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

All right. Thank you. So I'm so happy to be here today. I'm Sharon Zackfia, and I have with me virtually in our virtual world, the management team of Planet Fitness. So we have Chris Rondeau, CEO; Dorvin Lively, President; and Tom Fitzgerald, who's the CFO. I need to tell you that there's a complete list of research disclosures and potential conflicts of interest at williamblair.com. We probably could have done that in a virtual background here, so I didn't have to say that each time. But I think Chris would like to give us some overarching comments on recent trends before we get into the Q&A. And a reminder that people can submit to me as well questions to ask.

Great. Thank you, Sharon, and thanks, everybody, for joining us here late in the day. Just a quick update on that kind of what we saw in our 8-K that we released last week. Same, joins are doing really well, a little bit pent-up demand for sure. And we're seeing a real increase in volume of joins over last year at this time, which I think is super encouraging, considering there's been no real acquisition marketing for really the last couple of months. So definitely, people are looking to join. I think the interesting trend that we see there too is that with unemployment where it is and the financial burden [ gain ] penetration of new joins, so the same as what we've seen post -- or pre-COVID. And also an important metric that we watch too is because we cater to the casual first timer and getting people off the couch for the first time, pre-COVID, about 40% of our joins or 40% of our 15 million members were basically joining the Planet Fitness for the first time and a first-time gym member ever. And we still see that today. So even the joins we see now are still 40% first time who's never been off the couch before until they joined Planet Fitness. I think it's super encouraging. And it says a lot seeing that regardless of what you see on the news or regardless what you see about social distancing and gyms or what have you that somebody who's never been a member of a gym ever is still joining today at the same rate they were pre-COVID. So they're still choosing bricks-and-mortar as their option to getting healthier. So that's a great sign. Our cancels when we first opened a store is generally a little higher than normal, slowly comes back to basically about flat to last year or slightly more. But the net of it is we're still holding our membership base stable and opening, operating our stores. Our usage rates for members today is about 60% of what we normally see in member traffic. The initial stores we opened about, call it, 4 or 5 weeks ago, it was only about 25% to 30% of normal traffic and then slowly climbs up to 40%, 50%. And today, we're about 60% of normal member traffic workouts. And interesting there too is the more recent stores that are opening in the last week or so, they're not starting at that lower level. They're starting right out of the gates at about 50%. So they're really starting at about half usage today. So all trends have been good. And right now, we're slated to have about 1,200 stores opened for mid-June. So all in the right direction and super encouraged by what we're seeing in the market.

That's great.

Can you talk about any regional differences in the areas that you've reopened? Anything to call out there? Has it been more the length of the time they've been open.

Yes. Not only in the times they've been open, but we've been watching that, and we don't see any regional differences or geography differences. So everything has been the same. And yet to be seen when places like New York, California or in Massachusetts opens up if that changes. But so far, our member workouts and joins and cancels have all been -- are the same regardless.

On the -- so looking at the questions that are coming in as well. You obviously did a great job with the digital interaction with members as well as nonmembers during the time the clubs are completely closed down. Do you have any insight for the new joins? What percent of those might have had some interaction with Planet in the digital world before joining in recent weeks?

Yes, it's a good question. We don't right now, but we are going to work on hopefully ways of capturing that because there's no doubt, we've gotten a lot of traction. Now we went Facebook Live, the date we closed in March, I think we had over 100,000 views every evening at 7 p.m. on Facebook with our workouts there. A lot of traction, hard to really determine how many are members and nonmembers, how to target them, but great exposure. We plan on probably continuing some form of that in the future because it's just great brand exposure for us. And then our app that we launched last summer, you might remember, it was kind of a digital strategy we're already going on maybe because what we were seeing in our gyms is people working out and they have their [ phone up against the wall and forming a ] routine, but we didn't have the content. They were actually going somewhere else for our content using our gyms. So we felt like why don't we supply the content on their phone for them to follow workouts as opposed to third parties. So that's kind of the endeavor we went on last year. And luckily, because when we closed our gyms here, our content on our app was up 107% overnight. So good thing we're ahead of that. We learned a lot from that process. And part of the content play that we're looking at is we have an elevated experience for content that a Black Card member were to unlock in the app longer term. So we can hopefully drive Black Card acquisition or drive Black Card pricing through an elevated experience through the app with content, which led to that iFit partnership we did. We released 36 videos of content on our app to iFit, and those views are even better than what we had previously. So we've learned a lot from it. But you're right, you just need to see longer term. I feel it's a good marketing play there, a new avenue for us, where people who have our app that are utilizing our content that are nonmembers, how do we advertise or get them to join our bricks-and-mortar down the road. So I think it's a great way to see how we can capture people that aren't members that are utilizing our content exposure.

