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

Welcome, everyone. I'm Jon Komp, the senior analyst covering the active lifestyle sector at Baird, including the fitness category. I'm very pleased with the opportunity to lead the discussion here with Planet Fitness. Planet Fitness, as you may know, is the largest and most successful gym chain, really a pioneer of the high-value, low-cost segment of the industry. And that's allowed them to grow to more than 2,100 units, and it's mostly franchise system today. So joining us, we have CEO, Chris Rondeau, who's been really building the business from the start back in the early '90s; President, Dorvin Lively, who joined the company in 2013 and really is charged with keeping the business running today; and then Tom Fitzgerald, who joined just over a year ago, brings a ton of experience to the CFO role. So a great team to be with me here today. And just quickly on the format, we have just under an hour, so we'll end a little before 12:30 Eastern time. I'm going to hand it to Chris Rondeau to start. I'll then lead some fireside Q&A. And then the second half of the time, I'll get to your questions, if you want to submit them via the portal. I'll get them here, and I'll pose them to the management team. Any follow-ups or any additional questions that we don't get to, please submit those, and I'll get those to the company. So Chris, why don't you start it off? I'll hand it to you.

Great. Thank you, Jon. Appreciate that. And welcome, everyone. Thank you for joining us today virtually anyway and dialing in for today's presentation. Happy to say that our system here is evident with our performance here, even through COVID that the long track record for growth and profitability of this model is evident by the fact that we've had 0 closures here from COVID here out of our 2,100 units. So happy to say that we've weathered the storm as tough as it has been, and much stronger than many of our peers in the industry that have gone through many bankruptcies here. So happy to say that the 53 straight quarters positive comps leading into this COVID pandemic shows the proof of the strength of the model and strength of our franchisees honestly to get through this together and come out on the other side of this. So we're really happy to see with that. I also believe coming out of COVID, strong as our moat and as big as our moat was leading into the COVID pandemic, coming out of this will be even wider, evident by the fact that there are no closures in the system, other closures of other brands in our system, giving us opportunity for more market share. We already have over 20% market share of the industry currently today. And the strength of the model coming out of this, I believe, will be stronger and our moat will be wider. Interestingly, looking through our membership trends and stuff through here, this -- and kind of bring you through that. So that's always the -- usually the first go-to question that people have is, where is our membership and where are things at today. Right now, we're into the December here, fourth quarter, about 75% of member usage workouts. That's steadily climbed all the way from back in May. We started off back in May when we began reopening our stores of only about 30% of members working out of the normal volume we see. We've climbed up as high as 35%. And even with the spikes we've seen on the news and media unfortunately through the holidays, we continued to gain some traction a little bit week-to-week on member workout. So that's been really great to see. Although we declined in Q2 -- Q3 rather, membership declined over about $1.1 million, we continued to decline in the fourth quarter, but we talked about this a few times as we did see it slow quite a bit. So the trajectory of the decline was definitely slowing quite a bit through Q4. And what we're seeing today is it's really slowed almost to what normal levels are at this time of year. So we talked about a lot about pent-up cancels upon reopening stores, and we resumed the billing, which is when the cancels really begin. And as different tranches of stores opened, we began to see pent-up cancels come through, will take about 3 months to go through. We began opening stores in May. The last big tranche that opened up was in September, October, and those stores now have gone through their big cancellation trends that now are all pretty much the same. Out of 2,100 units, we've got about 1,800 open today, about 90% of the system. Most of those are in California, which has been a little bit of a thorn in our side since day 1 as far as opening. But hopefully, we'll be opening there in the next few months, if not sooner. But time will tell. There's no real no opening date there yet. But the stores that are open, the longer they're open, the longer they -- the more they seem to act normal for us, like the May openings, for example. The longer stores are open, the more normally they react. As far as the joins we're seeing today, we started to see upon kicking in our September marketing push. And what's interesting with our cancellations and our joins is as we've looked and analyzed our cancellations, believe it or not, in 2019 compared to 2020, we did not see any increase in cancellations in 2020 compared to the member base as we did in 2019. And in theory, what you would think is it's going to be incremental 2 million or 3 million cancels because of the COVID. And ironically, it really isn't the case. We didn't see any really increase in percentage over the base of cancels in 2020 compared to 2019. Really what it was is a join problem. And for the first time in the company history in 28 years, we essentially went 6 months without any kind of acquisition marketing at all. So we began to kick in marketing in September and then again in October, and in November, national sales. And what we began to see in those sales is the earlier cohort of reopenings, the May openings and June openings and then July, some of those stores started to see some positive member growth. And as the cancellation slowed here through the fourth quarter and now here kicking off the first quarter and now with the New Year's Eve push, we don't believe that the first quarter will have quite the push that we normally see in the first quarter from new membership joins. Although we do believe, because of the cancellations now, we're acting more normal for sure and the pent-up cancellation have gone that we'll begin to see some more system-wide member growth in the first quarter. Again, time will tell, and it's very fluid. As we all know, it seems to change month-to-month. But with the vaccine being rolled out and if all holds good and holds the same course we are on today, I believe that we'll continue to start to see us turning the corner here and finally hit that trough of the declining member base that we saw in the third and fourth quarter. So some promising news there. So interesting data on the joins, though, it's really good to see some stuff here. We are -- what we're seeing in the past is about 20% of our joins are rejoins, members that have been at least members one time in the past that have come back and rejoined us. In the second half of last year, we saw that as high as 27% coming back to rejoin us. So outside of the fear of COVID or home fitness, for example, that we hear a lot about, our rejoins are coming back higher than we've ever seen before, which is really encouraging. 40% of our joins have been coming to us as first-time gym members, which is the same percentage that we've seen in the past. So 40% of all joins have never belonged to a gym in their entire life. So outside of being maybe scared away by the media, they've decided to still choose bricks-and-mortar at the same rate as they had in the past, which is really encouraging. And 4% of our joins since beginning of March -- we have a new survey now because we always get that question about all the closures in the gym industry. And 24 Hour Fitness, Youfit filed bankruptcy, Gold's Gym bankruptcy, a lot of mom-and-pops are closing, about 4% of our joins are coming from a gym that has permanently closed. So we believe that will continue to increase as the years -- months go ahead as more closures happen. IHRSA, trade organization, says about 9% of the industry is closed permanently. And they estimate it could be as high as 25% when it's all said and done. So we expect that, that membership drive from closed clubs will benefit from that in the longer term as well. With that, Jon, I'll go ahead and open it up for questions from yourself or anybody else on the call today.

