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

Welcome back, everyone. Hopefully, many of you were able to join us to the Jamie Dimon discussion is certainly a very good one. I'm happy to rejoin the afternoon session with Planet Fitness. Joining from the company as their President, Dorvin lively, the company's Chief Financial Officer, Tom Fitzgerald, and newly hired and appointed an old friend, Safety Caravella, who is Vice President of Investor Relations. So welcome, everyone, and it's great to see you all virtually, and we hope to have this as an in-person conference in Las Vegas in September. And hopefully, we can see each other than I thought before then.

So I'm going to open up with the big picture question. And the question that to ask every company in a different way of how you think COVID has -- what -- how do you think COVID has permanently changed if there are any permanent changes in terms of the way Americans will view group fitness. Obviously, everyone has kind of been forced to make a lot of changes in the behaviors but what's your view in terms of how the next couple of years plays out in terms of people getting back into the gyms and working out with others?

Sure, John, thanks, and thanks for having us. This is Dorvin. I think big picture wise, I think emphasis on health and wellness is going to be -- we thought it was before, and we thought it was growing pre-COVID but I think that when this is all kind of said and reports are written, papers, white papers on it, it's going to be that those that had compromised health conditions, some of the motion. And so I think that many more Americans are going to really look to take care of themselves. And in some cases, it's just -- it's very simple, right? It's -- you don't have to turn into a marathon. You just want -- don't want to be as lethargic. You want to get some level of activity. And I think that what better place to start on that planet where we have the judgment-free environment, come as you are. And we have great, beautiful facilities, 20,000 square feet. And for $10 a month, the value proposition is just a huge value. So I think that's number one. I think that -- number two, I think, that coming out of this, we learned some things in terms of moving our digital footprint forward. And we saw before, COVID, people were working out in the gym they were using their phones and consuming content wasn't ours. Once COVID hit, we immediately, within a week or so shifted to doing a lot of live -- Facebook Live events and other digital content and then even more so throughout the year through our app and our partnership with ICON and iFit. I think that's going to be a permanent element of the expectations now going forward. That we do so much in our lives digitally, why not complement it then with your physical workout and whether you're working out at home or whether you're working out in a gym in that kind of social setting that we think we -- that we do a good job at, I think that's going to be a huge impact. And then just the final thing is I think now the manufacturers all realize that they've got to up their game in the equipment and the ability to deliver high-quality content as well. So high level, I think those are some things that are going to be here to stay.

And one of the things -- listen, I mean, covering Starbucks for many years to a couple of decades now. They've always talked about the importance of community. And I personally believe that communities will be more important coming out of COVID, than it even was going in, people are going to realize what they missed. Are there ways for you to bring in kind of the digital communities and kind of engage users that haven't feel like they're part of something necessarily that would make -- I guess, quitting that much more difficult to do. In other words, let's say it positively, would lead to a lot more stickiness on your membership base.

Yes. I think that's right. John, I mean, you go back to a couple of years ago when we sponsored the Teen Summer Challenge. And we're getting teens offer for computers and into our gyms in the summer for free, and we can do that because our gyms are open 24/7, and no cost for us, but introducing them and they were doing it in a social way, too, right? Where I think they want to work out with their friends. But in reality, when you go back and look at our gyms pre-COVID, a lot of people were working out together. So there's that immediate part of the aspect socially. But I do believe that you can do a lot of things now through content. And the way we can deliver that through our digital platforms. But if you look at what we were able to do through our Facebook Live events, 32 countries, close to 100 million workouts during that time period. So now to take that and personalize it in ways that we know you like this kind of content. Because others do and to be able to kind of bridge that so that we're offering you something that helps you get along your journey. I do believe there's some stickiness to that because you've created something. And particularly if your routines and exercises and the benefits of it are in your app, and it's connected to other things you do. So your history is recorded in your Planet Fitness app. You see the results that you're getting. You don't want to walk away from that and kind of lose that history there. So I think there's ways that we can do that as well. But that's a huge element of where we will be down the road in terms of community too, John.

