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

Good afternoon, everybody. It's Randy Konik, again, lifestyle and growth platforms analyst at Jefferies. I hope everyone is enjoying our programming for the Fifth Annual Fitness & Wellness Summit. One of my favorite firesides of the day is, of course, with Planet Fitness management. We took them public about 6 years ago and have been kind of analyzing the story ever since. So I'm very pleased to have with me today is Chris Rondeau, the company's CEO; Tom Fitzgerald, the company's CFO; and Stacey Caravella, in Investor Relations. So very pleased to have the company with us and excited to talk to you over the next 30 minutes. So how are you guys doing?

Great, Randy. Thanks for having us today. We appreciate it.

Awesome. So we've had a lot of conversations throughout the day and talking through COVID and where we've come from and where we are and so on and so forth. Maybe it would be helpful to kind of just start off our conversation, is give some of the statistics that you gave in the last reported quarter around membership, workout activity, traffic, et cetera? Anything around that? And how that looked in the second quarter versus the depths of the pandemic and also compared to pre-pandemic levels. I think that will be really instructive and helpful for our viewers to get some color on where the business stands as of the last reported quarter.

Sure, Randy. Thank you. So we have all through the COVID year in 2020, we -- this is the first time in really company history, 6 months, we've been without any marketing at all, right? No acquisition, marketing. We had many stores closed for many, many months. California was closed for almost a year straight, right? So we saw a negative number of growth throughout almost all of 2020 once we closed out in March. As soon as January hit and vaccines were just barely started to be distributed, we finally started to see some positive member growth in January, although very much more slower than a typical January. But as the first quarter progressed, we saw the growth picking up, vaccines were more broadly distributed. And then into the second quarter, we saw some really, really positive results and actually results we had never seen before. We saw a real unseasonable trend in growth actually through July. We have reported in the second quarter, but brought July into it as we finished the month. And this second quarter, we had twice the net member growth as second quarter of 2019. In July, we had twice the net member growth than July of 2019. So we saw some really big demand in net member growth that we had never seen in my 30 years here at Planet. So really positive member trends. And some of the stats around that, too, which are -- for me, I think, are really enlightening and really encouraging, which typically, about 20% of our joins are rejoins. So they're coming back to us, Randy, members of Planet Fitness in the past, and they are coming back to us. Our stats so far this year is about 30% of all joins are rejoins. So not only are they choosing Planet Fitness and choosing bricks and mortar, they're choosing to come back faster than we've ever seen. And on top of that, we -- at Planet, the Judgement Free Zone at $10 a month, we really catered to casual and first-time gym goers. And in history about 40% of our joins are first-time gym people, never gone to a gym in their entire life, their first choice and first venture into a bricks-and-mortar is Planet Fitness. And it's still today even post pandemic, 40% of our joins are still first timers. So they're still choosing Planet and choosing bricks and mortar at the same rate they were pre COVID. So glad that they're not afraid to come into a public place, not afraid of gyms, they're coming in at the same pace. So some really great results in all those stats. And about 3% of our joins are coming from closed competition. So far, our industry trade organization IHRSA reports about 22% of all gyms have permanently closed in the U.S., so that's about 8,000 stores. So we're starting to get some market share gains here from that side as well. So really great stats. And our member workouts are about 90% of what we normally see in a regular year. So not quite 100% yet, but very close. So we're really encouraged and happy with the results.

That is super helpful. One thing you talked about on prior conference calls is the shape of cancellations, and you gave some good perspective on joins and so on and so forth. But can you give us some perspective on where cancellations have gone through, again, through the last reported quarter? Give us some color on the shape of the cancellation curve, if you will, what that's looking like? And how does that curve make you think about people getting used to COVID or living with COVID and going about their lives or not today?