Yes. I'll start with a few, Chris, to follow up, and then I do have the Q&A session live. So I'll receive any Q&A written in from the audience. But first, Chris, I want to start. You highlighted kind of the normalizing of the cancellation trends and the improving usage trends in the gym. Maybe just share a little more of what you think is driving that. I mean certainly, COVID is still a real issue. Obviously, you're going on -- your performance is pretty strong. You have a pretty high percentage of your gyms open. So maybe just share a little bit more of what you think might be driving the good performance considering the environment.

Yes. There's a few things. Like one is seasonality is in our favor. When we began opening gyms in May, we were right upon summertime, which is -- couldn't be the worst time for gyms in general. But we were opening stores throughout the summer. The one thing that is very different from July and August, when we started spiking in the southern states here in the U.S., we saw a slight decline in member usage. Cancellations were coming up. Joins were going down when that side of the spike here, July and August. We're not seeing that trend in those metrics here upon this new resurgence. So I think the term, COVID fatigue, we hear a lot about, I think, is true. I don't think people are generally being as scared away or have the angst that they had in the summertime when it first resurged. So the member workouts continued to slowly increase week-to-week as we were open longer, joins stayed finally. There wasn't a real huge spike in cancellations that we had seen. Although slightly higher, but not what we saw back in the summertime. So I think that has also happened, again, coupled with the fact that seasonality has changed as well. So I think there's a lot in our favor here. And I think generally, just the trend in health and fitness, I think the tailwind in the industry we'll have going forward coming out of COVID, when we all see that the people that this is affecting the most is people with preexisting conditions, heart disease, lung disease, obesity is a big factor, that people will pay more attention to their health coming out of COVID. So I think the tailwind for the years ahead here this industry will have will be in our favor. And with less competition, it'll be even more in our favor, which then always begs the question is -- we always get asked about the 4,000 unit potential domestically, which as I said since the IPO could that number be higher? And we almost thought that could be the case even pre-COVID, just with our penetration in some markets that, that number may move organically. But I think now with closures in the industry, it could even drive that here as we near that 4,000-unit number.

And maybe one more follow-up, Chris. When you look at the trends in the clubs that you're seeing across demographics, I know you shared a little bit about some of the younger demographics and how they're using and signing up for your memberships, maybe just expand on that a little bit more, what you're seeing maybe short-term here, and then longer term, what it might mean for your business.

Sure. I think shorter term, we're not seeing the boomers join at quite the rate they usually join at. And their canceling is slightly higher than what we've seen in the past. The Gen Z population, however, though, is joining at quite a bit higher level than we've seen ever in the past. The Gen Zs are definitely more, I guess, bullish about coming out and working out amongst other people. So that's definitely a trend we've seen. And also, the trend of joining digitally has been a big change, too, which we've always said in the past, about 30%, 35% of our members join through the website. And now you have the ability to not only join in the web, but to join in the app as well. And right now, through a digital join perspective, we're seeing about 60% of joins come through digitally as opposed to physically signing a contract in the club, where they're joining either through the web or through the app. So I think just digital in general, whether it's Amazon or DoorDash or what have you, I think this digital world has taken off. And I think luckily, we were set to take on that.

Yes. That's great. Maybe shifting more towards the new join trends that you've seen. I know back in September, October, you talked about some maybe pent-up joins, some momentum there. Maybe just discuss a little bit more of what you're seeing in the current environment, how effective -- and that I think we've all seen the Planet Fitness brand all over the last few weeks here. Just additional thoughts on how that's driving the new join side of the business.