And so let me ask you this. I mean, obviously, you've talked a lot about -- I think it's ICR maybe where you really begin to focus on that. The issue wasn't cancellations this year in terms of your total number of members. It was the lack of new member joins. And I just want to get your sense or your insight in terms of why that would be, especially in markets like Georgia, for example, that opened up in early May. There's a pretty big chunk sort of the population that, I guess, weren't very COVID scared. In other words, they want to live their lives normally. And like -- and you're going to restaurants and eating inside. What is -- for the customers like that and regions that have been opened the longest, have you been able to study or determine why some of these people aren't? I don't understand why they're not canceling, that would make sense, but why aren't some of these cohorts of customers joining Planet? Is there any commonality in terms of factors that are maybe keeping them away where they would have joined perhaps in previous years?

No, you're exactly right. If you look at our total cancels, which was really a pent-up cancel demand when the clubs opened. But if you look at the total through the year, it's about the same amount of cancels year before. So it was just -- it came in a shorter period of time when those gyms reopen. But the issue on the join side is that we went total dark on marketing. And as you know, I mean you've been around and seen our brand, John, that we do usually 4 or 5 national sales a year, and we spend a lot of money in our national advertising fund to promote those national sales but then a much bigger piece of the marketing dollars, roughly about $200 million on a run rate basis, pre COVID most of that's local dollars. They get spent in the local markets. And so when you went -- when we went dark, I mean most of the clubs, on average, were close about 5 months. California is still closed. So they've been closing down 9-plus months, 12 months. So when you go dark on the marketing side, it -- we -- you think about the Planet Fitness member, the casual user, to a certain extent, it's the impulse part of it. It's like I need to get in shape. I need to exercise and you put it off and you put it off and you put it off. And so we need to continue to keep that message out there. So that's number one. Number two, about 20 -- almost 29% of our members are members that have been members at least once before. And so it's like we make it easy to join, easy to cancel because they fall off the wagon. We're not going to sit there and try to keep their car keys. But we know when they decide, I'm going to get another try, they're going to give it a try again. So I think that's important. But when you go for such a long period of time with virtually no marketing out there, you just don't generate the demand. We saw some of that after we reopened and started doing some market.

And January, for example, I mean, after what normally is a huge quarter and huge month. I mean January is normally 40% of your new members for the year and 60% come in the first quarter overall, you added, I think, 300,000 net in January. In terms of that New Year's promotion not delivering the results of previous years. So we do have another shot at this later in '21? Remind me, are you guys setting the full 9% on local and national advertising in '21? And should that mix change to get more national coverage, if that makes sense?

Yes. I think that, obviously, the biggest issue, I think, John, is that as we said, there would be a slowing of that decline in membership, which obviously took place, as we said, lower in Q4 than Q3, and then we saw some positive growth in January. But if you go back, you roll the counter back a couple of months. The available vaccines that they are today is not there. The percent of the population, and I think it's like 11%, 12% has been vaccinated at this point. States are starting to release or ease some of the restrictions. Texas just opened up, said basically you can go without any mask or anything, but I'm down in Dallas, and you wouldn't know the difference today, but it's been 1 day. I think what's going to happen is that as we progress through the spring and into the summer, as more and more people are vaccinated and feel more comfortable for the demand that's there to get out, go to a restaurant, go to a bar, go to a venue and go to the gyms. Now obviously, the wintertime is a better time to join the gym just because of the weather, but what we don't know is how much of people -- there's some data out there that people as -- the COVID weight that they put on during the period of time that they stayed at home all the time. So we'll see. We think that the summer months just kind of use that term, should be better than it has been historically just because there's some demand to get back into a normal routine of doing something. But we're not there yet. I think you're starting to see some activity by Americans to -- they want to do something. And I think the other thing, John, is that -- and you heard us say this back at the end of Q4 is that during the last, say, 6 months of last year, it was fewer of the kind of the older population, the boomers that were not joining and they were working at a higher rate as they had disproportionately in the past, whereas those joining were more of the millennials and Gen Z, et cetera. So as the older population does get vaccinated, and then they want to get back out and start doing things, it wouldn't surprise me to see kind of a bit of a shift in that mix of joins back closer to what we had historically. So there's another potential element of a benefit down the road when things ease up.