Yes. Second quarter, the cancellations have finally began to normalize to a typical year. The boomers have definitely, even since day 1, been the more active to cancel and slower to come back to workout. So we're finally seeing them go in the right direction. They're starting to come in and workout. They're canceling less than the past. So the boomer population and rightfully so are the ones that were a little bit more skittish or had angst through all this. But -- and what we're also seeing, which is interesting this year, Randy, is our joins so far this year have had slightly better retention. So it's still early to tell where that all leads, but interesting to see that the joins so far have a slightly higher retention. So you wander through post COVID, they're paying more attention to their health, maybe they're a little bit more committed on the outside of COVID here and they're more committed to their health and wellness in the future. And I think that can be a tailwind that the industry and specifically Planet Fitness could have for many years to come.

Super helpful. As we think about the landscape, can we -- I want to get your perspective on what the landscape is looking like? What it's going to look like? You gave a statistic that said I think 22% of the gyms have closed, about 8,000 units. We heard from others this morning that suburban kind of locations are doing better than urban locations that value or non -- units or gyms that cater to nonwealthy are doing better than gyms that cater to the wealthy, wealthy seem to be kind of almost staying home or have personal trainers at their house or staying in their gyms in their basement or what have you with the digital offerings that are out there. So I guess what I want to ask you is just kind of get your assessment on where you see the landscape of the industry right now? And where is it headed?

Yes, yes. So yes, 22% of the gyms have closed permanently. That does skew higher in the boutique world. So I think it's about 27% of all boutiques have closed and about 14% of gyms have closed. So it does skew higher in the boutique side of those numbers. I think what this has done is, unfortunately, I think it's probably weeded out a lot of the weaker players in the industry and probably some of the competition that would probably hurt even on the way in and maybe leave some of them out. So I think the boutiques through this have definitely had a harder go around the fact that they're just smaller footprints. The social distancing in the small 800 square foot studio is very hard to do. At Planet with 20,000 square feet thereabouts, so we can social distance fairly well in our stores. We did a lot of workouts. So we had almost reported I think 250 million workouts and no reported breakouts in any of our sites throughout COVID. So we were able to really amp up our social distancing and our cleanliness standards and show that we are a safe place to workout. So that worked out well for us. We had 0 closures at Planet, not 1 out of the 2,100 plus stores closed because of COVID. So we're able to weather the storm better than most for sure.

Very helpful. And when we think about just around the landscape in terms of why people go to a particular gym, always thought about 3 areas, price, proximity and amenities. Obviously, you guys lead on price, et cetera. But just curious to get your thoughts on of those 3, if you had to rank order those 3 areas of importance to why people join a gym, kind of give us your perspective on that rank order? And then as it relates to proximity of a gym to where a person works or lives, i.e. being convenient to that said individual. As you're building more units and getting closer, I've always thought of your business like I think of Home Depot and Walmart and why they have done really well over the years as they just got more units that got bigger and closer or got closer to where everybody lives. And then because of their price point view is low and beating the competition, they were able to take market share. And then because of that, they've been able to build thousands of units. So I guess what I'm trying to ask you is what do you see in terms of the order of importance of a ranking order, price, proximity and amenities? What is that to you? And when you think about the closeness to a consumer where they work or live, why can't you build thousands and thousands of more of units of Planet Fitness when competitors are going out of business, and there's about 40,000 ZIP codes across the United States or more.