So it's interesting because I was thinking of digital as a member acquisition tool or an engagement tool, but you just threw in potentially an upsell to Black Card membership or some sort of affinity associated with that. And how do you view the digital opportunity? I mean because obviously getting more members per club is the highest. I echoed myself. But you can also have special content for the Black Card members. So could you kind of rank, as you're thinking about digital, kind of where you're prioritizing the thought process at this point?

Yes. I think the content -- as I said before, it start off with how do we give members more education from content to get the most out of their membership in the club, how to use stuff better, how to change their own workouts on their own free will because we saw people in the clubs utilizing apps that wasn't ours. And then it led more to like how do we provide some stuff at home. As we've talked about that before, half of our members don't use a store in a 30-day period. Are they not working out? Or are they doing something at home that we're not aware of? So how do we keep them engaged when they're not using us bricks-and-mortar at home, hopefully drive some retention there as a member of that, gives them access to content. And then we looked at the iFit partnership as -- we're not in the content business, and they have been for 20 years or so, so partnering with a really great company to hopefully produce good content for us that would give a Black Card member an elevated experience in the club longer term. So I think -- and also the other part of it is we're not in the diet and nutrition world either. So is there another partner out there that we can work with them longer term that maybe people aren't working out right now or not using bricks-and-mortar, but they're following some kind of nutrition or how to eat better guidance in the app that [ we hope would book those ] long-term retention or even a Black Card benefit for them as well.

I know before the clubs reopened, we had talked about whether there are going to be concerns around peak periods and where members are going to have to make appointments to come into the clubs. I mean how has the reality been? Have you had any kind of issues with peak periods? Any kind of capacity constraints that you need to implement?

Sure. Yes. It's a good question. So luckily, our gym is about 20,000 square feet and big box. Since we don't have a lot of small rooms like a spin studio and yoga studio that you cram in a bunch of people in 1,000-square-foot room. So in that sense we're pretty lucky. Worldwide, it's different by state and by country, for example. But in a 20,000 square feet, typically, [ we would fit up to 200 people ] in the building, which we'd never have 400 people and we don't have that much equipment for 400 people in the club. So even at 50% occupancy, which is generally what the states have required is 50%, 200 people are still a lot of people at one time in our clubs. If it was a really busy club on a January and on a Monday, maybe you get to that on a Monday night. Right now, we haven't had any issues with it where people had [ to turn up and there's ] 200 people. So that's been good. And a couple of other things with inside the stores, the equipment, meaning the circuit and weight equipment, is generally pretty spaced out. So that -- they wouldn't notice any difference there at all. The cardio, which is generally in rows, we have in offer -- we shut off basically every other piece of cardio before social distancing amongst cardiovascular equipment, so treadmills and bikes and ellipticals. We average about 100 to 120 pieces of cardio per club. So it's, call it, 60 pieces of available cardio to use. Hasn't been too much of an issue, had some reports that on a peak night, on a Monday, for example, maybe the treadmills are full, but they -- some got to use bike and elliptical instead of -- because the treadmills are full. So it's a little bit of an issue there, but nothing really to speak of. A couple of things in our favor is, two, is that because of the work from home, we believe, the workouts -- our peaks, which are generally after 5:00 at night after work, it'll be 4 to 7 in the morning, our peaks are very less. And people are utilizing the facility now between 9 and 11 in the morning and 2 to 4 in the afternoon. So our curves aren't as drastic as it used to be and really flattened out some. So that's helping us some. But one thing that's interesting, Sharon, is in our app we're working on, and we were doing this pre-COVID because surveying our members -- and even a lot of the investors and analysts think that -- when you ask them when do you think that gym is the busiest, our members assume it's the weekend when people aren't working. And in fact, our weekends are the slowest. So a typical club of ours that will do 1,200, 1,500 workouts on Monday, that same club on Friday will only do 700, and our Saturday will do 400. So in our app, we're working on a heat map. So that as a member, I can look -- open up my app, look at my clubs that are around me, my Planet Fitnesses, and see on the heat map kind of a gas gauge of what our occupancy is real time, so you can determine when the club is busy or not. And we are working on this to try to flatten that out, so that we could actually have [ momentum per store ] without having to retool. So that could help longer term with the social distancing.