Yes. I think the new joins, the pent-up new joins, which we see upon opening, which is definitely there as well as the [ force ] of pent-up cancels we see, I believe that both of those are probably subsided now that many of these stores now that they're open, the gyms that are open, has been opened for 3, 4 plus months. So I think that's kind of gone by the wayside. So as I mentioned earlier, the cancels now seem to be pretty much on par of what we normally see. The joins -- so I don't see our January or even our first quarter -- last January was a record year -- a record January for us. So I don't necessarily say we'll sell as many memberships in first quarter as last year. Time will tell. It's only the 11th of January yet, so it's still early. But I do believe because of the slowdown in cancels and the joins that we're seeing that we'll start to see some more system-wide member growth that we hadn't seen since this time last year.

Yes. Great. And when you think about reengaging members who may have dropped, I know -- I think you're typically asked for the reason that members drop their membership. Can you talk more about how you might reengage people who have dropped over the last 9 months? Maybe they didn't feel safe at the time of being in a gym. And tactically, what can you do to drive new joins from that pool going forward?

Sure. We typically focus on the rejoin efforts around our national field times through e-mail. So -- but I think with this scenario here, we're going to target them a little bit more frequently than we had in the past, the rejoining. And we had seen -- like I mentioned a few minutes ago, we have seen about 27% of our joins coming from rejoins, which is quite a bit higher than we've seen in the past. So I think people -- they need -- they have a little bit more angst maybe a few months ago, and that's kind of subsided now and they're ready to get back into the gym and they're working out again. So that's been great to see. And I think some of the -- I think a lot of what we've done in the club has really put them at ease. We are big clubs, 20,000 square feet, big open space and good ventilation. Our area is changed over once every hour in our stores, increased cleaning stations in our facilities. Now we have self check-in with our app. We have a crowd meter we launched on our app, which is really cool. So real time, before you leave the house, you can check to see how busy the club is before you leave, so you can pick and choose the times you feel more comfortable. So I think we've gotten a lot of steps here to make people feel comfortable here in our clubs. And we have an important thing to note, too, was we've done -- since we reopened through the end of December, Jon, we did 132 million workouts. Not one proof of any contraction in our facilities. And the exposure rate at which somebody had reported back to us or the health department reported back to us that somebody had been working out and had it was 1 per 100,000 workouts. So it's very rare. So we've had, I think, all our systems in place and our COVID playbook operationally, we've really been able to make it a safe place, safe environment to work out in our facilities.

Yes. Certainly. That's excellent to hear. Certainly, a testament to the operators. Maybe a follow up on marketing, Chris. When you think of late in 2020, I know you temporarily took up the national advertising contribution above 3%, which now shifts back to the normal 2% level. But any thoughts going forward on whether or not 2% national, 7% local is the right split? And is there opportunity to maybe optimize that over time?

Yes, that was -- you're right. We did move that make a vote with the franchisees. We made that change here for the second half of last year to help supercharge the NAF because we didn't collect it for many months from many of the clubs. So that helped recapitalize the NAF for a bit. But we did revert back. I think longer term, that would be the right call for us to make a mix change of that NAF left. Probably a little early right now to do that. But I think as we continue to market with the franchisees and work with our independent franchise counsel and who helped us with that vote, I think we helped -- learned a lot through that second half of last year with that change, that we'll probably come back to that and look to revisit maybe some changes in the future. But I think longer term, that would be the right move.

Okay. Great. Maybe shifting a bit to really the development outlook. And maybe I'll first start. I know you made a pretty franchisee-friendly move in 2020 by delaying the commitments on the new unit and the reequipment side. Maybe just first share an update broadly the state of that balance sheet for franchisees and then also thoughts around the right time period to reinstitute some of those development time lines and if you might push those out further this year.

Yes, Jon, maybe I'll start on the franchisee balance sheet, and then Dorvin can talk about development. Yes, so I think just to reiterate what Chris said, we count ourselves fortunate to be able to say that, as a result of the pandemic, no stores closing, no franchisee has had any inkling to file Chapter 11 or anything like that, which we know is quite different than what's happening in the rest of the industry, both on brands that we know and read about, but more so on the highly fragmented mom-and-pops across the industry. So -- but as we've talked about, depending on the franchisee, they've had a period of months where they weren't able to bill. Some as short as a couple of months and others like in California where they only billed members 3 out of the 12 months in 2020. So as a result -- one good side -- one good point about our system is that 75% of the units are owned by franchisees who operate in more than one state. So to the extent that they were really localized issues and prolonged closures, that might affect some franchisees. For the most part, they had other stores in other states that might have been open that allowed them to continue to generate some cash. But no doubt, it's had an impact. And most of our larger franchisees had, I'd say, pretty modest levels of leverage of debt. But with a period of closures, their balance sheets got depleted a little bit, particularly on the cash side. And their covenant tests, in many cases, got tripped or their covenants got tripped. We've talked about -- we've been in touch with the lenders, been in touch with the franchisees. In all cases, all cases, any covenant trips received waivers. No one went into default. No one was penalized. Now a part of those waivers was to -- for the lenders to put a tight grip on the development capital in many cases. So that development capital that franchisees would use to build out stores has been clamped down a bit. So there's a sequence where the franchisees will need to, as the stores have reopened and been reopened for a while, rebuild the cash, rebuild the balance sheets, kind of get the metrics in place. Having said that, we'll talk more about this on our year-end call, but we did add about 130 new units in 2020 across the system. Only 5 of those were corporate, so 125 franchise units. So it's still, to Chris' point, a testament to the strength of the model, the strength of the system and the operational savvy and expertise of our franchisees to be able to pull that off in a pandemic. I suspect there aren't many large multiunit brands that were able to generate -- or to grow their base by 5-plus percent in terms of units this year. But that sequences, the balance sheet has to get rebuilt. The lenders have to get comfortable with the metrics they see. They know our model really well. They know how it responds and how profitable it is that at some point in the not-too-distant future, they would relinquish the tight squeeze on that development capital, which will allow the franchisees to kind of restart that whole development cycle that Dorvin could talk some more about.

