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

I'm very excited to have here the Planet Fitness team. We've got Chris, Tom, Stacey and, I believe, Dorvin. So I just want to thank the Planet Fitness team who told me that this was going to be a very easy fireside and kind of a normal run of the mill, this is a company that doesn't normally put out a holiday update, and instead, we got quite the press release, guys. So appreciate that. Before I jump in, Chris, maybe I will hand the floor to you. I think you might have a few things you want to just catch us up on.

Sure. Thank you, Simeon, and thank you, everybody, for joining us today for the fireside chat. I'm going to have a few comments and just turn it over to Tom for a couple of others as well. But we made some preliminary release this morning on our Q4 numbers and full year numbers. We added 1.7 million net new members in 2021 on par with the most previous years, so happy to report that even with first quarter was quite a bit slower last year than normal. So happy that we added 1.7 million net new members, bringing our total to 15.2 million, ahead of expectations, as well as opened 132 new locations for the full year, again, exceed our expectations for opening. So happy with those 2 metrics. You may have also saw even in relation to the Omicron virus that we also launched just a couple of weeks ago and announced that we were the first health club to achieve the WELL Health-Safety Rating, which is a seal of approval, if you will, from a third-party source that comes in and inspects our locations, about a 6-month process, checks everything from air quality, protocols on cleanliness, solutions that we use, emergency response protocols and policies in place to achieve that. Most of this WELL Health-Safety seal are the hotels, office buildings, restaurants, for example, but we're the first health club to achieve that. So I'm really proud of that, which I think is also a good feather in our cap and a badge in our doors here for our members as well as potential customers that are coming in to know that they're in a safe place to work out or to be in public. So it's great. And it's also good for our employees on top of that. On top of that, we announced this morning, while many fitness brands have retracted through COVID, 22% of the industry is permanently closed, Planet Fitness didn't lose a single store because of COVID. We're 2,200-plus strong here in our system. And this morning, we announced and we're excited to say that we have made a definitive agreement to purchase one of our larger franchisees in the system, Sunshine Fitness, of 114 locations. They happen to be our first franchisee ever from 19 years ago. Home-based out of Florida, they're in about 6 or so states today, 114 locations. They happen to be one of our best-performing franchisees in our system as well. So happy to make that announcement this morning. Gives us more diversification in our corporate store portfolio with a little over 100 corporate stores currently. And we're in about 8 states and a couple in Canada. Most of these locations are in the southeast of the U.S., so diversification as well as bringing on their management team, proven management team. The founder is still there running that business today, a management team that has their own CMO, their own CEO, their own operations officer that's in place that runs their stores. And again, they're one of the best-performing franchisees in our system. To now also take over the running of our corporate fleet that we currently have, so hopefully, their influence on our corporate fleet, driving more profitability in our existing locations. So I'm happy to announce that. And also think about it also helps us as a franchisor, the bifurcation of the 2 where currently our corporate stores, they tap into our development department here that also helps our franchisees, and they tap into our marketing department here that helps our franchisees. So this now also allows our corporate store -- excuse me, our corporate office operations to focus 100% of their time strictly on franchisees and driving their profitability and performance. So I think it's a great partnership. We look forward to the future here, working with Sunshine Fitness here as part of our corporate fleet here, and a great opportunity for us to capitalize on as they were looking to go for sale. And with that, I'll turn it over to Tom for a couple of remarks on that.