Sure. I mean price is hugely important, especially when you think about the customer we're going after, right, if 80% of the U.S. population doesn't have a gym membership, and that's really who Planet focuses on, is the 80%. And we really look at the 20% that are already gym members, let the industry fight after them, right? And 40% of our members that I mentioned have never gone to a gym in their life. So price is important. I've never done this before. I don't want to pay arm and a leg. And then I can't overemphasize the Judgement Free Zone and the at mix fare component, how truly important that is. I mean someone who has never worked out before, maybe hasn't worked up since college and they're 40 or 50 pounds overweight, do they really want to walk into a gym when everybody is wearing the perfect outfits, in their perfect shape and they got the 6-pack abs, right? And it's that old saying, I get to work up before I join a gym and Planet is the answer to that. So I tip those 2 first things as hugely important, and they go together. And that's why we're able to have so many members per boxes. We truly just make it welcoming it and affordable and make it so everybody can come. But proximity, Randy, let's face it, I mean, working out is hard enough to do by itself, let alone happen to drive an extra 25 minutes to get there, right? So it's got to be convenient. If it's out of the way, it's out of the way. And I don't care if you're expensive or inexpensive, right? You've got to be in close proximity and convenient to everybody. And we're in pretty much every major city in the U.S. we're in all 50 states from a -- one thing is really true in Planet is about 1/3 of our members make $100,000 -- over $100,000 a year, about 1/3 of our members make under $50,000 a year, right? We're in all demographics, where 25% of our stores, Randy, are in our end markets and neighborhoods that the government deems as low income. So we work really everywhere in all the clubs, this is because that component is where they need access and they need affordability, and they need a place that they come as a first timer. And without those 3 components, it's just not going to work. And that's really what's helped us scale over the years. And here we have with just over 2,100 stores, a 4,000 potential here in the U.S. and over 1,000 still in the pipeline in committed year in development agreements to be built over the future years. And I think to your question too, with the 22% of the stores closed, I think the bigger question now is 4,000 is going to be the floor, 4,000 units for sale. And I think it's probably more the floor coming out of COVID.

And I know you guys used a third party to think about real estate and where those units could go. But again, when you think about just life in general and as an observer of life and you see a gym in every town, you see car wash in every town, you see a 7-Eleven in every town. Why can't there be not really a Planet in every town, but the idea that today, my Planet Fitness that I go to almost every day is about 20, 21 minutes away from my house. Why can't there be a lot more Planets than maybe that third party is thinking or even you're saying the 4,000 could maybe be a floor. Why can't it be much?

Yes. So it is interesting, even pre COVID, we've talked about this, we've sold, and got area development agreements and there might be a county or a city that -- we look at the population and with our market planning we say, hold 10 locations, we sell 10 locations to the franchisee. And 5 years later, they built out half of that area of development agreement and they're coming back to us saying, "I can probably fit 7 or 8 more, not just 5 more." And what we've learned about market penetration and back to proximity and convenience, how high is penetration, I don't think we really quite know it. Here, we are in the Hampshire with a 10% of the population almost as a number. We have like over 20 stores here in New Hampshire, there's only 1.3 million people. How high is hot, right? In this figure of the marketing flywheel, which we've talked a lot about, almost $250 million a year going into market, getting to 80% of the population off their couch. I mean there's 200 million people over the age of 15 that are not gym members today. And there's 140 million people that live within 10 miles of the Planet, and we only have 15 million of them. So there's so much more room for this, what is our TAM? Well, it's pretty much everybody, right? Health is universal. And it's just I think coming out of COVID people are going to open their eyes and say, "Yes, we all know we should be working out and now it's proof that we should have done."

Super helpful. We've had a lot of different panelists or fireside chat people talk about Fitness 1.0, their vision of Fitness 2.0, et cetera. A lot of that kind of Fitness 2.0 and 3.0 involves the use of technology or kind of some sort of omni kind of model. So you guys have been talking more on these earnings conference calls about implementing technology into your business model. Maybe talk about technology as it's helped your consumer experience, maybe even obviously checking into the gym and so on and so forth. But just kind of lay out for us your long-term vision for technology and technology implementation into your business and how you think that changes the whole type of company and its business model over the long term.