Yes. I think, Jon, on the development kind of, I guess, current state of the environment right now, it's pretty much the same as it was kind of back in Q3, our call in November. Most of the franchisees had kind of shut down their pipeline activities. There's a few handful franchisees that are out there signing leases. But the far majority of them were not willing to go out, sign a 10-year lease, go spend a couple of million bucks. And with the risk of either not even being able to open like in California or the threat of shutdown in several other states, just not willing to go do that yet. I think it's pretty much the same right now. The franchisees, they -- as Tom said financially, they have to manage their balance sheet. But they're also looking at this asset that they have in terms of the pipeline and no one's willing to sell. There's a lot of buyers that would like to buy, but no one is willing to sell. And so, one, that sends, I think, a lot of confidence to us that those existing franchisees still believe in the model, still willing to, at the appropriate time, start developing again. I think that the factors they're going to look at obviously is: how soon does the spike in cases and the risk of shutdown or not being able to open in the case of like California; how long does that go; what's the sentiment around the vaccinations and how fast is that going; and then what's the overall kind of typical response by the consumers retail in general. And the thing that we're hearing from our franchisees and the conversations that they're having with some of these REITs and either local landlords or national players are that there's -- they're not willing to give too much on rent yet, maybe just a little bit, but they're willing to give some big tenant improvement dollars more so than in the past. I'd say if you go back a couple of years or so, it was not unheard of that you could sign a deal with a major REIT and get $200,000, $300,000 or maybe $400,000 upfront TI money. Small sample set, but we're hearing that, in some cases, it's double or more of that now. In fact, one guy was -- said he was able to get about $1 million in TI money upfront. I think the general consensus also is that retail is going to continue to suffer, and we probably haven't seen the last shoe drop yet. I think some -- there's some belief that some of them are kind of hanging on to get through the holidays and whether that's -- they shutter the doors completely or whether they just decide to downsize their fleet and have a smaller store footprint in terms of number of units. And so I think there's a pretty good consensus there's going to be more real estate available. And I think most people think rates have probably come down a bit from where they have been as well as getting some tenant improvement dollars out there. So I think there's a little bit of a wanting to wait-and-see what happens on that side of it as well as the balance sheet financial discussion that Tom just had.

Yes. Great. Maybe one more topic, and then I'll work in some of the Q&A that have come in here. But broader topic of digital and how fitness could evolve here as with a lot of things to a multichannel model, just maybe share a little bit more what you're testing currently, maybe the broader vision, Chris, about what you think digital could mean for Planet Fitness.

