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

So good morning, everybody. It's Randy Konik again, lifestyle and growth platforms analyst at Jefferies, here with another presentation from our virtual Nantucket conference. Again, we hope to have our conference back on a live setting next year and look forward to seeing everybody at the clambake next year. In the meantime, very pleased to have with us, this morning, Planet Fitness management. As you know, during the coronavirus, we've been very vocal on Planet Fitness as our top idea. And the depth of the coronavirus, given it's a strong business model from a membership perspective, driving predictable revenue and the ability for the company to gain, we think, massive market share in the years ahead as disruption from corona impacts the fitness, health and wellness industry in a very large way. So with those words in mind and our views on Planet, pretty clear in all the research we've put forth over the last few months, let's get started with our conversation today. And with us this morning is Chris Rondeau, the company's CEO, as you all know; as well as Thomas Fitzgerald, the company's Chief Financial Officer. Dorvin Lively, the company's President, excuse me, is not with us this morning. He had a personal matter. So we hope to see him again soon. But just wanted to let you guys know that Dorvin won't be able to be joining us for this particular videocast. So I guess with that, I wanted to welcome both Chris and Tom to our discussion. How are you guys doing today?

Good. Thank you.

Doing great. Thanks, Randy.

Thanks for having us in.

Great, guys. So again, thanks for coming to our conference. And I guess what I wanted to start off with, and it's on everybody's mind, is why don't we get some perspective on an update around the coronavirus? Maybe discuss what's open right now from a gym perspective in your system, what's not, and any learnings that you've had thus far that could be -- that you guys could share with us?

Sure. Thanks, Randy. Today, we have about 1,400 stores open. We're open in 47 states. In all those states, we're not all open in 100%. Some states are actually opening by county by county. So -- but we're open in 47 states, 1,400 stores open today. So it's all going in the right direction with open, which is great. Our membership volumes continue. As I've mentioned in previous calls, we're still up over last year, which is really astonishing, considering that in some of the areas where we've been opened the longest, the longest -- some of the areas has been open about 7 or 8 weeks at this point, so those markets have now started some local advertising there. So I look forward to seeing the response from that. But the join volume, the pent-up demand had been great. The cancellations have been pretty the same across the system where we see a small spike the first couple of days that club initially opens or reopens, and then it seems to come down and moderate back down on a normal level after that. So the net of it all is we're having a stable membership volume, stable membership per store and some net growth even in some locations. So it's been good. The member workouts is probably the thing, Randy, that we saw was most notable change year-over-year, where member workouts, initially at some of the earlier reopenings, were 25% or 30%. And then each week, you saw more adoption of members working out. Today, we're about almost 80%, 85% of normal member workouts today as we were a year ago. So even more of the recent openings now, Randy, are coming right out of the gate at a higher level of workouts right out of the gate. So I think the angst out there is slowly subsiding and people are excited to get back into the gyms.

Now related to that last part on, it's about 80% of normal workouts. It seems then that people -- the customer is pretty -- should be -- sounds like comfortable with the cleaning program as some of those different protocols that have been put in place to get people more comfortable. And it sounds like members are taking it well. Just give us some perspective there on what you're doing.

Yes. I've seen a lot of great customer sentiment on our basic communication on how we get our stores over with many stages throughout our stores, better signage, reconfirmed or reiterate our etiquette around member cleaning before and after workouts of their equipment and apparatus, and also what we've done for the staff, we've provided PPE for the staff to wear during work with face masks and stuff. With social distance, the cardiovascular equipments, every other piece is inoperable currently, so it forces social distancing amongst our cardio. Our stores are large at 20,000 square feet, so our stores have about 100 to 120 pieces of cardio in our locations. So still have upwards of 60 pieces of cardio that are available to use. The weight room floor and circuit training areas, no real change there. That equipment is generally within 6, 8 feet apart anyway, so that stuff has been normal there. But great customer sentiment. Even we put together about 100-page COVID operations playbook for the franchisees to use to reopen our stores. Even a lot of the government officials that we've shared this with were extremely pleased with the level of attention we've put to every single part of what we did to be sure that both customers and the staff are safe. So they gave us a lot of kudos when they saw these playbooks and what we really put into making the gyms comfortable and safe to come back to work out.

That's great to hear. Why don't we think about -- I said it in my opening remarks or introduction, I talked about disruption. I talked about our thesis that your company should be able to get market share gains or opportunities as others struggle. So we've seen the bankruptcy of Gold's, 24 Hour. It seems like Town Sports s struggling, obviously. How can that help Planet gain share? And can Planet take over some of these dark units that are a result of these closures happening with these companies that are going bankrupt or struggling in a big way? Give us some thoughts there.

