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

Yes, it's been encouraging. I think it's -- I'm happy with what's so far, what's happened with it. And so -- and that one question there is we also have the New Year's Eve promotion that's still going on. The New Year's Eve Times Square Ball Drop. It's yet to be known if there'll be revelers at Time Square, people that are there, changes out -- there's probably plenty changes that will happen. One is the thing with Dick Clark Productions, and I probably agree with them is they're saying that they think there could be more viewership this year if people aren't out in bars and restaurants and stuff on New Year's Eve that they're actually home. So it could actually get more viewership. It would be good for us. There's about 170 million people in the U.S. who watch that, about 1 billion people worldwide to watch the ball drop and our -- it's our logo, it's our hats, its our stage and so on. So we could get some good brand exposure from that launching into our January sale.

Got it. In the past, you've talked about a target of about 4,000 stores in the U.S., which is roughly double your current footprint. Has anything changed over the last 6 months given COVID in your mind to make -- to have you even more or less confidence in that 4,000 store number?

Yes, I would say, definitely more confident. On top of the 2,000 stores open, we have over 1,000 that are committed in areas development agreements with the current franchisees they've already paid their [ sole ] plot, that was territories for another 1,000 stores. So -- and those will open over the next 7 years. So that's already baked in over here for growth in the future. I think the one thing with the 4,000 units, which time will tell, Joe, but when you look at -- a couple of things I think is going to be coming out of this is, one is, people will be paying more attention to their health. I think people realize -- we've been told for decades that you need to take more care of your health. You got to eat better, you've got to exercise. And when you look at the people that this virus has affected the most, it's pre-existing conditions, it's heart disease, it's diabetes, it's obesity. And the U.S. is already in the health crisis. 70% of the U.S. is overweight or obese. So there already is an issue, but no one will really pay attention until something like this happened, unfortunately. So I think people will come out of this with a renewed importance around wellness, which is good for the industry. But on top of that, this industry -- there's about 41,000 health clubs in this industry in the states. If you take out healthy, it's 39,000. We take the next closest large competitors like LA Fitness at 700, 24 Hour Fitness at about 400, Gold's Gym, for example, you still have about 36,000 to 37,000 mom and pops. So -- and there are a lot of weak players out there in the industry. So a lot of them -- a lot of people have been around for 10, 20 years are hanging on by the skin of their teeth. I think this is going to accelerate probably a 10-year cycle of cleansing the industry of a lot of the weak players here. So there's already been a lot of closures. You've seen the bankruptcies of 24 Hour Fitness and Gold Gym and TSI just yesterday. But when you look at the mom and pop, which they don't hit the news, but our franchisees are here in the bottom that they're calling them from across the street saying they're not going to reopen. So back to your 4,000 question, the question is how much of the industry gets cleansed out by this that could have raised that number even further in the years ahead.

Interesting. So your market shares tend to be pretty high in a lot of New England states, for example, your home territory, so to speak, places like New Hampshire, Massachusetts, Rhode Island. Is there something unique about those markets that are different from, let's say, a California or a Texas or a Florida, that makes the economics different or the customer base different from New England, for example?

No. Dorvin, do you want to take that one?

