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

Good morning, everybody. It's Randy Konik, lifestyle and growth platforms analyst at Jefferies. Welcome you yet again to another year of the Jefferies Consumer Conference in Nantucket. As you can see, I'm enjoying the beautiful White Elephant sand beach right now and looking out over the water, not really. But look, I think we'll be back to in-person next year. Really excited to have one of our perennial guest, Planet Fitness, with us this morning, inclusive of members of management, the company's CEO, Chris Rondeau; and the company's CFO, Tom Fitzgerald. So I want to welcome them into the conversation this morning and say, how are you guys doing? What's going on, guys?

Thank you, Randy.

Thank you, Randy.

Always nice to see you. Thanks for having us here.

Great. And I'll see you in person next year. So I guess, Chris, I wanted to start off with talking about just the current environment for the gyms today. Just give us your thoughts, always appreciate, on what you're seeing out there for the gyms.

Sure. Thanks, Randy. So we have nearly all our stores open today. The only stores we have closed is a few handful in Canada, but all U.S. stores are open today. So we have over 2,000 stores operating, most without any capacity restraints anymore and no mask mandates at all. So times have definitely changed drastically here in the last couple -- 2, 3 months since the vaccines have been distributed broadly and people are getting vaccinated. So really good signs there. For Planet, we're -- our member workouts are over 80% of normal. So we're almost back to regular workout volume that we saw back in 2019. And the joins momentum are great. As far as the industry as a whole, luckily and probably because of the economics of this business model and the performance of this business model, we had no closures because of COVID. And the industry can't say the same. The industry has reported that 17% have permanently closed already. And IHRSA, our trade organization, reports that they believe that it can get as high as 25% when all's said and done and the dust settles. But happily and proudly that we made it through. We have a great group of franchisees. They're veteran operators for us. They're with us, many them for over a decade, multi-store operators, most of them are pretty diversified. 75% of the stores are owned by franchisees in multiple states. So as some states open and some remain closed even longer like California, for example, but most of the franchisees had clubs in other states. So great group of franchisees and open and operating. And I couldn't be more happy with the performance we saw through April and the continued momentum.

And then how do you think about -- just as we're coming out of COVID, how do you think about the consumers' level of focus on health and wellness and fitness? How does that change, if at all, coming out of this?

Yes. And I really believe -- and there's been some surveys out there, but I believe that -- as we all know, we've been told for decades that we've got to work out, eat better and be healthy, right? And unfortunately, a large portion of the population disregarded it, right? And I think through COVID and all those reports you see, 80% of the hospitalizations were people that were overweight or obese in the U.S. 90% of all deaths in the world were the most obese countries in the world. So I think people will come out of this with a very renewed sense of awareness and importance around wellness. I mean I think we saw that when people get vaccinated, we saw the momentum pick up in March and April, that is very unseasonal. And I couldn't be happy with what just happened there. And we're starting now to see finally is how the Boomers and Gen X population, which you may recall last year, we reported that the Boomers and Gen X definitely canceled at a higher rate than we expected. And that generally the Boomers are more affected for fear of COVID, for sure, but they're now coming back and joining at normal levels. So I think this is really, hopefully, now behind us once and for all. But I believe that people now pay attention to health. Definitely more so in the future. And as you know, 40% of our members at Planet are first-time gym member, never been on gym in their entire life, right? And at $10 price point, anybody can do it. So we're really -- as the world now has reopened, we're really the first choice for these people to get fitness and wellness a try in our judgment-free zone, which is comfortable for the first-timer.

Just to kind of jump off that a little bit. When you saw the cancels come through during COVID, it sounded like there was a disproportionate amount of them coming from, I guess, the Boomers, for example. You naturally think they're the most afraid, if you will, or concerned about their safety. Are you -- so you're saying like you're starting to see those Boomers feel comfortable again and return to normal kind of rates? Or what was that point you made there?