Great. Thanks, Chris, and hey, everybody. So just a couple of things. As you all may know, historically, we've returned value to shareholders primarily through buybacks. We did $800 million in share repurchases from 2018 through the early part of 2020. So as a percent of market cap, that's pretty significant. And as we work our way through what we hope is the end of this pandemic in the not-too-distant future, really focused on our investments and how to best invest our cash. And frankly, when we look at after debt service and CapEx for our own existing business, we just thought this was a great investment opportunity. And basically, the way it's structured is about half of it is going to come from us issuing new equity to the sellers and the other half from cash, 3/4 of which is going to be funded through a debt refi and upsize of the tranche we have in -- that's due in September of '22. And we've gone to the ratings agencies and basically said, if we contribute these stores, how much more debt will you upsize us to and maintain our rating? And that's kind of how we get there. So 3/4 of that cash will be debt funded and the rest cash from our balance sheet. Now we're going to market the deal later in the month and hopefully -- with Guggenheim and hopefully close in early February. But that's kind of the structure of it. And we expect it all to close in the first quarter. And I'd say what we said in the press release, based on Sunshine's historical financial performance and what we expect in 2022, we expect that the -- on an adjusted net income per diluted share basis, this will be accretive in the low double-digit percentage range, accounting for the incremental shares that we're going to be issuing. So we'll address kind of how this will impact our 2022 -- our business in '22 when we provide our outlook on the year-end call later in February. But I think importantly, to kind of take a step back, we've been asked in my couple of years here and before I got here, why don't you guys own more corporate stores? There's so -- the margins there are so great, the returns on new units are so great, and you have this tremendous EBITDA multiple arbitrage between what we trade at and what our system typically transacts at when there's a sale. And in those discussions with investors and some sell-side analysts, they've said as you think about that, the ceiling is probably 20% corporate store ownership until you start to move away from being asset-light. So -- and we've done our own work with advisers on kind of arraying all the public multiunit brands out there. And there's clearly a distinction between those P/E multiples of those firms to the extent that their corporate ownership is 20% and below versus those that are not, the former having much higher multiples. So we feel at 10% corporate store penetration, which this transaction will get us to, we're still well below that ceiling, if you will, of 20% corporate store ownership. But as Chris said, both strategically and financially, it's just a great investment opportunity and one that we believe provides very profitable growth in the future. So we're really excited about it. So maybe with that, Simeon, I'll turn it back to you.

Great, guys. And definitely, I guess I want to dig into this. But before we do, what I want to make sure is that your actual results aren't an afterthought because they were very impressive. So let's talk -- let's just drill into that, and maybe we'll be quick on it, but a few quick things that I want to touch on. The member count was above the expectations for in the middle of Omicron. So when you think about where we are there, why do you think you're able to outperform? And maybe to the extent you want to talk about new joins versus cancellations, but maybe the trajectory of the quarter and then where you think we're going right now.

Yes. So we're in the middle of the January sale, as you know, now, so not much yet to say really on January or first quarter. But through the fourth quarter, we didn't see -- even though Omicron was in the news a lot with increasing cases and so on, through fourth quarter, we didn't see any negative sentiment or negative reaction to member workouts or member joins or cancellations for that matter. And we -- nor did we see it in the Delta variant either earlier in the year. So I think with COVID fatigue and with the vaccines broadly distributed, and I think thankfully this, even though it's more transmittable, it's less dangerous than the original COVID. So I think that's also given some people peace of mind. But I think people already realize that health and fitness is essential and it's important, right? And when you look at who this has affected most in the most extreme cases, it's mostly people who have preexisting conditions and, in most cases, the overweight or obese. About 80% of all hospitalizations in the U.S. are people that are overweight or obese still today. So I think that's one big thing that people realize, that fitness is truly essential and important. And I think that's a tailwind, I think, this industry has, especially Planet Fitness here coming out of COVID for the next few years. And you can't imagine people are going to be less [ health demanding after ] COVID, right? We already pay attention to that. And I think that's a good thing. And there's less competition out there. So the silver lining is there's less places to go and less marketing out there besides us. So I think we can capitalize mostly on that. 40% of our members are still first-timers. 30% of our joins are rejoins. That's typically 20%. So people are coming back faster than ever and aren't choosing home fitness by any means. And I think that's -- and so positive news, which I think is what drove our joins and our cancellations to be in a good spot that allow us to achieve that 15.2 million for the end of the year. And to put that in mind, that's -- our height was 15.5 million when we closed in 2020. So we're almost back to where we started.