Sure. First of all, we started there first as Chris and his partner started in New Hampshire. And the brand really started to mostly up and down the East Coast. Our very first franchisee was in Orlando. But I'd say that as the brand got bigger and became more of a national brand, that's when it really started to take off and particularly as you move kind of further west. And then ultimately, we really went to California last when you think about the contiguous states in the U.S. But when you look at our brand, the interesting thing about -- we have 2000 locations. We're in almost every town of any size now. The economics are just really, really similar. You're going to have more revenue, more members, higher rent and you're in really urban, more dense areas like in Manhattan, as an example, downtown Boston, et cetera. But when you get into kind of, let's just say, suburbia, where a lot of our clubs are, whether you're in kind of metro Chicago, Atlanta, Denver, Dallas, it really doesn't make any difference. I mean that the model works just the same. You have about the same amount of labor, wherever you're at. Rents ironically are not that much different once you get out of the big huge metro denser areas. And then even when you get a little bit further out to -- a little bit more rural, you tend to have fewer members per store, but then you have typically less rent. And so they tend to kind of offset the fact that if you have a club that's 7,000-, 8,000-plus members, it's probably an area that's paying a little bit more rent versus a store that's in a market that maybe has 5,000, 5,500 numbers that's typically paying a little bit less rent. So when you look at our overall margins of our business, on average, they're in that high 30s to 40%-range EBITDA margin, and that's after their 9% marketing, the national and local and after their royalties. So that's the beauty of it. It's a pretty fixed-cost model, and now we're a national brand. I think the way we think about it is because of that, because it does work in a Chicago, Atlanta or even smaller markets of Tulsa or Topeka or Lexington, Kentucky, et cetera, is that, that gives us a whole lot of confidence in how we plan our markets. And we do our market planning, DMA-by-DMA and market-by-market. And we know exactly where every single member that is -- of our almost 15 million members, we know exactly where they live. We know what store they're going to, where that particular store is pulling from. And then with a lot of outside third-party data, we know the economics of the -- of that -- those markets' demographics, drive times, and then that helps us play in the incremental stores in those markets. And as you know, Joe, we improve every single location so we want to maximize the opportunity within the market. And if we have stores that have 10,000, 12,000 members, you really need another store in that market to kind of carve off or shave off a few of those members because at the end of the day, proximity, convenience is a huge factor in deciding where you're going to go to gym. You don't want to drive 25, 30 minutes to go to a gym. It needs to be in that kind of 12- to 15-minute drive time. But that's how we plan the markets. When you -- to your point about a higher penetration in population in some of the northeastern states, like the ones you mentioned, we look at other DMAs across the country, where we have pretty high penetration as well and that gives us a lot of confidence that even in, say, an L.A., where we -- the kind of the largest city in the U.S. that we kind of went to last, we had some of our highest revenue stores in L.A., but we don't have the penetration yet that we need. And that's a market where we -- on a percentage basis, we'll be opening more stores over the next 3 or 4 years. But at the end of the day, we still have a lot of confidence in the -- in our ability to get to that 4,000 store level in the year.

So in terms of real estate, I imagine with a lot of retailers and restaurants, unfortunately, going out of business or shrinking their footprint, are you guys seeing a lot more opportunity? Maybe speak to the number of incoming calls you're getting from landlords or property owners. Are you getting better terms for your existing rents, for example? How is that trending?

Yes. It actually probably started about 4, 5 years ago. As there was a lot of consolidation in rental land, whether it's the office supply guys or some of the big box guys. And as we've became national, when you think about it, Joe, how many retailers have been opening 200 plus 20,000 square foot boxes across the U.S.? I mean, the amount of square footage that we've taken down over the last 3 or 4 years is pretty darn incredible. So it's -- it really got the attention of the big REITs and landlords. I mean I always laugh about the fact that 6, 7, 8 years ago, we couldn't get them to hardly talk to us. And over the last 3 or 4 years, they would drive up to New Hampshire to meet with us and show us what they had available, what was going to come off rent. So now we're in a whole new world. And at end of the day, it's kind of unknown. With all the bankruptcy filings that have happened, we don't -- we're not exactly sure those retailers that have filed bankruptcy, what they're going to try to come out of with most likely if they come out, it's going to be a smaller footprint. But what it's going to do is going to create a lot more opportunities for us across the U.S. when you get right down to it. And these REITs and landlords, I mean they are reaching out and saying, "What are your guys' plans?" And it's market-by-market at the end of the day. The ICSC out in Vegas for the last 3 or 4 years, we've had the largest booth and the biggest activity going on around our booth, and literally signed deals on site because the big retailer or REITs and landlords were there, and they're ready to do deals, and they knew we were in the market, and our franchisee would go there. So I think that the opportunities ahead of us in getting high-quality real estate is clearly going to improve. The big unknown right at the moment is what's going to happen with rents. I'll tell you, it's kind of anecdotally, but I'm talking to some of our franchisees, what they're seeing at the moment is that a lot of these bigger landlords, they are a bit hesitant to bring down rents, but they're willing to get a lot more TI money upfront. And I think that's probably to try to keep their cap rates up and try to stabilize average rents in their centers. But we're seeing some pretty large tenant improvement allowances that they're getting that sort of unheard of 3 or 4 years ago. I think it will be a little bit of mixture of both. There's clearly good power centers in the U.S. They'll probably do pretty well even after this. But the shoot probably hasn't totally dropped yet on what's going to happen in terms of availability. I think there'll be pressure on the rents. And I think that they'll also probably get some upfront TI money as well. I think it's still just a bit too early to see where it's going to shake out.