John, John, just one thing, if I could add. I think back to the marketing and maybe just to wind it back a little bit. One of the things about this brand, the fact that it's so disruptive and pre-COVID, that the -- all the metrics were really strong, 53 quarters of positive comps that were plus double digits, 4-wall profit that was very strong. But one of the things that we don't really talk about a lot is the lifetime value of a customer compared to the cost of acquiring a customer, that gap is enormous, right? All right. So to your point, January was certainly not what we saw in 2020, which was a very strong January promotion, but it was still good. And if we had to do it all over again, we do it all over again because the marketing dollars we're spending, while they may not be as efficient as they were pre-COVID, they're still generating lifetime value opportunities that are multiples of the cost of acquisition, which is, I think yet another indicator of the strong economics of a disruptive brand.

Well, I guess what the economics would tell you is that you should spend even more money by acquiring customers to the point where the margin will be basically -- the gap is relatively narrow. So it's like, okay, well, can you spend more and get -- can you spend more on customers or get more customers or I mean have you been even if I -- this is before your time, Tom, but even if we were to go back to '19, '18, would have been a case like, "Hey, if we spent more acquiring customers," we could even have any more customers than we currently have in the system. Most restaurants don't talk about lifetime value the customer because they really don't know what it is. When I it's very fleeting, as you know from your times being in the restaurant industry. So that's a very interesting concept, but it would seem like the opportunity would be for you to spend more acquiring customers and get more customers as a result.

And certainly, some franchisees do. Our 9% is not a ceiling, it's a floor. It's a minimum.

Can we just go back -- and I think it's relevant. Just kind of rehit the percentage of gym workouts in the markets that have been reopened the longest and then contrast that if we can to the gym workouts and the markets that have been opened the most recently. I mean, how big is that gap? And is that gap narrowing to what it was earlier in the year?

Yes. Obviously, we started opening close back in May and the number of visits on a year-over-year basis was -- is it like 25%, 30% or so in that range. As those cohort to gyms stayed open longer than that increased. As we got through the summer to the early fall, the cohorts are opening at a higher rate because it was a little bit time away from when we had closed. On average, we're in the 70s percent range of visit year-over-year, with the older cohort groups deciding a bit higher than that. So I think the issue, obviously, is that when we got through the year and even in January, there were still some hesitancy of people to get out because of COVID. We'll see as we get through Q1 and then with just the better news on the vaccines and availability of it. And the younger age groups being more eligible to get it to vaccines. If that causes more and more people to want to get out more. But there's no doubt, John, there was a hesitancy to go to the gym. And we were doing as good a job as we could to get the messaging out there that fitness was essential. But yet there were still reports throughout the U.S. that the gyms were a bad place to go. And so we were combining that with real stats, but we kind of go by on.

Well, we can use, we can talk about the politics behind lockdowns for a long time. Especially, is like comparing states that sustain lockdowns that haven't. But yes. I mean, it's listed. I mean, in covering restaurants and you've seen outdoor dining closed at restaurants in California. That was remarkable. Like I mean, so we push everyone back in the small group gatherings at homes. And obviously, that's big deal. That doesn't help. So that's actually -- I mean, I bring in California timing. I mean for you guys, it's approximately 7% of your current gyms. I could imagine it, by the time this is all said and done being a much higher percent than 7% in terms of total number of gyms overall, because there's a lot of things in California that would check me and check very well for you guys. What would be your sense of -- or do we know? Is it too early to say if we're at risk of taking another step down with the California cancellations, which we haven't really yet had to address or on a post-vaccine basis, like, "Hey, what's the reason to cancel, if you can go into a gym without a mask and interact with others," being your others without worry?

No, it's a great question, and we thought about it. We said back earlier in the year that it's likely they would react very similarly because every cohort did. But this will be the only cohort that we've really opened that's opened in a quite a different state -- state of affairs. I think that there's probably -- as time goes by, there's more of a desire to get out and do something regardless of where you're at. I can only imagine that being shut down as long as they are, and they can't do the things, there's that pent-up demand to go do things. So that's number one. And then I just think the safetiness with more and more people being vaccinated could potentially also change the attitude of people to say, "Oh, it's too -- it's too risky to go to gym. I think it's a different world than where it was back in September, October, November. But they weren't -- there was not a ability and need to go in and cancel any big numbers up to this point. So I think it's to be determined, but it is a different state of affairs than it was 4 or 5 months ago.