Yes, sure. So we've continued to open lot of stores over the years, Randy. As you know, we had 1,000 when we went public here in 2015. And here we are with over 2,000. So we continue to open a lot of stores every year. And our competitors just either haven't opened any in many years or very few in comparison. So no doubt, I think what this silver lining, I guess, in the pandemic is it's, I think, helping cleanse out the industry, [ remove ] weaker operators in the system or better operators in the system that there's definitely some market share gains to be had. But even though in many years we've opened in markets already, we might have been the third gym in town, and you fast forward 5, 10 years later, we're the last guy standing. So I really believe that coming out of this, we'll be much stronger than we went into it. The real estate piece, our model is very different than most gyms out there. And the 20,000 square feet -- 24 Fitness, for example, they've got gyms at 20,000 square feet all the way up to 120,000 square feet. So some of the 20,000-square-foot boxes might be good for us. But I wouldn't look at it as though because it was a gym, it's an easy gym. Meaning, I would go in and gut it and make it a true PF. That being said, this -- I think this pandemic will also not -- not unsimilar to 2009, will make real estate even better for us even from other retailers and other businesses, other industries. So I would look at the gym closure as a possible real estate play, but not unlike the rest of the retailers that may not open as well as -- if it's good location, it's a good location, [indiscernible] was an Office Depot or an old 24 Hour Fitness location. And I guess the only thing I'd add to this is you've heard the Gold's bankruptcy. You've seen the 24 Hour Fitness news as well. Some other struggling competitors out there national. But there's 36,000 health clubs in the country. And if you take us and LA Fitness and 24 Hour Fitness and Gold's Gym, you put all the big national guys together, you have a hard time getting to 3,000 or 4,000 stores. So you've got, call it, 33,000 mom-and-pops out there in these markets that we -- you might not hear about it from the news, but our franchisees are calling us, Randy, saying, "Hey, XYZ Fitness across the street put a sign up, they're not reopening." So there's a lot more of those coming down the pipe as well, which is really just a market share gain for us. And I really believe we'll come out of this stronger. I think it's almost taken a 5- or 10-year horizon for us and probably brought it to next 6 months as far as where we are going to be in a competitive landscape.

Wow. That's a lot of potential market share. What about -- we get a lot of questions from investors around the boutique space because investors believe it's not the true kind of Planet-type customer, if you will. So maybe give us some perspective on all the expected failures we should see or may see in the boutique space and how that may help or not help Planet Fitness going forward.

Yes. I mean there's a huge boom, as you know, in the whole boutique space. I mean, they're quick to open, they're small locations, generally. As far as market share, most -- an average boutique has got 300, 400 members, right? So it's not -- one could close, and we almost wouldn't feel it as a Planet. Yes, we might get some, but you're not going to see a club close, like a full-service club that may have 2,000 or 3,000 members that will close be much more impact to our system. But there'll be consolidation, I think, more so from the fact that there's just so many boutiques. They're high-priced. So coming out of this, are people willing to pay $30 a class or $150 a month for a boutique experience? Or they're going to be more cost-conscious of what they're spending? But I think as you looked at Orangetheory and F45 and you got down the boutique list, I always go back to the same saying, is it's about the fit getting fitter, right? They're not really getting most people off the couch like Planet is and really cater to casual first-timers. Almost 40% of our members have never belonged to a gym in their entire life out of the 15.5 million. And even today, post COVID, we're still seeing about 40% of our joins are first-time gym members. So we're -- if you look at the other competitors in the boutique space, they're not actually getting somebody off the couch. They keep swapping the same customer back and forth that gets bored with that workout who wants a change, who wants the next new drug that they want to try, right? So they're going from an Orangetheory to an F45, back to Crossfit, and maybe go back to LA Fitness because it's all about the really avid exercises. We're truly getting people off the couch that have never tried before.

Yes. On that last point, you talk about 40% of your new joins are people that are new, I guess, to the gym experience. So that -- it sounds or speaks to the large TAM or addressable market that you have at your disposal going forward. I guess, if we think about the word Planet Fitness and the word Planet, you started to reach into smaller markets, if you will. You started to reach into international markets a little bit here and there as well. Maybe give us some perspective on how you're thinking about Planet dominating the planet over the medium and long term. What's the kind of strategy go-forward over the next, let's say, 5, 10 years?