And so to that point, when you think about -- and we've talked about it in the past and you talked about the 22% versus the closure number, when you think about the new joins, do you have a view yet, like do you believe you're taking share from the closed gyms yet? Or is this still more a function of going after the couch sitters and the people that were your TAM beforehand?

Yes. We have -- I mean it's not just self-survey-based, right? And from what we gather from the members joining, it's about 2% of our joins are coming from closed gyms. The majority of the closed gyms are boutiques, right? So out of the 22%, it's about 27-or-so percent boutiques, which is studio fitness, which a studio might only have -- the average studio has probably got 200 members, right? So -- and that's a good studio, right? So if it's closing, they probably have less than that. So it sounds like you've got a bunch of 5,000-member gyms that are closing out there. And the average gym in the industry has got about 1,200 or 1,500 members. So -- and that's the average. So if we think about probably the gyms that are closing, they're probably not a high-performing gym either, so call it 800 members or whatever they had. So some of -- again, you have a bunch of abandoned members. But I think the long-term benefit, I think, I look at is that month-over-month and year-over-year, you have just -- it essentially wiped out 8 years of club growth in the industry. So -- and now we didn't lose a single store. So you have just less places to shop and less marketing out there to think about.

Great. Okay. Let's touch on new stores. So you beat the new store number. New stores have been such a critical part of the story. So talk us through, where is that beat coming from? Where do we go from here? And then as we think about that long-term trajectory that you've been very vocal on, maybe just touch on that briefly.

Sure. I think, Simeon, you'll recall in Q3, when we upped our guidance, we saw the pipeline in terms of where stores were in development. There's always the wild card in that last 3 to 4 weeks of the year, and we had a number of things we had to fight. We had to fight the supply chain side, make we got the equipment in. We had product on the boat, product trying to get on -- off of the dock onto the trucks. But I think we and our supplier or -- our suppliers did a great job of delivering on that. The other issue obviously is getting the trades guys and to get stores built out and then ultimately getting our CEO and ability to open the store. And there's a lot of uncertainties on those and particularly this year, I think there's quite a bit more. But I think it speaks to the bullishness of the franchisees and throwing their teams at it and staying on top of it every day and knowing they wanted to be open by January because as we saw the trends throughout the year, we saw the interest level of people continuing to want to work out. You've heard Chris talk about all the facts not just today but in prior quarters, too. And I think it's just a combination of all of those things that speaks to the fact that we beat. And the fact of the matter is our franchisees are bullish and they've been putting more stores in the pipeline. It gives us much more confidence in that getting back to that 200-plus stores a year. We'll talk more about our 2022 guidance when we report our Q4 results. But I think that things are starting to come into place. Real estate availability, there's still a lot of real estate out there, some of which obviously, particularly on the closed gym side, that's not really our size that we need, but we still, I think, have the winds on our back on the real estate side of most areas of the country. So that's good. Rents are still kind of hanging in there, maybe a little soft in some areas, but most of the landlords are willing to give a bit more TI money upfront than they have historically in the past. So that helps on the overall investment and the ROI on that particular project. But we feel really good about where we're at right now, and franchisees feel good, too. When they look at the member growth, they look where we're at, they want to get back into building stores. And I think that speaks to where we came out at the end of the year.

Great. All right. One last quick one, and I'm going to check my notes and go to the issue at hand or the topic at hand. Seasonality, did that change at all to '22 versus '21? So how we're thinking about that? And then any quick comment on equipment sales? And then we'll dig into the deal if we can.

Seasonality standpoint, much like third quarter, you mentioned that we begin to see -- the business begin to get back to normal seasonality. As you probably remember, second quarter was quite a bit out of the norm. Second quarter was more growth than the first quarter and actually double the growth of 2019 in July as well. So we definitely saw some unseasonal growth here in months we typically don't. But as the third quarter ended and then into fourth quarter, begin to see normal seasonality as far as joins, cancels and so on.