Sure, yes. Good question. And besides the digital join stuff that I mentioned earlier, if I back up a little bit, we launched our app almost 2 years ago now. And we originally launched it with about 500 workout videos and instructions in our app for free. And the reason we went down that road back then was because we would see people in our stores and they'd be following routines on their phones, but they weren't getting it from Planet. They were getting it from a third-party source digitally. So it made sense for us to start supplying our members with content that they could use in our stores, so they wouldn't have to go elsewhere to get it. So we launched that about 2 years ago. And then leading into COVID, luckily, we were already down this road, we saw the content consumption skyrocket overnight, even though our clubs were closed. So people were running right to the app to kind of start utilizing content, even though our clubs weren't open because they wanted something to do with their house, which then led to the iFit partnership, which the parent company is ICON from makers of NordicTrack and a bunch of other brands. So we went to them to make up some better content for us as a premium content. And what we saw with the content being consumed is that 20% of the content being consumed were non-Planet Fitness members. They were actually consuming it just from the trusted name in fitness and wellness. And even though we're not a digital company, our brand is very well known. And we were a trusted source, and they were utilizing our app for free for the content. So we contracted with iFit to make up our premium content to launch our subscription model, which is $5.99 a month. And it unlocks even premium content within the app and better stuff than what we have for free on there. And ironically enough is that 20% of the subscribers so far are also non bricks-and-mortar members. And 20% of those end up joining bricks-and-mortar after subscribing. So we really think that the digital world and the component there is almost a whole another marketing avenue for us, and it's more of a gateway to get them into the bricks-and-mortar and a source to have them get used to our brand and know our brand before they join our club. So it's really whole another marketing vehicle for us that didn't exist just a year ago. So it's really interesting to see that stuff there. 75% of the subscribers also are Black Card members, current Black Card members. So even though they're already paying us $22.99, they've opted to pay $5.99 more for more content. And the content is really geared for the casual first timer, which is what our bricks-and-mortar is geared towards. And most of the content -- digital content out there and most apps out there is kind of just like the gym industry, where it's always about getting fitter. So it's not really catered to that casual first timer like our bricks-and-mortar. So we really feel that we can almost disrupt digital like we did with bricks-and-mortar, Jon. So we can get first timers to give fitness a try. Maybe this is their -- maybe they're super-intimidated to even come to a bricks-and-mortar planet, and this is their first attempt to try fitness and then hopefully convert them to bricks-and-mortar in the future. And at $5.99, it's far lower than anybody else out there. And if you think about it for a minute, with our $10 membership and the $5.99 add on, you're almost the cost of most digital-only options. So with Planet, it's almost like the gym is for free in a lot of ways. So I think we can really disrupt digital like we did with bricks-and-mortar here in the future. And we're still new to the game and -- but learning a lot and really, really intrigued with what we're seeing from how it's -- people are adapting to it. But I mean our Crowd Meter gets used like crazy. People are self-checking in now. We have a 60% of app adoption of all new joins here in the fourth quarter. So people are really taking use of this asset. Really, quite frankly, a year ago, people weren't really adept at taking it on.

And Chris, just a quick follow up. The $5.99 add on that you're testing, is that -- just any thoughts on time line before you might make that a broader initiative across the system. And then is that -- maybe not specifics, but directionally, is that potential profit generator for Planet? Or is that more an initiative that would drive other parts of the business, not necessarily looking to make a lot of profit off the [indiscernible] specifically?

Yes. We launched it in the fourth quarter. First, we launched it really, really cold. No marketing behind the app at all, just kind of let it go out there, make sure there's no glitches or bugs in it. And then we began to just start marketing it in the app store probably in the last few weeks. So -- and with the time of the year, we're starting to see some ramp here. Right now, our plan, we will share -- we always made it with our franchisees to be a win-win. And the way we look at it is that if we can continue to drive franchisee profitability, the overarching question we always get is, can you raise royalty? So we really look at the $5.99 subscription as we'll share some or if not all of it with the franchisee. Then in the long term, we'll be able to raise royalties more than the $7 in the future, which will either drive franchisee's royalty. I think the other thing it does for us as a franchisees' perspective is, God forbid that this happens again in the future, right? But even something small, we have tornadoes and floods and everything else that will take a club out of business for 3 to 6 months that if they have some portion of their member base paying $5.99, at least the franchisee isn't going without 0 revenue. So if we were to know this was coming 5 years ago, it would have been good to have franchisees having some revenue coming in at all 2,000 locations as opposed to 0. So I think longer term, it would be good for the strength of the franchisees, which then in turn allows us royalty -- flexibility with royalties.

Great. I want to mix in some Q&A from the audience here and please continue to submit questions. But first, I know that you brought this up a little bit on the third quarter call, but maybe just talk about the structural cost environment for Planet corporate, some of the actions you've taken and what that might mean in terms of bottom line flow-through or reinvestment for 2021 and beyond?

Yes. Jon, I'll start that. It's Tom. I think it was a difficult decision, obviously. We went a long time without taking any actions other than the senior team and the Board. But as we looked at things and knowing that at the time it sure looked like this pandemic was going to be with us for a while, there was no real talk of vaccines at that time. So we decided to rightsize to really focus on what are the key priorities that we want to make sure we execute well with excellence. And some of the other initiatives and things that seemed right before the pandemic, we just thought either we could put them on hold or just not do them. Now as we've said, I think, at the time, as we look to power up our strategic initiatives, the one that we're talking about a lot, obviously, is digital, it may take some of that investment back and we'll build out what we need to do so that we're smart about kind of how we redeploy those savings. But our intent is to make most of that net positive in terms of the SG&A outlook and sort of where we see that trending. And once we get back to where this is behind us, we want to get back to our goal of having SG&A grow more slowly than sales. So it's a source of leverage. It's not going to be worth 100, 200 basis points a year of leverage, but it will be worth some leverage. And I think one of the questions we get a lot is one can plan at the franchise or get back to the 40-plus margins. And we certainly don't see anything structurally that's going to get on our way calling the timing of that, kind of like development. We see getting back to 200-plus new units as absolutely in our future. It's just a question of when, not if. And I think the same thing with our EBITDA margins, Jon. We see those getting north of 40% again. Certainly no structural differences that we see that will cause that to not be true. It's just a question of when that happens, not if it happens. And given our moat, it's likely going to be even wider on the other side of this that whatever was the high watermark before will probably be reset in the future.