Yes. Yes. So in the U.S., the market [indiscernible] [ 4,000 ]. Begs the question, does that mean this is going to move and we'll have to find that over time as -- move up as more of the industry consolidates? Does it mean more for us here? We've really said all along that we really want to make sure that we really have a strong hold on the U.S., not get too distracted with international. But that being said, we are in Mexico, we are in Dominican, Panama. We just went to Australia in late last year. Those stores are now reopened since the pre COVID -- post COVID, so they're now reopened in Australia. And we're in Canada. So I guess the bigger question, I think, with international is not that we won't still focus on it, it's really make sure we have U.S. locked down, especially with the new possible potential here. But do we start to see some other international competitors out there that kind of like a 24 Hour Fitness situation that we can step in and maybe come in with an acquisition model in some other countries to get a stronger foothold earlier on as opposed to going in one at a time like we have so far. So we have to pay attention to that to see if there's some international opportunities from a struggling chain that we can come in and turn it around and come in and maybe start off in a country that maybe has 50 stores or so, that we can come in right out of the gate with some more locations, as opposed to going in one at a time that we have. So we'll pay attention to that and see if that ends up coming to fruition.

Got it. Super helpful. One kind of question we get now a lot is people are trying to figure out, how do we think about what drives member growth and unit economics post corona? How do those things change, if at all, and what drives those items? So any thoughts kind of there?

Yes, sure thing, Randy. We think coming out of this, as we've talked about, competitors struggling, can't imagine they're going to have the CapEx to put a whole lot of new units in the ground. And once things return to normal in terms of development cycle and so forth, we intend to get back on the 200-plus new units a year. So that will drive more member growth for us just with units. Plus, we think the tailwinds for health and wellness, which were pretty strong coming into this thing, will probably even strengthen just because people know that if they had a pre-existing condition that they could have taken care of, they were more susceptible to the virus with that pre-existing condition. So we got to believe that more people are just going to be thinking about taking care of themselves and improving their health, and that should play into us with our value proposition of $10 a month and you get the same equipment, you get it a lifetime or some of these other more higher-priced clubs. And while not having the CapEx dollars, we also got to imagine they're going to be pulling back on their own marketing spend. So that makes our share of voice even stronger. Not many have been around different brands over the years, and I've never met one that spends 9% of sales on marketing. It's amazing. And when you rub that up against the sales that we have, we're putting over $200 million a year in member marketing and member acquisition marketing that no one can touch. And so we just think that's going to continue to widen our moat. And so we think the fact that we're the ones growing, we're the ones marketing and our competitors are struggling, that we're going to get more members per club as is aided by the health and wellness trends I mentioned. So -- and with our fixed cost model, that's very accretive to the bottom line, where every new dollar, after you pay royalties and marketing, about $0.84 on the dollar is flowing to the bottom line. So not only are the economics incredibly attractive now, but we got to believe they're going to improve on the existing units. And then when you look at the real estate market, which feels like it's going to go through a big reset, maybe even bigger than the '08/'09 crisis, where boxes are going to be available that weren't available before, and rents feel like they're only going to go down, not up, and landlord incentives, tenant incentives to build will likely get better, we got to believe that the new unit economics are going to -- as strong as they are now, could even get better. So all of that is very exciting as we look forward to the road ahead as we march towards 4,000 in the U.S.

Yes. It's a very detailed answer, and I really appreciate that. Really a lot of good stuff is the bottom line on the horizon for you guys. So one thing you talked about there is around the marketing and that constant communication, that we always talk about the flywheel of the marketing driving more members and so forth, and therefore driving more growth, et cetera, and so on. [indiscernible] Chris you said, obviously, with the coronavirus pandemic, that marketing had pulled back a little bit, obviously, because the gyms were closed. But now, given Tom's comments and how you think about the marketing playbook, what -- how should we be thinking about marketing spend and changes to that going forward to continue to kind of, as Tom kind of put it, continue to have that voice out there and had -- be on offense while all these competitors that are going bankrupt or shrinking are on defense?