Yes, that's a great question because it's interesting now if I go back 2, 3 years ago, 4 years ago, it's hard for me to imagine running the business without technology. It's as strange as it sounds, but I think luckily, the wearables and the Fitbit's of the world got people thinking about technology as part of their fitness. And I think here we are now running Planet with our app and how we integrate and help customer experience and customer satisfaction within the app and technology. Because if you think about our industry, Randy, it's hard to imagine we bill every member every month, right, for their membership. And we only get to give them a service if they use our gym, right? So now think about how do we give them service and give them benefit and value for being a member of Planet if they use the club or if they don't use the club. And that's been something that this industry has missed is with -- they don't make it in how we service the number. And I think to be able to reach out to them and encourage them, get them in the gym or maybe use some of our at-home content to maybe get a workout in because they're going to busy with their kids soccer practice or whatever. It was a benefit, but it's also just technology to increase customer satisfaction from the way they join. Today about 70% of our joins are joining digitally and pre COVID, that was only about 35% and they join either online or in our app. We have now the ability for members to refer a friend through the app. And if they get the friend to join, they get a free month in that perk spot in the app now. If you remember, you open your perks button, and we have membership -- we have discussed with other companies like 1-800-Flowers. Petco was a partner we lined up during COVID. They've sticked with us. They like their relationship. We're getting ready to launch a gas partnership, press release should go out this week with a gas company. So if you remember, you could discount some gas. So even if you're not using the club, we are your life partner, we're going to help you live a better life, and we're going to give value for being a member inside the club and outside the club.

On the perk side of things, one thing that we see at least all these companies now are focused on with all these press releases out there, not in the fitness space is just companies in general are seeing massive amounts of, let's say, ESG press releases. Now I don't want to ask about ESG, but in terms of thinking through the future of, again, perks or benefits to members, how are you thinking about partnering with just companies, right? Why can't Jefferies send all its employees to Planet Fitness or so on and so forth. Where -- or insurance companies giving discounts to their insured by being a Planet Fitness member and actually using the gym? Kind of just, again, talk to us about the technology and what your technology can or can't do at the moment around doing something around helping the insured, helping these companies make their employee base more fit, more healthy, et cetera.

Yes. I think with technology, how I see this changing the world of the health, insurance reimbursement is probably the easiest one to focus on, right, is right now, we work with all the companies, Blue Cross Blue Shield UnitedHealth and so on. We give -- they get reimbursed for workouts here at Planet Fitness, and they do it most of all the gyms in the U.S. But right now, all that they get from -- all you get from the gym industry is that the fact that you're checking into the gym. That's it, right? [indiscernible] They don't know how long you're in the gym for, right? So I think with the technology and with Planet Fitness with the app and with wearables connected to the app is to now be able to track your workouts, not only the fact that you checked in, but how long you checked in for the calories you burned, your resting heart rate, did you work out, use our app at home, watching content, to give you credit, whether you workout in club or at home. And I think what would be interesting to think about is now we can be the only gym company that's able to supply the insurance companies with a full circle approach of your wellness journey and not just you check into a gym and that's it, whether or not you walked outside, you worked out on our app at home, you came into the club 1 day a week and give you credit for all of your journey as opposed to just your check ins.

Super helpful. Can you talk a little bit about content where again, through technology. You announced it with a press release, a partnership or I guess, an investment with iFIT a few months back, I believe. Can you talk a little bit about your vision for content and what you envision for that going forward?

Sure. We had about 500 workout videos and exercise in our app, pre COVID. We launched the app about almost a year before COVID hit. And we saw immediately when we closed our gyms in March of '20 that it skyrocketed the consumption of people watching videos in our app, both members and nonmembers who had the app were actually watching a lot of content. So we decided to make a statement about watching our content, could we offer a premium content option for a price because this is all free at this point. So we didn't found -- working with iFIT, and they've been in the home fitness world as long as we've been in the bricks and mortar world essentially almost 30 years. So we wanted to partner with really the one of the leaders, if not the leader in home fitness and content curation and have them be our basic premium content recording studio, if you will. So they then began filming premium content for us that we began testing in November of 2020 for a $599 price tag to get people some premium option to learn more about Planet exercise at home. And what's interesting is 40% of those subscribers are in that were not current Planet Fitness members, 40% turned into a bricks-and-mortar member afterwards. So they started off as an at-home subscription member and then turned into a bricks-and-mortar after. So I really look at the app as also a marketing vehicle for us that didn't exist a couple of years ago, to introduce people to Planet and the brand that maybe are super-intimidated to even go to a gym, even Judgment Free Zone and maybe break that barrier down to convert them into a bricks and mortar in the future.