So we're getting a lot of questions in the chat here about the health of the franchisees and their debt levels. And if you could kind of talk about that. And then as the revenue is starting to come back in, as some of the clubs have reopened, what we should think about in terms of development and how you hear those franchisees are to go back to opening new clubs.

Yes, Sharon. I'll take the first part of that. So our franchisee system, as you know, we've got about -- we've got 130 of them across 2,000-plus stores. So on average, a little over 15 units per franchisee. We don't really have a lot of mom-and-pop franchise -- as other systems do, a lot of mom-and-pops with 1 or 2 units. And the model is so profitable that the typical store earns high 30% four-wall EBITDA margin. So they've really been blessed, I think, with great returns and great profitability. So as we've talked to our franchisees, we have calls with them every week, the entire system as well as the Board that represents the franchisees with Q&A sessions, and then we also have one-off conversations. So we've had a lot of discussions. And I think for the most part, the franchisees really were able to curtail their cash burn by getting rent deferrals, working with our team on sort of best practices to approach landlords and really taking a big part of their operating structure down in terms of the cost -- the cash burn. The second piece was furloughing their associates or their -- or getting the PPP money, whichever was the better option for them. So -- plus some other cost reductions and belt-tightening they did, they really positioned themselves to weather the storm. So through all of our conversations with them, which continue, including this week, we've not had anyone really raise their hand or call us and say, "I'm struggling financially. I need some help. I need some sort of assistance from you." And also, we've had no one say to us that they will not be able to open any of their stores once they get the green light from the local authorities. So -- and at this point now, to Chris' point, with the number of stores that are open and more to come here in the next couple of weeks and more after that, they're really focused on reopening their stores. And once they do, the clock starts on the revenue cycle and most of the clubs, they closed shortly after the March drop. So the customers have a 30-day credit to burn off, and then the stores will start billing again. So the cash flow will be coming soon. And they've really, I think, done a nice job weathering the storm. So as things have gone maybe compared to other systems, ours is in really good shape.

Can you talk about how many signed leases there are out there among your franchisees at this point?

Yes. I think, Sharon, on the development side, it's about a 6-month time line, and you've heard us talked about this in the past that from the time you negotiate a lease to getting your permitting, your architectural drawings, getting everything approved, landlord turnover and then ultimately up to presale and opening, it's about a 6-month time period. So in reality, we've -- a decent amount of insight into certainly 3 months and then that last 3 months out past that. So you think about we're back in March. So we had good insight into, say, early Q3, not all the way through Q3 and certainly Q4 is a big time period for us. And then obviously, when the country shut down, construction crews left the sites. No one was traveling. So the pipeline kind of dried up on the back end of that. Some of the stores that were fairly close to opening, those -- a lot of those have already opened. So the construction crews were able to get back in and get those stores open. But as Tom said, the real emphasis on our part about assisting the franchisees and then the franchisees' activities, certainly over the last, call it, 30 days, has been working on getting stores reopened and getting the teammates in, getting them trained under the new protocols, make sure that we have all the PPE supplies in place and be ready for members to come to the stores that Chris talked about. So the big activity was around that. As the country starts to open up a little bit more, unfortunately, some of the towns and municipalities, the people are still not working, they're working remotely, so getting permitting and things like that has been kind of difficult. So we made the decision at the time when we really didn't know when stores would reopen, but obviously, franchisees had a requirement not only to build x number of stores this year but also to be able to replace equipment in x number of stores this year, so we made the decision to give all of these guys a 12-month extension in doing so to take a burden off of their shoulders in terms of all these things they needed to do, as Tom just walked through, given no revenue coming in the door, minimize cash flow, et cetera. So we pushed that out. We think it's the right thing to do. At this stage, it's still a bit too early to see. Will some of those take full advantage of that? Will some of those -- once they see the member base, as Chris talked about -- and keep in mind, most franchisees don't have all these stores opened yet. So as -- the larger guys are spread out from a geography perspective across the U.S. a bit, and so they don't have all the stores open. So they're still really prioritizing, getting stores opening and getting the team in place and getting trained, et cetera. But some of the guys are starting to look at sites and talk to brokers about potential sites to try to refill the pipeline. But as we said, back at the end of Q1, most likely, this is going to impact not only 2020 but could have some lingering impact in '21. At this point, it's really still too early to know what that would be. But from the guys we're talking to, I mean, they want to get back, start growing their store base.