Yes. So our marketing machine Randy, I mean, it's definitely a flywheel that just keeps spinning faster. When we went public August of '15, we had just over 7 million members. And here we have 15.5 million, and 9% of that goes into marketing. So it's a huge flywheel that just gets bigger and faster. And even if when I look at our oldest 100 stores in the system, which have had nothing cannibalization, had nothing but encroachment for more Planets opening up [ next week ]. And our oldest 100 stores in our system had a slightly higher same-store sales than the system did. And it's just because more marketing dollars are spent today more than ever in these older markets because stubble franchisees are spending with them. So it just keeps driving more people off the couch. Now 7% is spent locally by the franchisee, and it's everything down from hyperlocal like a billboard or postcard, to local cable, local radio or even some syndicated ABC, for example, in that market. 2% is spent nationally. Now through this whole process, we don't collect national ad dollars unless we're drafting members. So we weren't drafting members for the last couple of months. So as now stores come online, as now we begin to build, our war chest for that 2% begins to build now rapidly. We won't begin to do a new big national promotion until probably late summer when the vast majority of our stores are open. We've got about 1,400 stores open today, so we don't want to waste any dollars if somebody can't join their store because it's not open yet. So we'll wait until big national pushes late summer, let's say. But stores that have opened in the first kind of cohort of reopening, so 4 -- call it 6 or 8 weeks ago, those stores have now just begun starting the marketing. We haven't let stores really market right out of the gate. We wanted to make sure that members were acclimated to the changes, the staff were acclimated to the new changes, get everybody comfortable, and then begin the marketing. And so stores that have been -- come online earliest, so Florida, Utah, Georgia, they've begun to start marketing last week. So really, it's to see even the volume of joins we're doing today, which is over last year at this time, now that we have started adding some marketing dollars to that locally, what that do is to drive after that. So it's really encouraging. So I can't imagine it's not going to even help more so these new markets that we're able to start marketing in today. So more to come on that.

Super helpful. The one thing we've always paddled investors with that have been more negative, we've been obviously very constructive and bullish, is this idea of the number of members per unit at about 7,500. I think a lot of people have always thought, like they imagined 7,500 people in the unit at one time, which is a little tough to imagine. But maybe talk about how you think about utilization, how you think -- especially now with work-from-home, it gives people more -- even more flexibility. And how do you think about what the right amount of members per club is or could be as the business continues to grow, as you just said, and even in the historical older markets, they continue to see positive results.

Yes. It's a good question because that's something we're also working on there, too, that even helps that, hopefully, maybe push it in the future. So our average clubs [ have about ] 7,500 members per store. If you go back 10 years ago, the average club had about 5,500 numbers. So it's up 2,500 members more, 2,000 members more per store today. The usage right now, because of work-from-home, is interesting. So our busiest times of the day are after work, so call it 5:00 to 7:00 at night. And in -- the second largest peak is the morning before 7:00 a.m. It's interesting now, you start seeing more volume that we haven't seen before from like 9:00 to 11:00 in the morning as well as 2:00 to 4:00 in the afternoon, which is great. It is helping to lessen our peak hours, if you will, which is great. And the other thing, too, which is interesting, and we've got it going down this road actually even pre COVID actually, is that we surveyed a lot of our members, even a lot of the investors and analysts, if you asked them like, what are the days you think the gym is the busiest? And our members are saying, the weekends. When no one's working, people can work out. And the weekends are our slowest. Like, our average Monday -- a club in Monday will do about, call it, 1,200 to 1,500 workouts on that Monday. That exact same store on a Friday will only do about 700 workouts. And on the weekend, it might only do 400, 500 a day. So it's that drastically different. So to your question, too, which is interesting for me is we have a lot of stores with over 10,000 numbers in our system. And -- but if you look, if we could flatten out our peaks and flatten out our days, you could have a lot more members per store without changing the model or changing the equipment in the store and service a lot more members in the store. So we were working on this even pre-COVID, and even more important now, is in our app, if you open a club and really see real time, Randy, the busyness of that location. And see, based on true check-ins of members -- so you could pick your local club and say, "Well, this one's at 50%. This one's at 60%. I'll go to the 50% club." So you educate our members around what days are busy, what hours that they are busy. We get to spread that out over the week, you could service a lot more members per store without ever changing the size of the box or adding more equipment, which would be unbelievable to the bottom line.

It's kind of like using Waze or whatever, right?

Right, yes.

So kind of monitor when you want to go the gym based on the traffic. That's pretty cool, actually. I didn't even realize that, but that's -- I'll start looking for that. Is that available now, by the way, or no?

No. Probably in the next couple of months.

Great. I'll be looking forward to that. How do you think about Black Card penetration? I guess there was always fears that, that could roll over in a disruptive environment and people could switch -- want to switch to White Card from Black Card and so forth. Kind of give us some perspective there around the Black Card penetration rate around corona. And any color on what the highest markets -- the markets that have the highest penetration of Black Card today, any reason for that? And any ability for Black Card? Currently, I think it's 61% now, can go higher.