Yes. They're now joining at pre-COVID levels, finally start to turn the corner, as well as our exits and the cancels have normalized. So they're now feeling safe and the angst have now subsided, so now they're feeling good, which is great. And you might have heard me talk about this, but what's really interesting with the rejoins right now, Randy, is typically, as we talked about before just the IPO, honestly, 5 years ago, is about 20% to 22% of our joins are rejoins. So they were Planet Fitness member at one point. Unfortunately, they fell off the wagon, they've canceled and they'll come back to us down the road. Right now, we're seeing rejoin rate we've never seen before. About 30% of our joins today are rejoins. So not only are they coming back, they're coming back faster than we've ever seen before, which I think says a few things. They're really looking at health very differently than they did before. They're not choosing home fitness as a replacement. They've come back faster than ever. So really great trend.

And then when you think about all these different dynamics of losing the members and starting to recover the members -- I think on the last earnings call, you talked about a time line of thinking through, I think, 2022 -- early or so 2022 to get back towards where things were in your view in 2019. How do you think about that at this point?

Yes. So our height was in March right before the close period, where we had 15.5 million members. And we ended April with 14.3 million members. So I think as long as momentum continues and this holds true that people are now -- I think the unseasonality that we're seeing in March and April I think will carry through here. And I think as more people get vaccinated and going outside and going to restaurants and bars and movie theaters and so on, that this momentum we're seeing is going to carry not just to think in the broader public world out there with people venturing out and just going places, as you know.

Yes. How about -- you touched on at-home or in-home fitness and that. What do you think about the dynamic of in-home/at-home fitness and the gyms? How has that kind of been playing out? How do you think it plays out over the next, I don't know, 6 to 12 months? But then also, how do you think the dynamic is going to play out over the next 3 to 5 years? What kind of -- are the changes you see are -- that are kind of permanent or temporary or what have you? It's sort of that interplay between in-home and the gyms, I just want to get your perspective there.

Sure. I mean I've said this a lot, but home fitness is not new and it's been around forever, right? And it's -- whether it was the VHS tapes [indiscernible] and Soloflex and Bowflex, and you go down the list of the home fitness apparatus that were out there in exercise videos. I think what's changed though, Randy, is people's consumption of digital. And I'm not even -- and I don't look at digital as being home fitness. Digital is basically fitness anywhere. It's education and it's know-how, and it's improving your workouts with knowledge, right? So I believe that people have definitely -- probably accelerated their digital consumption or digital know-how, how to use it and -- because they had to, right? So I think coming out of COVID, that will stick. But I think what we'll see now is they're going to use their digital resources in apps, which we did a lot of stuff with our app, which we'll probably talk about in a minute here. But it's how to exercise and get better results, which then drives stickiness longer term, right? So before, you had to hire a personal trainer, pay tons of money and make appointments. And now you can do it 24/7, at your own will, any time of the day and educate yourself through digital. That will happen. And we're even seeing it just from a joins standpoint, Randy. I mean we have about 25%, 30% of our members join digitally, whether it's through the website or the app, for example. Today, that number is almost double. It's like 60% to 70% of our members are joining digitally. So as opposed to the normal typical tour, walking in the club, filling out paperwork, they're actually joining through the website or through the app. So that's just from a join perspective, but that's just how people have adopted digital as a whole. But I think back to your question, people are going to get back to the gym. I think they'll use digital and some home fitness as a supplement if they can't make it to the gym from a convenience standpoint, whether a kid's soccer schedule is in the way or it's snowing today, that they'll learn to do some stuff at home to keep their regimen up. But I really believe that people will get back to the gyms as they had in the past and probably more so, I think, coming out of COVID.

And then when you think about this view of the digital kind of supplementing the physical or the gym, if you will, and you talked about, I think you said about 17% of the competitors have closed and that could be -- move higher, how do you think about just the long-term potential of Planet? You've given us, I think, 5,000-or-so long-term unit targets. How do you kind of think about that unit target in the framework of all these competitors closing and digital almost, like you said, supplementing your workouts and almost increasing people's desire for fitness and continuing it? So just kind of when you think about that, what does that inform you about the long-term potential for Planet both unit-wise and the digital side of things as well?