You mentioned earlier that you guys were on pace to add roughly 200-plus stores a year. Obviously, COVID has impacted that. And I know visibility is fairly limited in 2021. But when do you think we get back to that 200-plus store level again? Could it be next year? Or is that more of a '22 event?

Yes, I doubt that it would be next year. I mean, we haven't given any guidance yet. We did say that clearly, COVID was going to impact 2020 pretty significantly. We could have as much as 50% or more a reduction over our -- I think it was 261 last year, and we said it'd probably impact '21 as well. And there's no doubt that it will impact '21. At the end of the day, the overall real estate pipeline is somewhere around 6 to 9 months from the time you kind of start, okay, I want to store in this market, in generally, kind of this main in Maine kind of area. And it's today, there's probably going to be more options than there were a couple of years ago. And sometimes, quite frankly, Joe, you just have to wait. You wanted to be in this town, in this area, and there was nothing available. So you'd wait. And you kind of go to the next town and the next town, and that's the beauty with our large franchisees. They have multiple markets that they're really working at the same time. But with pre-COVID, there are a lot of stores in the pipeline. And we've opened stores since our -- during COVID since our stores reopened. We already had stores in the pipeline. But there's clearly been a slowdown of that. And some of that is okay, literally, take California example, still generally not open. Those franchisees are not really anxious to go out and sign leases yet until they kind of know what's going on and we've seen that over the last 3 or 4 months is we've had a lot of stores closed. And fortunately, we're getting back close to 100%. But -- so there's been some slowdown on the activity of generating sites in the pipeline. And that does, as I said, it takes, call it, 6 to 9 months. I think that what's going on at the moment is there's -- there are some deals being done by franchisees. They see a great opportunity, and they're wanting it and they'll take it. And then in other cases, it's -- let's see what's going to become available. Let's see what's going to happen to rental rates, et cetera. So when you kind of start filling the top of the funnel, it's 6, 9 months to, I guess, to the bottom of the funnel when you get right down to it. The other issue is -- we're facing at the moment because of COVID and work from home, getting permitting out of them municipalities is pretty tough right now. I mean, literally, in California, it might take 4, 5, 6 months, just to actually get permits done. And California has already always been difficult. But you used to be able, in most markets, you can just kind of walk into the town inspector offices and apply for your permit, walk in and check on the status. You can't do that anymore right now. So it's just another thing we have to deal with in today's world. But, yes, we don't have any concern that our franchisees are going to build more stores. The amount of cash flow that these are generating even today, where the stores are open, and even with some of the reduction in the members that we've talked about, we're still generating positive cash flows. The real question on the growth side is kind of getting past COVID a bit, the concern of a reemergence or shutdown, reemergence, some of that is causing some hesitation at the moment to jump in by some of the guys. But as I said, some of the franchisees are doing deals right now.

Okay. That's helpful. I want to shift gears a bit to pricing. You do have a 2-tiered pricing model, $10 a month for the Classic, $23 a month for Black Card. I believe the Classic price has been $10 a month for quite some time now. Is there any thought to increasing that at all over time?

Yes. So we've had -- yes, you're right. We've had $10 a month in the early '90s and haven't really moved it since. The Black Card, where we were originally $19.99 and moved it up to $21.99 about 20 -- what was it, 2017, Dorvin?

Roughly.

Yes, I think so. And then just last fall moved it to the $22.99 we're at today. The interesting thing is our White Card membership, which is really what we advertise, Joe, right? $10 a month, $10 a month, $10 a month. That's really what you see on TV. And the fact that we're about 60% Black Card and people get off their couch, it's a great $10 price point. The curiosity price gets you off the couch. Anybody can do it. It's 40% of our members that have never been in a gym in their life. So it really is working. And the fact that they walk in and they walk out, choose some tickets and send them through the Black Card. So I think our price will probably be more in the Black Card than the White Card and let the $10 drive people in to take a tour. And really, where you see the benefits of the Black Card, it's actually a better value than the $10 membership. So as long as we continue to add more value to that Black Card, I think that's where the pricing power would come into, whether it's more acquisition of Black Card members or more price or both. I think that's what probably what you've seen in the pricing.