Super helpful. We're having an at-home panel discussion in a few hours, I believe, and we've had some of the players that kind of target that area of the market earlier in the day. And what the -- what sounds like they're seeing is continued growth into 2021 on top of difficult 2020 comparison. So we have seen at-home accelerate in COVID and then stayed strong coming out of COVID. And in the gym space, we're seeing a recovery, right? So I guess what I want to ask you is that if we're seeing both kind of areas rise, what do you think -- what's your view on the at-home fitness craze? How real is it? How sustainable is it? And if we're seeing gym's recover or at least you're -- not all gyms are created equal, but your gyms -- your business is recovering pretty nicely and a few others in this space are as well while at-home continues to grow pretty quickly and stay in growth mode, where are we going to go from here with at-home fitness?

Main thing with at-home, it's nothing new, has been around forever, right? Whether you go back as far as Richard Simmons and James Bond. So I think at-home has always been there and will always be. And if I think about an at-home person, will always be an at-home person, and the bricks and mortar is somebody separate. But I think what they're seeing and what we're seeing is both is just the general awareness of being in better shape, 80% of the hospital patients here in the U.S. were people who are overweight or obese, 90% of the deaths in the world were in most of these countries. I think just generally people are paying attention more to their health and the tide rises, all ships rise. So I think everybody can benefit from that.

Got it. And then what about -- a question we get a lot from investors is they want to get some perspective or color on what's -- we know what's going on with the franchise or numbers because we get your financials on a quarterly basis. But the investors in your stock or prospective ones want to understand what's the health of the franchisee base? So I want to get your thoughts and color on anything you can provide on quantitative or qualitative details about what's going on with the franchisee base right now?

Yes. Great. Thanks, Randy. So I think it's a -- in summary, it's unique. We're not a collection of mom-and-pop franchisees. We have about 125 franchisees across our system. The average has more than 15 stores, some have over a hundred. And I would say back to the stats on the industry, the fact that 22% of the units closed across the U.S. We have 0 closures in that number, as Chris said. So I think it's just really a testament to the model, the kind of economic returns the business generates pre COVID and what we expect to be post COVID to be, frankly, even stronger. A typical franchisee store after a couple of years is going to make four-wall EBITDA margins in the high 30% to low 40% range. We've got a lot of them that start with a 5, not a 3 or a 4. And so they were able to make money, invest money back in the business and still be well capitalized enough to endure what no one imagined, right? No one imagined 2020 having months, in some cases like in California, 9 months out of 12, where they didn't bill a single member. And the only relief we gave them was an extension of their capital obligations for new stores. We added 12 months to any obligation they had and any reequipping of the existing stores, whether it's cardio or strength we added 18 months to those obligations. We didn't give many other financial help. So the fact that they were able to endure that kind of stress, I think, is a real testament to how strong they are, how well capitalized they are. And while we don't share it, we conduct franchise business reviews with our top 30 every year, and we completed that here earlier in the year. And given the circumstances, we were climbing into their financials in a pretty detailed way. And what I would say is pre COVID, most of them had debt. Most of the bigger ones had debt, they had modest levels of leverage, though. And in some cases, they -- because of the closure period in 2020, they tripped their covenants. But the covenants might have been that they tripped might have been less than 4x, right? These were -- they weren't tripping at 7x and 8x, they were tripping at relatively low levels. In all cases, the lenders provided waivers and to see -- to make sure that they could get to the other side, nobody was put in default or anything like that. The lenders know the strength of the model and the economics that it produces and the returns it produces. Now that membership is built back up, right? They are more confident than ever. They see the opportunity on the other side of this, where we describe our competitive moat was wide and likely going to get wider. And I think the real testament is on the last earnings call, we affirmed the high end of the range of new store growth. We said the range earlier in Q1 would be 75 to 100 new stores this year. We affirmed that it would be at the high end of the range. And that's on top of the 130, we did in 2020 and the worst pandemic of our lifetime. So I think it's a real testament not only could they weather the storm, 0 closures, but have the ability to continue to develop and with strengthening balance sheets and development lines of capital that might have been constrained during waiver periods now relinquished that we expect the development engine will get back to the 200-plus new units a year that we experienced pre COVID. It's just a question of when, not if that happens.