So something we've talked about for a long time has been the increase in kinds of sites that you've been seeing as a result of what's been going on with brick-and-mortar, and now there's things that have been going on with other elements of the service economy, whether it's other fitness, clubs or studios or restaurants or what have you. So can you talk about what the real estate landscape looks like, if you feel like that's opening up more for you, and then on the competitive side, what you're seeing in terms of rationalization there? And if that changes, you also made a target of 4,000 clubs in the U.S.

Definitely, in terms of retail land and real estate, a lot of conversations around what's it going to look like on the other end of this, and a lot of companies have already announced either they're closing all their stores or certainly downsizing. So just retail, in general, I think we're going to have more space available. The question is, is it in a market and in a targeted center that we want to be in, number one? And is it the kind of box that we would like to be in, in terms of -- why would it cost to retro the box to be able to have a Planet? I don't think the final shoes dropped on exactly what the landscape is going to look like. I think we're all convinced and franchisees and some of their brokers are convinced, there's got to be more availability and there's going to be more opportunities to take advantage of that, not only from just pure retail, but most likely, competitively. There's a lot of rumors about what some of the competitors are doing, to your point, a lot of things around 24 hour, what they might end up doing and just other regional chains as well coming out of this. I think it's still too early on that. I think the other opportunity is some of the big box guys who have been talking about downsizing some of their big boxes, I think you're going to see some of that as well take place. But at this point, there's just not been enough activity out there to know what real opportunities is going to be in the short term. I think most likely because a lot of these guys are going to -- when they've opened back up or will open back up because of some of the municipality mandates in terms of opening, they're going to use that as an opportunity to liquidate and sell off their inventory. So it hasn't all kind of popped up on the radar yet. But what we are doing and our real estate team and then what a lot of the bigger franchisees are doing with the brokers are staying closely connected with some of these big REITs that have those spaces where some of those retailers are to be able to take advantage of it. And quite frankly, this may be an opportunity where things happen a lot faster that may have taken 3 or 4 years to happen, we may be able to take advantage of that here in the next 12 months or so.

I had a question come in from the audience about attrition or member churn, asking really if you're seeing any difference in any of the clubs that have actually started to charge. Again, Tom, I think you mentioned that some of the clubs that have reopened haven't gone through a billing cycle yet because they were on credit. So I think the question is geared around once you start charging, might attrition go up?

Yes, I don't see -- it could. Tom, you can add to it. I don't see, when we really started billing members, the fact that we went to them and said that clubs are reopening and your dues will be turned back on, [ granted they're on credit ], I think that's probably the influx we saw, the first initial couple of days when the store reopens where we have the increased cancellations in the first few days because they can still -- even when they cancel, they have a credit. They can still use the club with a credit, [ even all their kids ] have their memberships. So I think that's probably more what we saw. In the first initial couple of days, we saw the increase, and then we notified them we're going to turn the billing back on. Time will tell, but I don't see that will be a deciding factor.

Have you resumed marketing yet as the clubs have been reopening? And if so, how has the marketing message changed?