So keep Classic at $10, slowly raise Black Card over time as you add different amenities and things like that. Is there a thought to adding a third price tier, somewhere in the middle?

Yes. I think in time, we probably would have a third tier. Even occasionally here, even now we offer a middle tier price, which is basically the White Card membership without a commitment. So what will happen, it will be $15 a month for the White Card membership, the Classic Membership, but there's no monthly commitment on that membership then. So -- but there's no real actual benefit besides the commitment fees. But I think in time, there could be maybe one of the features of the Black Card is you get with that middle tier or a third tier. I mean there's a lot of things we -- opportunities here we could test based on different services or offerings that we could come up with over time. And it's something we're always working on or thinking about.

Got it. So if you look longer term, it seems there are a number of secular trends that are certainly in your favor. First of all, people are increasingly interested in living a healthy lifestyle and exercise is obviously a part of that. At the same time, the number of your competitors or a number of your competitors are either going out of business or downsizing, which should mean a more favorable competitive environment. In fact, just yesterday, Town Sports, as you mentioned, filed for Chapter 11 bankruptcy protection, although it doesn't sound like they're going to be closing any stores, at least at this point. Can you touch on for -- on that for a moment? Is there an opportunity to take share from some of your competitors? Or is it more that people are coming off their couch rather than coming from a 24-hour or New York sports club, for example?

I think both. And I think there's 2 ways to look at the competitive landscape. Then one is we can capitalize on club closing and taking a member base because if all of a sudden, the club closes and they have got 2,000 members that have no place to work out, we could benefit from that. I think on top of that, though, you also have the clubs that especially in -- we saw this in '09, where people are trading down from higher price memberships. So people that are paying maybe $40, $50 or $100 a month for membership, realizing, "I'm not going to stop working out, but I want to be more cost-conscious of what I'm spending to do so. And if I'm not using pool or I'm not using the rock wall or obstacle course, why am I paying for it?" So on the competitive side, we have either closing or we have the consumer saying, "I'm not going to keep spending money that -- for things I'm not using." Our equipment is the best equipment that money can buy. It is the same treadmills you'll find it in Equinox at $10 a month, same treadmill. So we have great quality equipment, so we have people trading down from higher-priced gyms. But on the flip side of that, Joe, the other part of the question is I believe coming out of something like this, as I talked about, is people will be paying more attention to their health. And I think the tailwind this will give the industry in the years ahead of people paying more attention to taking better care of themselves. I think we'll capitalize on more of the first timers coming in off their couch saying, "I'm going to do something." or tell me he has worked out since college.

Are you seeing an uptick in people trading down from higher-priced gyms or coming from gyms that have been closing? Or is it still too early at this point?

We haven't seen -- we can't really see the -- okay, we know a lot people trading down. On the closings, the thing with 24 Hour Fitness, for example, so they closed their stores, what they did is dump their other members into their existing locations. So it's not like they just abandon their members. But you'll see that -- more of that in mom and pops, which will be small one-offs in all these markets, which will be harder to really reconcile where it's coming from, except for you see 1 club that spiked out of nowhere. But you'll see a lot of that because those members are going to go to another club. And in some instances, our franchisees are negotiating with that club's owner saying, "If you're going to close, we'll buy your member base from you." So that we just dump the members into that club immediately. And with this model, as you know, Joe, if we dump another 1,000 members in our locations because a club closes, it doesn't cost that franchisee anymore to run that store. So the flow through to the franchisee is -- it's like 84% and all they're paying is their ad dollars and their royalties to us. So we keep it real.

And on the flip side, how much of a threat do you see from home gyms, whether it be from a Peloton, for example or a Mirror or somebody just putting a weight bench in their garage? I mean, obviously, that risk has been there for quite some time, but it seems like it's been heightened a little bit due to COVID?