You guys obviously gave guidance on fiscal '21 openings. And fiscal '21 and fiscal '20 openings combined a little bit over 200 units, which basically is nearly what you've been opening on an annual basis for the past 5, 6, 7 years. So I guess comment on kind of -- I mean, it's going to be an obvious question, but a comment on that rate of slowdown into '21? I mean, should we expect a slow first half of the year and an accelerating second half of the year? '22 being higher than '21. And I guess, to some extent, I'm going to answer my question, with franchisees having greater difficulty of attracting new members to existing gyms, I would think that problem would be even more acute at new gyms, but I'd like you to clarify how new gyms are in fact, the success or the level of success of new gyms attracting new members to new gyms.

Yes. John, I'll start that one. And by the way, I don't think we mentioned it earlier, but Chris Rondeau wasn't able to join us here for this today. He's had his rotator cuff operated on. So he loves doing these things and certainly appreciates all the support. I'm going to make sure...

I wasn't going to joke about it, but I mentioned that in the half you just give a sense of Chris. I have a picture of that on my phone is the selfie that he took, obviously, from the passengers seat coming back from his surgery. Yes, he looks to be a pretty special place right now.

So that's definitely not big news, right? Yes.

Yes. No, wasn't -- no, it wasn't a lot of efforts are shoulder like that.

That's right. That's right. So sorry, we probably should have said that earlier. But I think to your point on store growth, and you're right, 2020, while it was about half of what we did in 2019. It was still a good year. And as we've looked at the landscape of public companies, we think there's only one company who had of any size that had higher percent of store growth than we did. So I think given the circumstance and the fact that our model is so powerful but was highly disrupted during the pandemic where revenues go to 0 when the stores close, I think, is a testament to the strength of our system. And as we think about the range that we gave this year of 75 to 100. It was our best guess based on every -- best estimate, I should say, based on everything we know in both quantitatively looking at the pipeline and different things as well as qualitatively talking to franchisees. And I think as we've discussed, John, they're all in different states in terms of their ability to develop back sort of relative to where they were pre-pandemic, and it's really a function of 2 things. One is where their -- where their capital structure was pre-pandemic? Where their covenants were? And how effective that was by the duration of their closures, right? And so to the extent that they had low levels of leverage, but were closed for a longer period of time, they likely trip their covenants. They got waivers from their lenders. They all got waivers. And then there's a -- once they reopen, there's a period of time where they and the lenders are going to look at the metrics, the lenders know our business very well. We've talked to them multiple times. And then they'll reset some things. And along this period of time where they gave the waivers, they might have partially shut down or completely shut down those development lines of credits that our franchisees use to build new stores. So that will unwind over time, and it will be at different speeds for different folks, depending on their situation. But what we can tell you is their enthusiasm to develop is incredibly high. And we've talked about the supply is -- and the economic terms are probably better than we've seen in a long time, both the quality of the real estate, the quantity of the real estate and while rent rates aren't necessarily dropping dramatically, they're probably sticky downwards, they're definitely seeing more consistently better offers of tenant improvement allowances from landlords, which will defray the cost of building, which will improve returns, et cetera. And so and by the way, we don't think those dynamics are only going to be here for 6 months. They're going to be here for a while. We don't see anybody taking down any considerable number of boxes that we're going to really compete with in the 20,000 square foot sort of target box that we look for. So we think, assuming there's no strain that rears its ugly head or causes further disruption we think the cycle will just continue to build itself almost like a positive feedback loop, where the longer they're open, they go back the membership levels and what was a profitable model, gets even more profitable. And then frees up the opportunity to develop. And we think, as Dorvin said a while ago, we think getting back to that 200-plus level, whether that's in '22 or mid-'22 from a run rate standpoint, it's hard to tell, but it is not a question of whether we're going to get there or if we're going to get there, it's just a question of when we do.

And do you think that, that $200 million is still the right number? I mean is it -- I mean, obviously, I'm now asking questions about covenants and the development lines of credits that the individual franchisees may have with their lenders. Would it be possible that the lenders would kind of -- would restart those development line of credit so they could restart that level of development in early 20s? What do franchisees want to and secondly, I guess, suppose what the banks will allow?