Yes. We really haven't. So the national ad fund, the 2%, because we weren't billing members, there was no ad fund coming in. And until we have the majority -- or the vast majority of the stores open across all 50 states, you won't see any big national promos. So we'll continue to open stores and all the states start opening up. So my guess, by the end of summer, hopefully, or beginning of September, so you'll maybe see a big natural push there. Now on a local level, out of these 38 states that we're open in, 11 or 12 states were open 100% of the stores in. So in those big DMAs where we have all the stores opened, you'll begin to see the 7% local spend begin to work probably in the next couple of weeks here and begin to build members and at least collect their 7%. And they do the marketing co-ops, which we've talked about, where we take a DMA like Atlanta, which might have 40 stores, and they all contribute to their local marketing co-op and they do big marketing pushes that way outside of national promotions, and that's not -- it's very common anyway. But you'll begin to see that probably in a couple of weeks. But if you look in that area, you would almost assume that isn't national because they'll buy syndicated ABC. They'll be on cable networks. I mean it's a big spend. So I mean 7% is most of it, right? So you'll see -- again, see that here shortly, but we haven't done anything yet, which is even more encouraging because the joins have been coming in ahead of last year without any...

Is there a -- so one of the unique things about your clubs has been that there's always been a lot of sanitization available. Tom is going to have to move around a little bit more in his office over there.

These darn motion sensors.

I mean is there a way to emphasize the cleanliness or the sanitization of the clubs in kind of a Planet Fitness appropriate or reverent way? Or is that something where you don't even want to go there because it reminds people there's a pandemic?

No, I think it's called out that we probably should take credit where credit is due. And we looked at sanitization stages in our gyms for decades. All facilities have cleaning solution, disinfectant, paper towels there for members to use and staff to use. And our members, I mean, if you don't clean the equipment, it's not even the staff that will tell you. It will be the fellow members that tell you, you didn't clean that. So they take etiquette pretty seriously in our clubs. So we just call them out with improved signage. In our gyms now, the sanitization stations have flags on. So when you're in a facility, you can see all of them around you, so you know which is the closest to get to. And it's interesting because the members coming into the gym are thinking we've added a lot more, and we really haven't. We've just -- you can't miss them now. So you come in and you say [ geez with all of these ]. So it goes without -- so in our promotions, I think you'll see a little bit more feature around how clean our clubs are and then the fact that we have that available [ for sure ]. I think it's probably more important than we take credit for and you know we're doing it forever.

What is your line of sight at this point for the -- you mentioned 1,200 by the mid-June reopened. What's the line of sight for the roughly remaining 800 or so?

Yes. So there's 11 states that we don't have any real time line necessarily. It changes all the time because even if they have a date today, and we can get to the [ 94 ] and the state changes it tomorrow. So -- and the other thing is we're not quick to jump the gun where the state gives us the green light, we open tomorrow. It takes us about a week or 10 days to make sure that we -- corporately, we feel safe and the franchisees feel comfortable that they brought employees back off of furlough. They've got them retrained on proper etiquette, proper cleanliness, the improved signages on trash cans and the new self-check-in as well where you download the app, the bar code's on the app, so you're checking yourselves in as opposed to getting your key tag over to the front desk staff to check you in. So just to make sure we have all that in place and the staff's PPE, so their face masks are on properly for them to use and gloves and such. So it takes about a week to 10 days. So that being said, we have -- Planet's 1,200 by the middle of June. I guess the number might grow, but it's hard to really say exactly when the rest will fall. In the next 11 states, we really don't know when will New York really open up, or California, for example.

One thing that's interesting that coming into this year we talked about a lot was the shift kind of away from digital marketing towards more broadcast. And I mean, I don't know about you, but there's nothing interesting on broadcast TV anymore because there's like no content. So as you think about, at some point, restarting national advertising or even as the local ad budget starts to ramp up, how do you think about that media mix? And then kind of taking it a step further, New Year's Eve doesn't happen in Times Square. I mean what's -- is there another kind of high-visibility opportunity around a New Year's resolution sign that you can take advantage of?

Yes. I mean Times Square is really the -- that's a real unknown, right, let's see what's going to happen by the time that happens. So we'll have to play that one by ear. We're looking at it already. I think what we learned on third and fourth quarter last year and all those learnings into first quarter, I mean, we were really knocking the cover off the ball in January and February, and we really -- had some really good numbers when COVID hit. So there's no doubt that what we learned with cable advertising and TV was super important and was definitely working for us. So I think we'll probably continue still with that strategy. I mean cable advertising is definitely a big one for us, and that's almost all repeats anyway, doesn't really change with Seinfeld or Friends, for example, it's a big one for us. So I think that is still a big play for us. I don't think we'll change our strategy. I think what we learned last year will probably still stay in effect this year and in the future.