Yes. And I think it -- well, home fitness is not new to your point. And home fitness, it has been around since, I'd say since Richard Simmons and Billy Blanks with Tae Bos in the '90s and P90X. When that came out, everybody has their DVDs at home. So I don't think it's anything new. I do think it's a good supplement for the real bricks and mortar. I think if you can make it, it is a good supplement to that. And the biggest, I think, on the Peloton or the Mirror is from a price standpoint, how many people really, [ based ] on the U.S. population live paycheck-to-paycheck. How many people are putting their $2,000 bike in their house or have the space to put a $2,000 bike in their house or any apparatus. The bench in their garage, or if they have a basement or they live in an apartment. So I don't think that's anything new or anything. But I think to that point, though, I think the digital world has changed drastically for the better in the long term. And what I mean by that is we start in our app, we closed in March, our content consumption in our app was through the roof. It skyrocketed. And then we did a partnership with ICON, who is the parent company of NordicTrack and FreeMotion and some other brands. And to come up with real premium content, better quality that we can produce on our own, and we put that in the after -- or during the quarantine, and that got even more consumption through our members. And 24% of the consumption was nonmembers, believe it or not, which is really something we never expected to see that people will look at us as a trusted name in wellness and fitness, downloading our app and using our free content and 24% of content were nonmembers of Planet. So they were already trusting us in the digital world even though we weren't a digital company at that point. So I think the adoption of that is good because -- a couple of things. One is, we started this endeavor a year ago when we launched our app with content because we saw people in our clubs utilizing our equipment, but on a third-party app and following their routine. So we were like it's our duty to supply our members with content to get the most of their membership, right? So we launched these videos last summer and luckily we were because we didn't know COVID was going happen, but luckily, we're already in that world. So now we get -- I think we can supply the members more education around how to use our equipment in our stores to get the most of their membership, right, to get better results. But also if they're at home and they can -- they get in this week, they can go turn to their Planet Fitness app and get more workout at home. So maybe we can stay more engaged with them longer term, if their schedules get busier or if they're now back in school and they can't make it to the gym, can we actually utilize Planet Fitness' app at home to keep them engaged? So I think the digital world is a good one for us. And I think COVID has forced people to learn rapidly the adoption of how to utilize it.

And I think we have about 2 minutes left. So this is probably time -- we probably have time for 1 more question. This is a good one for Tom. I didn't want him to feel neglected. So in terms of your capital allocation strategy, you have done a couple of ASRs in the past. You have increased your leverage a bit. Maybe remind us from a leverage standpoint where you are currently, where you're comfortable and maybe what your capital allocation priorities are going forward?

Yes. Sure thing. So we think the right sort of target is 4 to 6x leverage, kind of recap at 6, and then it pretty quickly moves down to 4 under normal circumstances because the model generates so much cash, and we have returned it to shareholders. We had a $500 million Board authorization last year. We did a $300 million ASR before the year ended, and we still have $200 million remaining. And -- but at the moment, we wanted to really protect our liquidity and build the cash up on balance sheet. We currently have about $500 million as of the last quarter in cash between restricted and nonrestricted. So we think that's the right approach once things get back to normal because all the things we've talked about here is our model and our competitive position is only going to be stronger on the other side of this than it was coming into it, and it was pretty darn strong coming into it, right, with 5% of the gyms and almost 25% of the gym membership and the store profitability that we've talked about. So we think that's the right approach. We haven't really focused on our capital structure and what we're going to do longer term because we've been focused more on getting our stores reopened, taking care of our club members, taking care of our store associates and our franchisees. And thankfully, our franchisees are very strong and have weathered the storm financially, which really says a lot about the state of the system and its ability to go, in some cases, several months with 0 revenues and still be able to say that we haven't had anyone raise their hand and say that they're in financial difficulty. So we thought it was prudent to protect our balance sheet so that we had multiple options. And at the appropriate time, think about where we want to go, capital structure-wise. But we think it will largely look similar to what it was in the past.

Great. Thank you. Well, I think we're just about out of time. So let me thank Chris, Dorvin and Tom, once again, for your time. We greatly appreciate it. And I hope everyone has a great rest of the day. Thank you, everyone. It's good.

Thanks, Joe. Thanks, everybody, for your time.