Yes. So the unit potential in the U.S. is 4,000, correct. A little over 2,100 today. On top of that, we have already sold in area development agreements with the current franchisees over 1,000 more units. So on top of the 2,000-plus stores, there's already over 1,000 that have committed to area development agreements with the current franchisees. So that gives us over 3,000 right there. I think if we look at the industry -- and I was with the industry, I've been here for 28 years now. If you look back, we started this business, me and my compadres originally. Back then, it was 15% of the population had a gym membership, right? Today, it's 20%. So almost 3 decades, it's only moved 5%, right? It's sad, right? So if you look at what's happening today coming out of COVID, people getting into fitness, right now about 60% of our members are Millennials and Gen Zs. The younger population is adopting digital because that's the life they grew up in, right? They've been working out. The Millennials are reported -- I mean Gen Zs are reported to be more active than Millennials. So we have this huge bucket of people that are now coming of age. The youngest Gen Zs is 8 years old, right? So 80 million Gen Zs that still have a decade of aging into that 20, 21 when the time they join. And then you add the 17% of the closures on top of it, right? It's like it's really a perfect storm in a lot of ways that we have people adopting fitness, people have access to know-how and knowledge, which you didn't have. I mean in the '90s, it was -- Muscle & Fitness was the only way you could learn to work out or hire a trainer. That was the only source of knowledge, right? Now you have a plethora of knowledge to learn how to work out and get better results. You have all the trends, all the wearables that really push people to think about their wellness. So I think the trends that this industry have are just phenomenal. With our $10 price point, we're at every basic DMA in the entire country. And 17% of the population is closed. So you're right. The question is, is 4,000 an old number now? And is that going to be higher in the future? And this -- it very well could be in that there's not really anything in my eyes that seem that it wouldn't do that.

And when you look at -- from a personal experience perspective, I'm a Planet Fitness Black Card member and I drive about 20 minutes to get to my closest Planet Fitness in suburbia New Jersey. So are you -- how do you think about the current density of real estate and the opportunity to where you can kind of continue to fill in to kind of get closer and closer to where your consumers or members or potential members work and live? How do you think about that?

So I'll start and Tom can add to it. But if you look at the U.S., for example, if you've lived in the Northeast, we started looking at it and actually this is kind of what we rolled out, right, [indiscernible]. If you look at the Northeast, Pennsylvania all the way down to New England, with New York all the way through Maine, we have well roughly 5% to 6% of the entire population as a member of our store. If you look at New Hampshire, 10% of New Hampshire is a member of our store. 10% of Orlando is a member of our store. So now you roll down to the South and you go out West, now we're in the 3%, high-2% range. So it's just a matter of time. It's just a matter of opening our stores, right? So -- but quite frankly, we had growth in every state. We actually opened our 20th store in New Hampshire. If you told me we would have 20 stores in New Hampshire 10 years ago, it would be crazy. There's only 1.3 million people in the state. So -- but it's just a matter of time before we open more stores and the franchisees continue to grow the model out. So our penetration is extremely high in some of these DMAs where we have multiple stores. So it's just a matter of getting more convenient because 20 minutes, Randy, our average member won't drive more than 12, right? So when we look at -- luckily, because we're a membership-based company, like a QSR wouldn't know all this data, but we know your home address, we know your age, we know your gender, we know your income, we know everything because it's sensitive data. So we can be really creative on what store you're a member of, where is people driving from. And as that store gets mature, we need now a location that make it more convenient for a bunch of members that are -- hence, the area that we open the store. Tom, do you want to add?

No. I think that's right. And I think just one other thing, Randy, we get asked is with the stores densifying, will there be some cannibalization? And frankly, we have -- it's really on the margin. It's not something that will affect the franchisee's decision to put a new store there. In fact, we've talked to a couple of big franchisees who do that almost as a competitive blunting tool. Well, they'll sort of accept a little bit of near-term cannibalization, low single digit, which is nothing, to get the right location, to keep competitors out and keep, to Chris' point, getting closer and closer to the consumer because that 12 to 15 minutes is kind of the sweet spot.