Got it. And then just a quick question. We had a question come in as you were speaking, that the question was basically asking, has Planet had to provide any financial assistance to any of the franchisees?

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Got it. All right. Very helpful. We have a couple of minutes left. And one of the questions I want to ask you, Chris, is that last couple of conference calls, you talked about your view of timing of when the industry got back to pre-COVID levels? I think you noted or said that you thought it would be Q1 2022. It looks like your business from a member count perspective, at least reported in the second quarter is kind of I guess almost back or back towards the prior peak, if you will. But some of the industry is not. So I guess what I'm trying to get perspective on is how do you think about your timing view of the industry getting back to pre-COVID levels? And then is the industry kind of permanently impaired in that those businesses going away, aren't coming back and new ones won't kind of form in their place, and that provides opportunity for Planet to kind of gain more and more market share over time? Just your thoughts.

Yes. I think I knew it would come back, I guess, the fact of how fast it were to come back. And you're right, we're at our peak at 15.5 million members right before we closed in March of '20. We fell to our trough in December of 2020 of 13.5 million. It started to come back, we don't think it would be that fast, not quite as fast as in July that we had already 15 million. So we're only 500,000 off, so it came back extremely fast. The rest of the year, we have to see what happens. I mean, as you probably remember me talking, I mean, mature stores generally don't grow during this part of the time of the year. They basically just hold on or even come back some. So we'll have to see if the volume is there to still grow towards the rest of this year. But honestly, 15 million members already is wherever you hold on to that to be pretty great for the end of the year going into the first quarter. And I think this first quarter coming back, I think the industry is in for granted anything crazy happens with anything, the next variant comes around whatever. But I think first quarter for the industry could be remarkable, probably the best the industry has ever seen. And I think I'm super excited about Planet's first quarter.

That's really helpful. We have one more minute left, so I have one more question, and it came in from a client. Just wanted to ask about international expansion plans. How are the different countries I guess, Canada, Mexico, Dominican Republic, how are they trending? And is there any strategy to enter other areas of the world like Europe? Just your thoughts there?

So I'd say, yes, Europe, a lot of low-cost providers already over there. So kind of -- I don't think we'd readily go there first. We'd probably go back to acquisition opportunities maybe in the future makes sense. Yes, we just signed a big area development deal here in Mexico. We had press release given on that a few weeks ago, a big Mexican business group who has brought in H&M and Old Navy, a few American brands there. They partnered with one of our largest U.S. backed franchisees by a private equity. So we got 2 big groups on there that help build 80 stores in the next 5 years in Mexico. We've got about 60 opened in Canada, a potential of 300. We have 5 in Australia, although 4 of those are closed because of COVID, hopeful for opening end of this month. So I think after that, we'll focus on these countries, really make sure they're well solidified and growing quickly. And probably after that, I'd probably look to Asia. I think there's no real big low-cost provider in that part of the world, and probably our next place we'd look to go. But I think the one thing I always say is the big focus point here and what we don't want to be distracted of is the opportunity here in the U.S., which I think quite frankly, is probably larger than we thought before because of COVID. So we -- those countries are doing good, and they're all performing well. But again, we don't want to lose -- get too distracted with the opportunity we have right here domestically.

Yes. Super helpful. We're out of time. Just so everyone knows the next event here is the panel on the industry breakthroughs created by technology, very interesting panel, starts in about 4 minutes. So I just want to thank Chris, Tom, Stacey. I want to thank you for your time and your participation in our summit this year, our fifth annual one and look forward to your participation in 2022, and brighter days for the industry and Planet Fitness. So thanks to you, and thanks, everybody, for listening and move on to our next event or next panel.

Thank you, Randy.

Thanks, Randy.