Getting some questions as well from the audience about the last recession, you saw some of the trade down benefit your results, why you expect to see it this time around. Do you think that's another opportunity for Planet?

Yes. There's no doubt, I believe that with unemployment -- and first of all, the big boom in boutiques and boutiques in $30 a month -- $30 classes, $150 a month memberships that, I think, will get a lot of people that they're not going to not work out. They're just going to be more cost conscious of what they're spending to do so. So I think we'll definitely benefit from that trade down like we did in '09, and I believe -- the only other side of that, I would believe, unlike '09, is that this was caused by a health-related issue where the virus affected people the most at were in poor health or with pre-existing conditions. I really believe that people will walk away with this with a renewed sense of importance of working out to be healthier longer term. I think for the industry, it's good. I think people will come out of this saying, I should really take better care of myself in the future. So I think that's another tailwind that the industry has. And the fact that we're catering to casual and first timers is probably a perfect place to be with our affordability of $10 a month.

And then this may -- you may have answered a bit of this because you said we're catering to first timers, but a question coming in about at-home fitness. And obviously, a lot of people have been forced to do at-home fitness, whether they wanted to or not. And does that create some sort of structural shift in the fitness landscape away from you towards more of the at-home fitness market? Or is that not kind of a zero-sum game?

Yes. I'd say, I mean, at-home fitness has always been around when we go back to Richard Simmons, right, Jane Fonda, and then it was Billy Blanks with Tae Bo, I think it was P90X and...

You're showing how old we are, Chris.

Yes, right. It's always been there. I do believe though, like I said, I think this has definitely gotten more people to probably do something because they're [ bored to the neck ] at home. And I don't think at-home fitness will ever replace bricks-and-mortar. I think it's a good supplement. But I don't think the true experience and quality and variety of equipment that you have in a gym will ever replace what you could actually do in the house. But I think with the digital strategy that we're on, I think it's good that people, if they can't make it in for a workout this week or maybe for a month because of kids' schedules or whatever, they do have an option to at least do physical at home. But I think once this all goes by us, I think people will have adopted digital technology to learn more about fitness. I don't think it will stay at this level, but I don't think it will retract to pre-COVID either. I think that people have probably accelerated their ways of using digital to learn more about how to be healthier. So I think it's good.

Another question coming in about the club productivity for the most recent classes. I guess this would be pre-COVID when they were all open, how you were seeing the newer units perform relative to history.

Yes. I'll take that, and you guys can jump in. If you go back pre-COVID, Sharon, we track all of our clubs kind of month 1 all the way through month 12, year 1. We compare those to the same cohort the years before. And we do it for years 2, 3, 4, et cetera. And that's how we talk about our comp waterfall as well because we put new stores in comp in month 13, and we've talked about the impact as those clubs continue to ramp. So yes, it's clearly a driver of more market share in the market. It's a driver of contributing more marketing dollars into a market as we open stores because you can shout -- your voice a bit louder. We didn't see any significant changing -- changes in our newer stores that we've built over the last couple of years or so. So it's still too early. I mean we've only opened just a small handful of clubs now since reopening has started. And in some markets, we're not reopening any clubs yet because the state is not open. So we'll wait until the state can open before we'll open those clubs. But at this point, given that we've got -- we have close to half of our stores open, and our join rate's been over-deciling a bit what it had been year-over-year, gives us a lot of confidence about the fact that people are wanting to join a gym. I mean this is -- June is not the peak of the year when people would join a gym, but you're still comparing apples-to-apples on a year-over-year basis. And one of the things that we talked about is, given the social distancing, given that people generally are trying to wear masks, et cetera, are they going to have a hesitation to join a gym at this point in time? And we certainly haven't seen that hesitation in terms of the clubs we've opened up to this point.

Great. Well, I think we're out of time. I don't know if anyone had any closing comments. Otherwise, I'll just thank you for joining us and taking the time out of your day.

Thanks, Sharon.

Great. Thanks a lot, Sharon.

Thanks. Take care.

Thanks, everybody.