Maybe just a follow up on franchisee profitability. I know the profit dollars for the average unit per Planet, coming into the pandemic, were certainly top quartile and better than most peers out there. But when you think about franchisees recovering their profitability, maybe it's premature to put a time line on. But how do you think about the unit-level profit dollars getting back to where they were and kind of broad strokes how quickly that might be able to happen?

Yes, sure. I'll start that one too, Jon. I think pre-COVID, as you know, the 4-wall margins for franchisee units that were mature were high 30s, low 40% EBITDA. And frankly, there are a lot of stores in the system that start with a 5, not a 4 in terms of their 4-wall EBITDA margins. And the way we looked at it, it obviously depends on each individual situation. But generally speaking, if a store lost 10% of its member base through the pandemic, its EBITDA margins probably declined 500 bps plus or minus. It depends on the locale and the rent in that territory. But -- so overall, if it was high 30s, low 40s, it probably still starts with a 3 for a mature store, which we think, compared to what we've heard somewhat anecdotally from lenders as they look across their portfolio, nothing started as high as Planet did typically in their portfolio in terms of EBITDA margins and cash generation and returns. And with this impact from the pandemic, that's likely still the case. And certainly, compared to our competitors who operate on much lower margins, when they have to reopen and then start paying back the rent that's been deferred and all the incremental costs, with the haircut in their own revenue -- because unlike us, where 98% of our revenue is member dues, in those businesses and those competitors, 70% is dues and the other 30% are things like personal training packages and all the other ancillary things they sell, which are much slower to rebound. So we think not only in an absolute way our margins will be strong, but relative to other multiunit brands and certainly within the industry will be head and shoulders different from everybody else.

Yes. Great. I want to follow-up on one topic, maybe for Dorvin. Topic of the extensions on the reequipment going further out. Maybe just to clarify, first, is that just the reequipment or is that for new units also for the additional 6 month extension? And then any broader strokes, how do you think the system balances the desire to stay really best-in-class in terms of the age and the quality of your equipment versus prioritizing cash flow that could be redeployed for things like new unit growth?

Yes. That's a -- it's a great question, Jon, that we talk about a lot. And historically, even pre-COVID, we've talked a lot about it. And it really was a differentiator in our brand versus all the other brands out there. I mean if you look over the last, call it, 2 to 3 years, we were probably about the only equipment purchaser for replacement equipment out there in addition to all the 200-plus stores that we're opening every year on a new perspective. And our franchisees believed in doing that. They believed in that reinvestment in the business. And we think that's contributed significantly to our same-store sales, the 53 straight quarters positive comps. But given what happened when we went into this pandemic and it was lasting longer than, I think, a lot of people thought, we made that 12-month extension for development and reequips we put that out there. So everything that was committed in 2020 got an incremental 12 months. And for all of the existing equipment, that in essence moved everything that was originally 5 cardio, 7 strength and moved it to 6 and 8. But then all new equipment, whether it's a new store or new equipment into replacing equipment, and we have some of that during the year as well, that still falls back to the 5 and 7 and we truly believe that's a brand standard that we want to adhere to. But what we did just here in Q4 just recently, we looked at the fact that not all of our stores are operating at 100% of kind of utilization where they have been. We're pleased with where it's at, but it's not at 100% yet. A lot of stores have been closed for a number of months throughout the year. So the equipment isn't being used. So we went ahead and made a decision to extend for an incremental 6 months for replacement equipment as well as remodels that were coming due. Doesn't apply to the development requirement extensions that we put out there, but we did so in terms of the replacement equipment remodels. And we thought it was the right thing to do because you go back to Tom's point he made earlier. These guys are trying to operate through existing stores, maybe have some close, some open, managing the cash flow of the business and rebuilding the liquidity on the balance sheet. And then combined all of that with the fact that the utilization of the equipment in the stores hasn't been at the same level it has been historically. So we thought it was the right thing to do for the franchisees, gave them a little bit more breathing room to operate in terms of how they plan their budgets for 2021, et cetera. But we did that in concert with conversation with franchisees and feel good that, as Chris said earlier, it's kind of a win-win for both of us. But we believe that from a brand standard perspective is the right thing to do.

And maybe just one follow-up there, Dorvin. I know we've talked a lot about new development. But just to clarify, so after May of 2021, is it back to normal development timetables for new development, so thinking more the back half of '21? And then as you think beyond 2021, is there a scenario -- I know Tom mentioned getting back to 200-plus units. Is there a scenario where you could see that accelerate, if you think about private equity-backed groups have maybe lost a year of growth and you think about widening the moat and improving competitive landscape? Do you ever see an accelerated pace at some point going forward, even though the time table might be difficult to gauge?