Yes. And I think it just depends on the situation, right? And back to my point about where they were relative to their covenants before all this happened, where they ended up based on how long they were closed. And how they reset things going forward in terms of where the reopening levels are and how it moves from there. But I think most importantly, that's why it all comes back to membership growth, John. And why it's our #1 priority, getting that sequential membership growth is kind of the catalyst to cause everything else to start moving at a more normal pace than what we've seen, thus.

And just to rehit a couple of things. So one could say -- and I've asked this question, but I want to reask it because I think it's very important that fiscal '20 and '21 development would have been accomplished in just fiscal '20 alone. So those were sites that were presumably identified? When you say, maybe in some cases, construction was even started in early '20. That basically the '20 is happening over '20 and '21. Is that the case that the pipeline will be largely finished relative to that, those 2 years that you've identified '20 and '21? And our franchisees currently in the marketplace, looking for sites signing leases, having landlord conversations that would allow development to be higher in '22 than it is in '21. In other words, is '21 just finishing of an existing pipeline or our franchisees out in the marketplace significantly adding a pipeline beyond what has been identified in '21?

Yes. It is definitely not a complete carryover from activity of 2020, if I'm hearing your question right. There's activity. People are in discussions and again, that varies depending on what franchisee -- when franchisees think they're going to get the green light, right? Because they want to start that cycle of finding locations and discussing with us, so we approve it, which is not a laborious process. But they want to get that to be ahead of when they think they're development lines of credit to the extent they're stifled, for lack of a better term, when they start to see that freeing back up, right? They're not going to use the -- yes, they're not going to wait for that to happen and then start the targeting process.

I understand. Franchisees are even more enthusiastic on the long-term based on the quality and quantity of the real estate rents being stable and better TI. I understand that. Now what is the company's view on increasing its asset footprint in the United States? I mean I understand that no franchisee wants to sell at current EBITDA levels, I get that. You probably wouldn't want to pay the multiples implicit for what they would want. But what about breaking more ground yourself and accelerating development in '21 and '22 relative to what you've done in previous years?

Yes, I'll take that one, John. We've got just over 100 stores out of our 2,100 plus fleet. Probably half of that's come from acquisitions, small tuck-in acquisitions. We'll open some new stores this year, and we have some under construction. We've typically only put 5 -- maybe 5 to 8, 5 to 9 new boxes a year. And we probably won't do any more than that, just pure organic growth. But we would most likely, a faster growth would be through acquisition. And so we have a ROFR on everything. We -- a number of those we look at we tend to only look at. We tend to only look at those that are geographically aligned with where our stores are today. We're in 8 states. So it's not like it just concentrated one specific market. I think that -- if you think about the model, most of the territory in the bigger markets is now home by franchisees or we may own a piece of it, in some cases. But we've said during this time period, if anybody wanted to sell, particularly those franchisees in the markets where we're at, we'd be willing to buy. And no one wants to sell. So that speaks very well. I think that as we think longer term, the corporate store fleet, I still don't believe it will grow as fast as the total system will grow just because of the sheer number of stores that are open. That would only take place if we do some decent-sized acquisitions. Now we have the cash. Let's assume we're on the downhill side of COVID. We have a very healthy balance sheet, and we're going to generate a lot of cash flow when these stores are open. Albeit slightly down from where it was before, but it still generates a lot of cash that has to be deployed in some form or fashion. So it's always something to look at in terms of an option of the return on the investment of buying stores versus doing alternative capital allocations. But we'll look at them when they come up. It's not a major thesis in our strategy right now.

So let's talk -- you have the cash and you're going to generate cash flow. I mean, I hear you on company store development. You're going to -- you can't force the franchisees to sell. And obviously, they want to price for their business, whatever that is. So what are the opportunities internationally that you would at least consider that if the price was right, the opportunity is right, that you'd be happy to explain to your shareholders? And I guess, kind of beyond that, are there other capital needs that exist in the business that you could perhaps pursue? And thirdly, would it make sense for you guys to flex back up the G&A spend on a -- relative to what it would have been on a pre-COVID basis in '21, '22?