Super helpful. I guess, Tom, maybe we could stick with you for a second on this next question. We always get the question of what is current franchisee health at the moment. So maybe give us some perspective on that. And then the other question we get related to franchisee health is we get the question of when are the franchisees going to reaccelerate their unit deployment, if you will, i.e. when is the company going to go back towards the 200-plus unit adds that they were doing before COVID? So just to get some perspective on that around the franchisee health. And then around that, how do they think about reaccelerating their unit development would be super helpful.

Yes. Certainly, Randy. So the first part on the health of the franchisees. As Chris said, we're very fortunate in an industry that is highly fragmented and is going to have a lot of dislocation from the pandemic, whether it's 17%, 20%, 25% of units, it's a lot. We have 0 stores in that number. No franchisee went bankrupt and the store closed because of COVID. So I think it's a testament to Chris' point about the model, how well-capitalized they are, the fact that some money came in from the outside but operators rolled their stake forward or rolled a portion of their stake, took a few chips off the table. So we never really lost a beat from an experienced operator standpoint as the system strengthened financially. And if you think about it, some of the -- there's a handful of franchisees who only have stores in California. They billed their members 3 out of 12 months last year. And it's not like the other 9 months, they had the equivalent of takeout or drive-through that supplemented their revenue stream. They had 0 revenue. And the fact that they all made it -- and other than the equipment extensions and the new store extensions that we gave, we didn't give many help. That's pretty remarkable. So I say all that to say they're not -- they're all in different places. They're -- as we've talked to the top 30 here recently, their collective enthusiasm and willingness to invest and get back on the growth pattern to your point of 200, 250-plus stores a year, it's all there. It's just a matter of their -- to the extent they had prolonged closures in their stores and most of them had debt, they might have tripped a debt, so they got waivers. They got to work their way out of that. It's just a matter of timing. So I think calling the precise quarter when we get back to that, it's a little tricky. And we put all that in the soup when we stirred it around and said we feel comfortable with our 75 to 100 new store growth target this year. And we also talked about where we see the reequip revenue. But I think if we zoom out for a second and we say, back to your point about that sort of higher target number, we think all the catalysts that were in place pre-COVID that caused franchisees to collectively be ahead of their area development agreements, right, they were investing faster than they were required to in terms of store build-outs. All those catalysts that were there arguably at worst are neutral post pandemic and more likely more positive post pandemic, whether that's the competitive situation, to Chris' point, about consumer mindset and taking care of themselves, landlords have probably more boxes than people lining up to sign leases for. All the things are just -- rates are still good. There's a lot of money in the world. So if anything, that is going to cause our moat to get wider. It's going to result in our franchisees getting back on the 200, 250-plus new units a year and getting back to being ahead of their development schedules. There's nothing that we see that is a speed bump or a headwind, God forbid, that some other variant comes around and does bad things. But that aside, we don't see anything really standing in the way. And I think one last thing, the combination of the bricks with clicks just further insulates us competitively and widens our moat because we know what we're spending to do the -- to build out the app properly, the infrastructure it takes both on the technology and the talent side. And we can't imagine that our competitors who are struggling coming out of this can foot that kind of bill. So it's another advantage of our scale that I think just helps us further widen our moat.

So I want to ask you about that tech stuff in a moment. But just before that, you gave us some good color there on just the real estate scenario or trend lines and so on and so forth and your franchisee health and their enthusiasm. How about just on the reequip, because we get asked that question a lot. Again, I know you gave guidance for this year, just generally speaking, if we were to say or handicap what would come first, normalization of the reequip trend line or the normalization of the store growth -- store unit growth trend line? What would come first, in your view?