Yes. I think the punch line on it is how soon will we see something normal? Normal environment in terms of consumers just being out active in the public feel comfortable with whatever it is that they're doing as well as joining gyms. And then I tie that into the fact that given a lot of the pipeline stalled back in the summer and certainly into the back half of the year, it's about a 6- to 9-month time line to kind of regenerate that pipeline for sites. And at the moment, as I mentioned earlier, a little bit of a hesitant to go out and do something in a big way right now, given that there could be some potential benefit from waiting with some reduced rates on the rental side as well as potential more TI money upfront as we've seen in a handful of cases. With that said, the development extension we gave was anything that was required in 2020 got 12 months. So if you were supposed to build a store in November, you get to November '20, you get to November of '21. Keep in mind, though, we also had a lot of franchisees that were ahead of schedule. And as from the past, where there was plenty of capital to be employed, there was plenty of cash flow being generated to these franchisees, both of private equity and nonprivate equity where they were putting that money to work and generating some really nice returns. So I think it's a little bit of kind of TBD on that. But I'd just go back to the last point I said earlier, no one is willing to sell and people are wanting to continue to hold on to their pipeline to build it out. I agree with Tom. I think we're going to get back to those kind of growth rates we've had in the past. It's just a matter of time and then building that pipeline back up from a real estate development activity perspective.

I've got a question here I want to pose. Maybe a broader question around real estate strategy. Just how flexible do you think that the franchisee systems have been in terms of new formats or different footprints for the gym? I know in the past, something you talked a little bit about a smaller footprint in test at lease. But how flexible are you seeing the franchisees be in terms of footprint? And maybe what does that mean as you see more real estate, hopefully, come available in some future period?

Yes. We haven't really changed in a big way the overall format or footprint of the gym. It's typically a 20,000 square foot box. We've built a number of smaller boxes, particularly in smaller towns where maybe the availability of real estate certainly wasn't surplus and you kind of took what was available in a lot of cases. We have a few franchisees that will do ground-ups, but some don't like to do ground-up. So if there's a 14,000, 15,000, 16,000 square foot box, they would take it. And we've tested some down into that lower teens 10,000, 12,000 square foot box. And then some really small towns, it works. In fact, we have couple or so corporate gyms that go all the way back to the '90s and early 2000s that are down there and -- so that around 10,000 square feet. And I think from a really small market perspective, that's probably what you would end up doing. But the far majority of -- we have over 1,000 in the pipeline, which we've stated. Those are really in more denser markets, the bigger cities, suburban areas. And at the moment, we still see that as probably the right size box. What we have done is the assortment of the equipment that's going in, we changed that over time. We've had -- we've put in some functional training that we didn't have that a few years ago. We've been testing some bikes, high-quality bikes that you would see in like a spinning studio. We've done that. Those are getting a lot of usage. We didn't have that 3, 4 years ago. So there's things we've done to kind of meet the consumer demand from that perspective. But I don't see us in the real near-term getting away from what's really been tried and true and is working. We'll see how long maybe things around social distancing might impact it in some way. Maybe that means we have fewer pieces of equipment in or maybe that means we need to go a little bit larger. I think it's way too early to decide if there's some aspects of COVID that's going to impact the design. But we believe for the 80% of the U.S. population and those -- the first timers that our mix is right, and therefore, our size is kind of right. But we've got to kind of see as we get out of COVID or get further in on the other side of it, kind of what kind of demands that might put. But right now, Jon, we don't see that impacted in a big way.

Great. I want to follow-up, a separate topic, Chris, going back to just a discussion about membership. I know you made a comment about getting back to membership growth. I guess the question is, barring any adverse development for COVID, do you think the membership bottomed in the fourth quarter here? And then when you think about the recovery, how should we consider the broader consumer adoption of digital cutting into the potential to get back to your member base, if at all? How are you viewing that?

Yes. I think the -- it certainly feels like maybe we're at the bottom now, the trough of membership decline that we -- throughout the fourth quarter. And although the joins, I think, in first quarter won't be quite as strong as they were first quarter last year, I do think strong enough that we'll start seeing some positive member growth here in this quarter. The other question we get a lot is, when do you think we'll get back to membership bases of pre-COVID. I think it's going to -- unfortunately, we're not going to be to sell 6 months' worth of joins in a couple of months. So it's going to take us probably all of 2020 to claw our way back to -- of 2021, claw our way back to last year's levels. So my guess this time next year, hopefully, we'll be approaching 2019 levels again. But I think hopefully, we'll start to see positive member growth for most of the system here for the first quarter. I think the digital -- I think home fitness, I don't believe is something that will ever replace bricks-and-mortar. I mean it's been around forever, essentially. I do think though, however, digital has been adopted at light speed, and I think it's probably here to stay. I think it will -- when we were going this way, we were doing this even pre-COVID. I think it's going to allow us to service our members better in the store, Jon, but honestly, outside the 4 walls as well. So if you think about our industry, you don't use the facility, our industry doesn't service their membership base, right? Once they go home and leave the doors, we don't really have a customer or help them down their fitness journey, right? So I think now it gives us the ability to see whether the person is in the club or outside the club, how do we stay connected and engaged with our membership outside our club so that we could help keep them active even if they can't use the club or they scheduled this and allow them make it to the store. But then when they're in the store, how do we teach them to use more of the equipment. Because we have a trainer at every location, but with 7,000 members, we're open 24 hours a day, 7 days a week, we can't quite possibly train every person to use the equipment, right? Or if they want to learn a new piece, how do we really teach them and how we show them? So digitally, we were able to now educate everybody how to use more of the club. So again, most of their membership and also a variety, right, which keeps it interesting, so people don't get bored with it. We've also implemented a QR reader in our phone and our app. And we have QR codes in every single piece of equipment in our store now that you can literally scan the equipment and show you a quick 15- to 30-minute video of how to use the equipment. So if you're on a treadmill, you see something you want to try, you can simply just walk over to it, open up the Planet Fitness app, scan the code, and it will show you exactly how to use it real quick. So I think it's going to allow us to just service our membership base better in and outside the 4 walls. And on top of that is, even in the digital subscription side, it also opens the door now to get into meditation and mindfulness, nutrition, diet, whole other slew of things that we haven't even gotten into yet so that almost Planet Fitness becomes your one-stop shop for everything wellness in your journey. So you're not having to piecemeal it together on your own. We can have it just be the trusted source to bring you through your entire journey soup to nuts.