Great. All right. So I guess the problem we were talking about, the benefits of being virtual and not one of the problems when we're live, they actually have to pull us off the stage. Here, they just shut us down with a button. So let's see how many I can get in here on the deal. Let's shoot in. So all right, so it's 11:45, and I've been already asked by more than a handful of investors whether this feels like a massive change in strategy for you guys. So maybe talk about why it isn't. Why increase the corporate store -- the footprint so significantly now? Maybe talk about the genesis of the deal. Is this a change in strategy from a cap allocation and the business model? Just kind of give us the framework of what went in behind the scenes.

Sure, I'll start, and feel free to add to it, guys. We had just over 100 corporate stores previous to this deal. This one brings us to just over 200. I think when you look at from a management team's perspective, as I mentioned in the opening remarks, we ran this -- I hate to say a little bit piecemeal but a little bit piecemeal in the sense that we had our VP of corporate stores running it, tapping into our development department and marketing and ops department that also is servicing franchisees. I think as we continue to grow our corporate store fleet north of 100, we would really have to build out a complete management team to continue to run that as it's getting so large, which is going to take time and energy as well as unproven operators to run that business where we have arguably one of our best franchisees in the system, a very veteran operator, proven track record over 19 years, right, that's for sale. And it was a very strategic decision here to say, okay, well, this only brings the 10% ownership of the entire system. You have a proven track record with the CMO, a chief development officer in place, a chief operating officer in place, that we're inheriting in this deal that -- and higher margins in the system, right, generally speaking, so they can influence our existing corporate store fleet like they have run their fleet. That in itself is a huge benefit, right? And also then allows our franchisee support team here to refocus 100% of their time on servicing franchisees, which could then can hopefully drive performance from the franchisees' development and same-store sales perspective. So I think it solves a few different things on one big wag. Diversification, we're mostly in the northeast except for a few in Colorado and in California. These are all in Southeast U.S., which are also bigger population growing states than New Hampshire, for example. A lot more people move in Southeast states. So a lot more growth and a lot more ADA development. We don't -- as far as our corporate stores we have today, we have very little runway in comparison to their runway here for future store growth. So it allows us to continue to open new stores here, greenfields and ground-ups here in the future. So we did get a few things for us.

Yes. I'd say maybe add one thing, Simeon, that we didn't touch on. They went through a normal sale process. They go through a broker. They cast a wide net. And they had an offer. And as you know, we have a right of first refusal in our agreement, so we essentially exercised that -- essentially we exercised that to match the offer. So we weren't price setters. We were just matching.

Okay. So why -- actually, so that's a good point. So why don't we talk about how is their average unit economics versus the group? Maybe talk about the low double-digit accretion comment because that was a big comment, talk about any cost savings that you think you might get.

Yes.

And then low double digit is a big number. Does this change your view on franchise versus owning?

Yes. So I'll start with that one. I think Chris said it -- while we believe 10% is the number we want to peg to, so we're not looking to change that. I'd say the other piece of it is from the standpoint they have above the system average member counts on a mature store basis and they have above system average margins, top tier, so it's really a strong, strong business. And the returns on the new units are very strong. So it's really -- and I think back to Chris' point, it is a well-seasoned, experienced team that has gotten them there and is now going to have the ability to not only continue that with the stores and the runway they have but also to affect our stores. I think there was another question in there that slipped my mind, I apologize, that you asked.

You're talking just to the low double-digit accretion, kind of thinking through the...

Oh, the accretion, yes, yes.

And while we're there, if there's -- just for everyone listening, if there's anything you want us to think about in terms of the model, I'll leave that open-ended.