Yes. I think we'll clarify a lot of that when we talk about 2022 here down the road. But I think we -- when we talked to our 30 largest franchisees, we have a couple more to go here this month to talk to, but we asked them to essentially show us their financials improve from a cash flow, balance sheet, P&L standpoint that they could meet their CapEx obligations, and they can. So again, there's nobody who's going to allow the valuable asset they have in their Planet Fitness area development agreement, the stores and the runway that they have, to fall into other hands because they couldn't meet their obligations. They have the ability to fund it either with cash on the balance sheet or injecting money to the extent that the business needs.

I think that's an important part there, Randy, when you asked about the reequips getting back on pace or new sort of development, at the end of the day, they're contractually obligated to do so, right? And as you can imagine, the value in their business, right, is not only what they have open but their runway to grow, right? So none of them want to lose their runway. And if they don't reequip, then they're go in default as well. So it's just really a matter of time. And we gave the 18-month extension on the reequips and the 1-year extension on new stores. So really just a matter of when, not if.

Got it. That's super helpful. I like that point of -- you made a good point there, the contractual obligation and basically this stuff will be coming sooner rather than later, it's just a matter of time. So that's super helpful. And I want to ask now -- and we have about 7 minutes left, and I want to start to ask about the tech piece of the company. And just really kind of walk us through, first, about what you've been doing with the app, its development and your vision for how to bring the app into the business model and the tech into the business model, whether it be reducing customer friction, as you pointed out, with new joins, and now 60% of joins are coming through digital, means either the website or the app. Just want to get some perspective on what's your overarching strategy around the app and the tech.

Sure. So if you look at the -- you're right. So if you look at the friction points, right, and some of the friction is the joining process. How can we make that easy, right, and whether it's in the app or online. And also, other than see a commercial, then they've got to come in and learn in store. Now that gives them access to learn about Planet Fitness, whether it's in the app or online, and then they join that way, which is just easy, right? And it takes less friction from the staff, and they can still pay more attention to cleaning and servicing members that are working out. So that's good stuff. But even stuff like the Crowd Meter, right? So it serves the members where before you leave the house, if you want to avoid crowding or you want to be in respite, you can look at your Crowd Meter in the app. It's a real-time calculation of how busy the club is before you leave the house so you can coordinate your own times on your own will. Also the ability to upgrade your membership to the Black Card. If you're a White Card member, 1-click upgrade. We had no formal way to refer a friend. So if you had a friend you wanted to join, we have specials that we send the members. And they can forward their invite to their friend to join through the app, and their friend can join through the app at a discount because he's friends with you, right? So helpful way to refer. And also now guest privileges. So Black Card members, you bring a guest in, in the old days, and we bring a lot of guests in, you would come in the front door and go to the gym and you sign up your clipboard and you're in. Now you actually invite your friend through the app. So now your friends got the app, right? And that's how he gets his 1-use bar code, kind of like an airline ticket. They come into the club to use it for free for the day. And now we capture that data and now we can market to that potential friend to hopefully get him to join down the road. So that's from a joining standpoint. Now when it comes to all the content, and we partnered with iFit, who's the makers of NordicTrack and a bunch of other brands, and they've been in the industry as long as we have but in the home fitness world. We've partnered with them to come up with a lot of our content, which is of higher quality, better trainers and so on, which is our premium content, which I'll talk about that in a second. But really when you look at the app, Randy, what's really intriguing to me now to finally see it working is be able to service our members in the store and out of the store and engage them because otherwise this industry, they pay us a month in and month out, right? Everybody's member, not just Planet, everybody's. But unless the member walks through the front door of the gym, we have no way to provide them any benefit, right? No service, no benefits, no encouragement, no engagement, right? Now it allows us to engage with our members in the store and out of the store, which can only drive stickiness, drive retention, drive customer satisfaction. So we have the content. We have a bunch of free content, members and nonmembers are utilizing it. And then we have premium content that you can sign up for for additional $5.99 and it unlocks a bunch of other premium content within the app. Some interesting things we see with the premium content. In the fourth quarter, we have a bunch of members, about 80% of the subscribers are current members. A big portion was Black Card members, Randy. So they're a Black Card member, many of them for many years, that have opted-in to pay an additional $5.99 on top of their $22.99 Black Card. But interestingly enough, as well as a bunch of people and nonmembers, 20% of the PF subscribers are non-Planet Fitness bricks-and-mortar members, and they're actually signing up for the $5.99. And in the fourth quarter, 20% of them ended up buying a bricks-and-mortar membership after the fact, after subscribing for $5.99. In the first quarter, that went up to 30% of the people who actually bought bricks-and-mortar after the fact of paying $5.99 for digital. So it's that bricks with clicks, and it really is a gateway to membership -- a bricks-and-mortar membership. And it's really a whole another advertising vehicle that we feel that didn't exist 2 years ago for us, whole another way to introduce people to the brand. They may be super intimidated to come to a club. Maybe they want to work out a little bit for $5.99 before they join a bricks-and-mortar. So it just gives us more brand exposure, Randy. And I think being able to service the members outside our 4 walls, diet, nutrition, meditation, I mean we haven't gotten there yet, but the platform is built now that we can really be a one-stop shop for wellness of the entire ecosystem, right? So right now, you join your gym, then you got to find your diet and you got to find your home fitness. And we can just close the circle and make it an entire ecosystem for wellness and catering to the casual first-time gym member that doesn't know where to start.

