you got credit card breaches, where it comes a breach, you lose big subsets of your member base of your recurring billing. With ACH, you don't lose that. So we kind of control that easily. As far as the voluntary cancel, our #1 reason for cancellation, vast majority is just nonuse, which is very different than our competitors, where when they get a cancellation, they're going from club a to club b across the street because it's next one is shiny. With us, it's like the couch won. I hate to say it, but it's true. So how do we get them back? And we make cancellation policy probably the easiest in the industry. Our billing date is 17th for every member. Seven day notice, on the 10th, you're out, no harm, no foul. We really don't look at it is a cancellation, we look at it as, you join, you're onboarded, when you cancel, you're unboarded. How do we unboard people correctly so you come back. And almost 20% of our 14 million members were members at least one time in the past. One thing that we're looking at is using technology to hopefully figure out and crack the code on the human behavior piece of it. In this industry, quite honestly, doesn't really know what makes people stay. And we're trying to crack this code forever. But if you think about it, 2 people join at the exact same day with the exact same background, same age, same gender. One stays 3 years, one stays 3 months. So we have no idea what the guy who stayed 3 years, what he did? Did he do a treadmill? Did he do a bike? Did he do weight? Did he do circuit? We have no idea. We don't even know what button he pressed on the treadmill. So we're trying to capture that data now in 17 stores exactly what people are doing, so we can go back in time, fast-forward a couple of years and look at millions of members' usage and figure out, wow, this person did this treadmill for 20 minutes, did this program, then he gravitated to the bike, did this program. And this person stayed 3 years; and his peer stayed 3 months. And how can we guide the next person to join down this journey because we know a million other people that like you, did. Right now, we really don't know. You check-in with gym, we don't even know how long you work out because you don't check out. So we're trying to look at that data to figure out if there's a way to help guide people to change their behaviors.

When you think about the 7200-or-plus members for gym, you're still not having capacity issues, right, in terms of people getting on the cardio or even a 30-minute cardio? Is that something you think about to the degree that people might come in more often? How much capacity do you need -- do you build the gyms a little bit bigger, particularly given the availability of real estate?

Sure. Yes. Our average [ closing ] is about 7,500 members and that same 20,000 square foot box we build today, we have a lot of clubs that have 10,000 members, quite a few. And it really doesn't become an issue until you get to about 12,000 members plus, and then it starts to get a bit dicey and then we just look to open another store. So there's plenty of room to continue to expand our average members per store without really retooling the box. And also, we look at our visits and our traffic. So we do about 5,000 workouts per week per club. That same club that does 1,200 to 1,300 workouts on a Monday, by Friday, that same club is doing 700. And on weekends, they're doing 400 a day. And then Monday it moves back up again. And it's kind of our customer. They're not 7-day a week person. Our member -- average member works out 5 times a month. So there's other days that we actually tell members that if you want to avoid the crowd, you come in on Thursday, just skip the Monday. So besides even getting a bigger box, you can just direct people to come in certain days to help alleviate the stress.

Is the 7% royalty rate, is that the upper bound of where you think it could go ultimately?

Yes. I think we're at about 6.2% now in terms of the existing stores and all the newer stores are at 7%. The way we think about it is that 7% is kind of at the higher end of franchising concepts, albeit, we think our model is a little bit more economical than some. So that's one kind of data point. The second thing is that a lot of our franchisees are ahead of their development schedule. And so to a certain extent, we kind of win-win. They're building stores faster than maybe they would have if we'd had a higher rate, let's say, before. But you look at our comps, we've had now, as Chris pointed, 51 straight quarter of comps. I think if we can keep driving comps, keep making the 4-wall box, more economical, maybe do some things around nutrition, et cetera, that we're talking about, I don't think it's unheard of. We don't have anything planned immediately to do that, but that's kind of the way we think about the overall royalty rate.

Because as you know, the question is interesting, right, at some point -- I don't know if it's $400 million or -- but at some marketing level, marketing spend could go down, right? With you and the franchisee sharing in that, I don't know if that ends up being a trigger to allow a higher royalty rate?

Yes. I think that could be. I mean I think we're far from that point where we get diminishing return, I mean, still 80% of the U.S. population doesn't have a gym membership. So we have a lot of work to do. So I think we need to get that quite a bit higher, maybe to look at that. But the question is if we can drive some -- a little bit of retention, even one month is a big number in 14 million people, higher Black Card penetration, higher Black Card rate, we may not have to get rid of the marketing dollars in order to influence the change in the royalty.

What -- again, your gym doesn't have a ton of labor. But tight labor market for you in your gyms that you own and for your franchisees, how are they managing that other than just the growth in the top line solves for that?

Yes. So we typically staff -- whether it's a corporate store or franchise store, you wouldn't know the difference. As you know, John, we typically staff 24/7 about 12 to 14 people in total. So it's a pretty fixed cost model. So when you have another 500,000 members join, you don't really have to increase any of your cost. But you're right. I mean if you look over the last 24 months or so, particularly in certain states, we've seen labor increases and it's impacting us both corporate as well as the franchise side. And you try to make sure you balance that out and make sure that you're still giving and delivering that member experience. The way we think about it is that if you're taking care of the members, you're saying the hellos, you're saying the goodbyes, you're keeping it clean, you're keeping it Judgement Free, about 70% of our comps [ have been ] member growth. So if we can keep doing that and keep comping the way we have, then the overall 4-wall box is more profitable year-to-year. There's clearly continued pressure on that side. But at this point, we haven't had any major concerns with a return on the investment, as an example, particularly given that an average store is going to generate kind of high-30s EBITDA margins.