Yes. And I think we'll talk more about its impact on our business when we get to providing our outlook for 2022. But what I would say is as we looked at our business for '22 and where we think that business will be, that's how we got to the low double-digit accretion. So it's not an LTM. It's a prospective view. And I'd say, as you well know, we're really valued on adjusted EBITDA and adjusted earnings per share. And if you take their 114 units and you do the typical math of what our system does, you can get -- you'll be pretty close probably to the adjusted EBITDA that's going to get contributed once this deal closes in the first quarter. And if you rub that up against our multiple, it's a significantly attractive financial opportunity.

Great. All right, we're hitting up against time, but I'm going to try to throw a few more in. You mentioned the ROFR. Were there other groups you were evaluating? Or did this really come to you? And then how do you think this is going to flow with the rest of your franchisees?

Yes. We -- actually, we have to approve every sale, right? Even if it's not one we're interested in, we still look at it to make sure the buyer is somebody we believe is the right buyer that believes in the model, believes in the brand and so on and so forth. And we look at financials and make sure that we're not interested. I mean this one here, with their track record that -- naturally as a franchisor, we know the -- we know where they stand up compared to their peers, right? So a lot of the buyers don't understand that. We look at them as one of the -- well, cream of the crop, if you will. And when they came for sale, as I kind of looked at their management team and they're staying in place and looked at our current portfolio, why -- instead of us having to build a team, we can inherit this team and 114 really great stores at the same time, made a lot of sense for us. So I think that's just definitely how it kind of came about. But we're always looking at the deals to see if it's not one we're interested in, but this one just kind of checked all the boxes for us and did a few things for us at one time. Like I mentioned, it allows our franchise headquarter company to then focus on servicing the franchisees, not being a part-time job on the side of the corporate stores. So I think it did a lot for us in that aspect.

Yes. I think in terms of other franchisees, I think if we were exercising our ROFR every -- on every third deal that came through the system, that would be a bad thing because the buyers wouldn't be all that interested because they know it's going to happen. I think making one big move in this way and saying that we're at our target will not cause any concern within the franchise community.

Yes. And I think I mean forget the number of congratulations texts I've got in the last couple of hours, but it's -- the amount of franchisees, and I think whether it's the franchisees or us or the -- even the street of the market, way more concerning if we were selling our stores, right? I think that shows that everything we've been saying even since the middle of COVID in our closures is that when we came out of this, it wasn't a matter of if, it was when this would turn around. I mean our closures for the brand is probably the highest it's ever been. This reinforces that we're getting -- double-downing here in the future because I believe this fitness boom we have in our brand with less competition even, that the best years are probably yet to come.

And listen, it shows. Did you guys say how many stores the group has left to develop under the current ADA?

Yes. We've not said that. We're not disclosing it, but it's significant.

Great. So okay. So listen, this is very exciting. It's not -- obviously not a small deal, but you're also not buying something that you don't know well. So as you think about -- in any acquisition, you think about the guardrails, maybe talk about your past performance, so talk about how -- what we know in terms of how you've already integrated other acquisitions and then maybe help us think through, given the size, what the guardrails you're going to put in place as you go through this one as well.

Yes. We have the 100 -- a little over 100 corporate stores today. We've done quite a few smaller acquisitions over the years, 8 stores, 10 stores, 5 stores here and there, 3 stores here and there, tuck-ins around our current store fleet. We're in 8 states as well as a couple in Canada. So we've always -- as the franchisees come up around us in our local market because it makes sense to just -- the regional managers are in place, we can just tuck in 3 or 5 stores here and there. So we've done it over the past. It's pretty seamless. And again, buying a franchisee, we know the history and track record from day 1, right, the performance of those locations, the competition in those markets. So heck of a lot easier than trying to grow at a competing gym that we don't have a history with that business. So we definitely know that this is the largest one, but we're inheriting a great management team in place, which is the benefit in this transaction.

Great. All right, guys. I think we are hitting time. So at the risk of being shut down, I want to thank the Planet Fitness team, thank ICR. Good to, I guess, not see all of you, but looking forward to do this in person. And Happy New Year, everyone.

Okay. Thank you, everybody.

Thanks.

Thank you, Simeon.

Thanks, everybody.