That's super helpful. We have 2 minutes left. So I wanted to just ask a little bit more around this. So again, this app, you put it nicely, it really helps you engage and connect with your members inside and outside of the gym. And some of the things on the app that I've noticed as a member myself, as I mentioned, is some of the perks that you get, whether it's for Valentine's Day I get 20% off 1-800-Flowers for my wife. Just where are you with that in terms of adding more of these discounts, if you will, where almost the membership pays for itself? And then finally, again we have a minute to go, is where are you with trying to build more relationships with insurance companies or employers to kind of -- which would naturally be more opportunity for more members to join your business that has lots of units around the United States. So just curious there.

Yes. So without our partners that we have currently with the PF Perks, we have -- until the app was born and we put this in last year, we had no real central depository of all our partnerships. Remember, you could go and see how to get the discount, who we are partnering, where do they go for it? So we had on the app now, we haven't before, now something that you open it up and see what perks and specials we have. And we just had a pilot, we had one per week, where people could buy at Stockyards and buy steaks or burgers and something [indiscernible] So -- and you get a discount. You click right through the app, you place it through their site, and you can buy your product, 1-800-Flowers, Reebok, Petco. So we partnered with them. But what's good now in the app is that now we have real data really that we can see how many eyeballs are looking at it every day, right? How many people are opening this thing, clicking through us and we can go to all the partners and show kind of exposure we can bring them. We did 430 million workouts in 2019. 430 million workouts, if they're all on the app, checking in the front door and they can look at their app and see the specials every day, that could drive a lot of traffic for other businesses and partnerships. And now that being said, with the insurance companies and other employers, when we get reimbursement from insurance companies, we work with UnitedHealthcare, we work with Blue Cross Blue Shield, you name it, we all do it. But we can only really provide the insurance providers that he will check in the indoor, right? And same as everybody else in the industry, we know you checked in, but we don't know what you did. We don't know how long you really gym-ed for even, right? So now we actually hopefully provide better data, but also maybe work with the insurance companies where we can actually give them credit when they check in the gym. But if they're using our app and watching a video at home and getting an exercise, hopefully then we can also give them credit for reimbursement for the insurance providers. So -- and I think to Tom's point, no one really spends this kind of money in the digital world. That would give us some really big topics to talk with insurance providers about the data we can truly supply them through the app and to what people are watching and doing in the facilities.

Super helpful, as always. We're out of time, unfortunately. We can talk all day. Thank you guys and we'll see each other in person for Nantucket next, but I wanted to thank Planet Fitness management here again and thank everybody on the line, and hope everybody has a great rest of the day for our conference in a virtual manner. So with that, thanks, guys, and we can now conclude our presentation. Thanks, everybody.

Thanks, Randy.

Thanks, everybody.