Maybe a separate but related follow-up. Just thinking about the members who have stayed on throughout COVID and are working out in your gyms and now, frankly, seeing a lot of enhanced benefits. So you just mentioned some of them. Should we think differently about retention about -- coming out of COVID for the members you have? Are you seeing anything, satisfaction scores or other things otherwise, that might suggest that there's a good opportunity to see some favorability on the retention side?

Yes. That's the -- that right there is definitely the billion dollar question is, how do you drive retention and the industry has always strive to crack that code. And I believe with digital, it might give us the opportunity to do so. I think being able to watch what people are using and what people are trying out for equipment, what piece of equipment being QR code read it the most, by what age and what demographic, what gender and so on. So we can then help instruct people based on -- like people what we know they're going to like ahead of time based on just these million people do this and this, and they stay longer. How do we help guide their journey based on the person they are and who they're like. So we actually have the data now that shows what they're going to like ahead of time. Because right now, our industry, we just open our doors and you check-in, and no one knows what anybody touches or uses or tries. So us now being able to watch that real-time and actually learn from it to help get people more results, which if you're getting results, you'll stay longer, and that's really the hidden gem right there. So I think longer term, the retention is the one that we really like to change. I mean because you get somebody -- you get 14 million members to stay 1 more month, that's a big difference. So -- and that's just 1 month let alone we can drive it longer. So that's definitely our end game.

Yes. Look forward to seeing more of that. Maybe one more, Chris, thinking about the kind of the post-COVID environment. I know you talk with a lot of international peers quite frequently. What are you hearing from some other operators globally, either those that are still in COVID and seeing something different than Planet or in markets that maybe are more in a post-COVID environment, at least having the virus contained? Are you -- anything that you would note of some of those conversations?

Yes. I think the one -- most of the chains in Europe that I've been in contact with, who are fairly large chains in some of the low-cost sector, they -- it's interesting because they came out of COVID kind of like when we did originally. But as you've seen, like in U.K., like the reshutdown, not just gyms, but just in general shutdown again. In Germany, a lot of the same. So they're definitely -- they're going through some tough times and not quite as -- they aren't quite as optimistic today as they were 3 or 4 months ago, especially now that they're closed in the midst of our New Year's resolution time. And I mean this time of the year is -- this is like December Christmas shopping for a retailer, right? If you're not open for the first quarter, that's pretty tough. So I think they're definitely through some hardships right now in Europe, for example. The one group in Asia that I've been talking to, they've definitely been seeing some really good trends there, probably 6 months ahead of us or 4 months ahead of us as far as the reopening phase. And so we did it back in May, the early reopening, and like, I want to say it probably February, March, is that reopening. And they seem to be doing really well in some of those different parts of the country in Asia.

Maybe last one, just to wrap up. You mentioned Europe prices. That's an area that we should look to maybe -- I know you're largely in North America, Central America, Australia today with the footprint. But is Europe a place we should think about your longer-term aspirations for Planet Fitness to operate in?

Until probably recently, I probably would have said our focus would probably be Asia first, because there's just a lot of big operators over in Europe with a really big footprint in each of those countries. But I think in the midst of what we're seeing today, they could be in a situation that there might be a merger opportunity possibly or acquisition opportunity for sure, just seeing that they're under so much pressure right now and will be reclosed for a longer period of time. So I mean always be opportunistic to look at it. But again, with a 4,000 unit potential in the U.S. and only 2,000 build right now, and that 4,000 could be higher now with the closures here in the U.S. of other brands. So don't want to take our eye off the ball here domestically for sure and just make sure we quickly get to 3,000 or 4,000 units about a year.

Yes. Great. I think that's a good place to end. I know we covered a lot of ground here. I think the discussion, hopefully, was helpful that talk through some of the short-term headwinds and tailwinds, frankly, that you're still seeing as well as the opportunity coming out of the COVID situation. So hopefully, we answered a lot of the questions. I know I had a lot submitted. So feel free to follow-up if there's anything we can help with. But I want to thank the Planet team as well as the ICR team for putting this together.

Thanks, everybody.

Great. Thank you, Jon.

Thanks, everybody. Thanks for your time.

Thanks, everyone.