So competitively, you dominate the value channel. There's being -- you're seeing a little bit of further growth from some of those players. What do you see when Crunch or another value player opens against you? And does that have any impact on comps or your ability to pick up new members?

Yes. We go head to head. I don't think it's really -- any competitor, whether it's low cost or not, if it's more convenient, somebody is driving 12 miles get to us, 12 minutes, and somebody's across the street, that's the one that's going to win. Low cost -- if we even see a blip, you fast-forward 12 or 18 months and you think it never happened. And members that leave end up coming back. But -- because if you think of even the low-cost providers out there, they were more like us many years ago, where today, they've added in the pools back in, the basketball back in, heavy dumbbells back in and they're more just less expensive LA Fitness at this point. So we already don't have those things. So they're already not joining us because of that. But I would think in the mid-tier world of the LA Fitness and 24 Hour Fitness is they're probably making their life more difficult because they're now basically a less expensive version of them more so than us.

The other thing I'd add, John, to that is that in markets where we have clubs that over decile on the average, let's say, they have the 10,000 to 12,000, 14,000 members or so, we want the franchisee to open up a store fairly close by, cannibalize that existing store because if we don't do it, maybe the competition will come in and do it. And so it's a maximization of the penetration that we want in that market. And our franchisees look at it the same way. I mean they know if they have a store that's got 12,000 members, they should be putting another store in that market. And so when we do our market planning, we take all of those things into consideration as to the potential capability within that area development agreement and encourage franchisees to put another site in. And that's one way of just continuing to kind of build your fortress around your market.

Now I know the official target is 4,000 clubs in the U.S. But you've also done some testing of smaller markets. Do you yet know if that represents an incremental opportunity beyond the 4,000 in some really smaller counties, communities?

Yes. There's -- when we really did this initial planning, the beauty of our model is we know where every single member or customer lives. And we can see exactly drive times, how far they're coming and that's how we came up with the 4,000 target because we had enough sites in a lot of cities to be able to know that our model really operates very similarly. At that time, we assumed you need about 75,000 population to support a 20,000 square foot box. And we're going into markets today, 40,000, 50,000 or certainly the kind of the shopping network around the store. We have done some really, really smaller areas into that kind of 10,000 to 20,000 to kind of test it out. There, we're trying to kind of maximize the box size with the capital investment size, keeping the brand element as much as we can, so that you get that same Planet experience to get the return. All those are coming in. And so more to come on that, but those really, really smaller markets were not considered when we came up with the 4,000.

When you think about -- Australia makes you think about beyond North and South America. So I know it's very early, but when you think about the portability of the brand and the operating model, in particular, Asia, Europe, how do you think about, just generally speaking, the opportunity in those areas? And is that something you're more likely to do organically or some type of M&A and refranchising?

Yes. I think that today, all of our international markets has a US base franchisee. So Canada, Mexico, Panama, et cetera. Our Australia business was 2 local domestic franchisees teaming up with a partner there that already had some gyms. I think that most countries, particularly Europe, it's got a kind of a low-cost version. It's not our model. Kind of going greenfield one at a time might not be the right way to do it. Maybe it's an acquisition and then use that as kind of a base. We've done some work around kind of where we think the brand and the country -- the top countries that we want to pursue. I think most likely, we would go with a partner in those markets. And ideally, maybe it's a partner that has a brand that could convert over to Planet. So you got -- at least you got a footprint as a starting point, but we're going to look at all those kind of opportunities. But first and foremost, there's such a big opportunity left in the U.S. that we want to make sure that we don't take our eyes off of that. We -- Canada is up and running well. We want to get Mexico. We want to get Australia and get a good base there because I think all of that just helps us as we go from the next country to the next country to make sure that we understand exactly what the footprint needs to be like and to be country-specific as we go into those markets.

And then lastly, if you think about -- and again, we've talked about this, I think, a little bit in the past, consumer product opportunities for you, right? And this strikes me every time I go into a retailer and I see Gold's Gym branded product. Why shouldn't there be? And actually, I did see some Planet product in a BJ's maybe 9 months ago. Not that it's huge, but it could certainly be very profitable. Are we anywhere on possibly going down that path?

Yes. I think some licensing that makes sense. And I think you're right. I mean 14 million members in all 50 states, the coverage is there. But it probably begs the question is this time for us to try and do stuff like that? We had an idea. We're in BJ's and a few other retailers with some products, very little -- limited, but some products. And you're right. You go to Walmart, they have an entire aisle just of Gold's Gym products. So whether it's -- that we replace that or are we going to Target and do something, but -- or even Dick's, a whole clothing line, you have Under Armour, you go to Dick's for new Planet Fitness clothing. So I think there's yet to be had, but I think there's something there for us for sure.

Okay. Well, thanks. I think we're just about out of time. Thank you.

Thank you, John.

Thanks, John.

Thanks, everyone.