Yes. Yes, even post COVID here as we're reopening, with our joins right now, we're still seeing about [ 60% ] acquisition on Black Card. So really encouraged that the people aren't choosing a White Card option just because it's a little less expensive right now. And that's -- pre COVID was at 60% as well. So -- and we did that last price increase was last September, $5. So we went up to $22.99 in the Black Card. And it's really amazing because you think when people look at us at a $10-a-month location. We always advertise it $10 a month. You have 60% walk-in and walk-out paying the $22.99 with no real intention. But once you understand all the perks and benefits of that Black Card, the reciprocity, bring a free guest with you to work out, no charge, your access to massage beds, massage chairs, tanning, people walk out, it's really a better value. So I'm really glad to say that we still get a position even coming out of this pandemic.

That's super helpful. The last thing, because we're running out of time, but I really want to kind of really explore this topic in a big way. And it's the area of technology, because I think what's underappreciated about the story is some of the enhancements that have been used around technology. You just gave me one now, this traffic indicator that's not even out yet, that's coming. So maybe a bit more about what the company has been doing from a technology implementation standpoint over the last couple of years and how that's helped the customer, helped your business. And then how do you think about any technology adoption or implementation over the next couple of years that we should be looking forward to that can continue to help drive the consumer experience and/or the efficiency of the business model?

I'd probably do the whole call in technology, but there's so much going on right now with technology, it's great. So we have -- our app, luckily, we're going down this road, we launched it last summer. And before that, we had an off-the-shelf app which gave us no flexibility on what we wanted to accomplish. We launched our app with 500 workouts and videos in it. So some content. And overnight, we closed down in March and our app consumption was up 170% overnight. And then we went down the road and engaged iFit which is a parent company is owned by ICON, which is companies like NordicTrack and Freemotion, and they have really great content. And we launched some premium content with them in our app. We saw even more consumption in our app with their content. So really, right now, it's free to members and non-members. It's even open to the public and people are consuming it at areas we've never seen before. We also did the Facebook Live workouts every evening. We launched those -- the date we closed in March, we launched them that night. Have never done it before. And we're having 100,000 workouts a night on Facebook Live. We then put them on our YouTube channel, and we're up to like 15 million views on YouTube. And this is all stuff that didn't even exist 8 weeks ago. So amazing how people are just sponges for it right now with the bricks-and-mortar closed and how we're able to engage members and non-members. So it could be a whole lot of marketing vehicle for us to go after the nonmembers that are actually utilizing Planet Fitness with the trusted names in bricks-and-mortar fitness. And if they're coming to us for content, how can we convert them to members going forward. So give them a taste of Planet at their house, which I think is a great thing for us. In our app, we launched our app and then we started to put content in there, and we'll queue it to that library of content. And the ultimate goal for us, what we're working on is to have super premium content, maybe some diet nutrition counseling for Black Card members. So we could get more acquisition out of Black Card, we get that to 65% or 70%, can we get $25.99 a month to $24.99 a month of Black Card. So how do we give out some technology benefit to members that are Black Card as a perk, which is great there. And also for the app, we now have the ability on the app to upgrade to a Black Card membership in the app, one click of a button, agree to the terms and conditions. Never existed before. As a member, you can refer a friend and send them a special promotion discount to join, which we never had a way, a really formal way to refer a friend. And 15 million members, how can we -- in that message, those 15 million members and have them refer somebody to join. So a lot of stuff and technology now that's really great. And the 15 million members, on a turn of a dime, you can have access to everybody and actually give them encouragement, give them communication and give them content, which is really great. And just ready in testing right now, we've talked about Black Card guests. So as a Black Card member, you can bring a free guest to work out with you as a Black Card member. We never had a formal way to really track Black Card guests. So in our club, you might do -- on a Monday, you might do 50 to 100 Black Card guests for free. So on top of the 15.5 million members, how many people are we really servicing already, right? We don't really know how the unique people to the Black Card members are coming in. Do they bring the same person every day, a different person. Now with technology in the app, you actually invite your friend through the app. As the friend, you get a barcode on your phone, kind of like an airline check-in. You scan your barcode when you come to the club as a guest, now we have your information to be able to talk to you as well. So, so much stuff over at technology. It's really exciting, really exciting.

Guys, that's great. It's just a lot of eyeballs and bodies to get in front of and to reduce that friction to get even more members to join and increase that customer satisfaction. So it's exciting. So no, that's awesome. Look, we've -- we're 3 minutes past our time here. I just wanted to thank everybody on the webinar today listening in, and then thank Chris and Tom as well. And again, everybody, stay safe. We'll see you next year in person in Nantucket. And we hope everyone enjoys the rest of our conference. So talk to everybody soon.

Great. Thank you, Randy.

Thank you so much.

Thanks everybody on the call. Appreciate it.