Yes. So a couple of things on that. I think that our first and foremost, priorities is getting this U.S. business back into a growth mode where we were before. Getting our membership levels up, getting the economics back to where they were and getting new boxes in the group. I mean that's our biggest market, biggest opportunity. And frankly, the low risk, right? And the most even greater today than it was pre-COVID. Secondly is we want to continue to capitalize. And I think there's some weaknesses in the competition in Canada, capitalize upon that and build out that footprint up there. And then thirdly, in Mexico. We think the Mexican opportunity is probably 300 stores or so. We only have 5 at the moment. They've performed pre-COVID very well. So we -- I think the model is clearly going to work in Mexico. And so we want to do that. We've been doing some work on some other countries and thinking about kind of where would be the next best opportunity. When we went to Australia, and we think that's a good opportunity. It's probably not as great as some of the European countries or in Asia. So those are the 2, probably the biggest Asia in Continental Europe that we think about. U.K. is kind of saturated with the 2 big brands there. But in all those markets, it's probably going to take an acquisition.

And you mentioned competitive weakness in Canada, is there -- a recall the call, you don't have to say name. Is that -- and I don't know this, is that a fragmented fitness market? Or are there a couple of major players that we should be considering?

Well, there's -- I mean, there's a lot of regional competition up there and a couple of bigger brands up there. I just think that the U.S. industry has reportedly probably 20-plus percent of the gyms are closed. I think that that's probably going to be -- I don't know what the number is in Canada because I don't cover that. But I just think the competition is weak than going into COVID. So with our footprint up there, I think we're close to 50 stores now. So we've got a decent-sized footprint. So we want to capitalize on the scale that we have there. And whether that's buying out a gym or buying out members or the same opportunities we have in the U.S. to be able to capitalize on unique, very specific opportunities. If those come along, we'd be willing to do that, too. So I think that -- go ahead.

No, please. No. No.

No, I was just going to say. So I think when it comes to the next biggest area, it is either Europe or in Asia. Probably Asia is the biggest opportunity. Because there's generally a low-cost brand in every country and Europe, albeit different than us, our model and not judgment-free because most of those are more than casual first time gymgoers in those countries in the low-cost models. That probably need to be an acquisition, try to do it one at a time is -- it would take a long time to get scale. And then in Asia, I think, there's just not as many larger chains established yet. So that might be a better opportunity quicker to do something there. We're not opposed to looking at partnering in those opportunities when they come along. To this point, it's all been the franchise. And we have 2 stores in Toronto. But outside of that, all of our international stores are franchise.

Go ahead, Tom.

No, you're asking about G&A, and I think digital. So just a couple of quick points, I know we're running out of time. So as we discussed, we rightsized our headquarter and field team here in Q3 to really just get focused on our priorities, took about 15% of the heads out and said at the time that we would judiciously add-back 4 key strategic initiatives, one being digital. And just to put it in perspective, we are going to spend some CapEx. We're going to spend some OpEx around digital. We have been and will continue to do so and maybe at an accelerated rate, just given the opportunity that we're seeing. And there's really no one else who can match us to do that, right? If you look at our scale, this is where scale really helps, not only in marketing, but in this area, too. If you look at the 17 8s high-value low price competitors that we look at, 17 of them, collectively, they have 1,300 stores, right? So we're 60% -- we're 60% larger than they are combined. And there's just no way that any of those folks can likely power up a digital investment that would be equal to ours. Let alone, our position is different because we're going after the casual first-timer. So we just think that provides enormous benefit and will be worth the G&A and CapEx investment. Having said that, as we've said, our intention longer term is to make sure G&A grows slower than revenue, so that it's always a source of bottom line accretion.

And I know we're over, but does this environment caused you to think how you do reequips? I mean should we do smaller, more frequent reequips? Or are the chunky kind of year 5, year 6, you reequip still what we should expect once profitability gets back to normal in '22 and beyond?

Yes. We don't see any reason to change that and to take a different approach at this point.

Okay. Helpful. Okay. Thank you. Very interesting, time flew.

Yes. Thanks, John. Good seeing you. Thanks for having us. Thanks, everybody.

Thank you.