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

Thank you. Good morning, everybody. It's John Ivankoe from JPMorgan. Welcome to the opening of our event, JPMorgan's Gaming, Lodging, Restaurant and Leisure form that we do with Joe Greff every year. Thank you for allowing us to be annually successful event. And I'm very happy to see Vegas as back to normal as 2019 as one could expect, it's only been really a couple of days since mass restrictions came off for employees for certain customers in elevators, casino floors, gyms, what have you. So it's really nice to see Vegas having the activity that it does. And specifically, in gyms, which is our highlight entry, the start of our day here today is with Planet Fitness. Planet Fitness is joining us remotely, they have their franchise convention, I think it's tomorrow and are joining us from their headquarters in New Hampshire. Joining the company, Chris Rondeau; Tom Fitzgerald; and Stacey Caravella. Of course, Chris being the CEO; and Tom being the CFO. I don't know if Dorvin is remote or is joining us today or not. But everybody, thank you for joining us.

So first, I actually would like to lead with the franchise convention. I mean, what you expect to discuss what challenges may be for 2022? What opportunities there may be in 2022? And as this is a franchise, majority franchise-run system, what you expect to accomplish in some upcoming meetings?

John, there might be some confusion there. Our conference is until September, so it's not tomorrow.

Okay. All right. Well, okay. So let me rewind that and talk about your opportunities that you have with your franchisees or challenges that you have with your franchisees. I guess the concerns and opportunities that are coming up within the system.

Yes. I think even if I back up a little bit on the whole COVID situation, and as you know, John, we've been extremely close with our franchisees forever. We really look at them as partners in the business. And we involve them with a lot of decisions and a lot of tests and trials that we do here at PF and ideas that come to us from franchisees. So we involve them in a lot of things. And through COVID, we're even more so, right? We wouldn't have got through this if our culture and our comradery wasn't so good with them. We really got through this together and weathered the storm well together. We had no closure during COVID, which is thankfully for the model and the franchisees themselves. And maybe today, we don't have the conference until September, we talk to them almost every other week. And then once every couple of months, we have a big town hall call that everybody dials into that we go over strategies and things that are going on here in the business and trends we're seeing. So we fast forward to what we've seen here through the fourth quarter and through the calendar last year and even in January, with member workouts picking up and joins picking up and all our gyms are 100% open today and to your point, more and more have no mass mandates as we go down the road here. So couldn't be happy with the trends of the business we're seeing and the franchisees are as bullish as we do as we see the future with. There's -- we have a market potential here in the U.S. for 4,000 stores. We've had 25% of the industry has permanently closed because of COVID. So it just widens our moat even more so for the future growth of the business, which begs the question is 4,000 really in the floor of the sailing and unit growth going forward. But -- and the tailwinds, I think the world is coming away from COVID with definitely a renewed appreciation for taking care of your better health. And I think pre COVID most people thought of exercise or gym does good for your waist line, but it's not about just heart health, it's also mental health, right? And we've seen what the world has gone through and coming out of that mental health is equally, if not more important, than the waist line part of things.

So let's talk about that 4,000 stores. I mean one, of course, correct me. Do you expect around 7,000 members per gym? I mean, is that still the right long-term expectation on a fully built out Planet Fitness system? And if that's the case, 28 million members of anything in the United States is a lot. I mean you kind of really get into like the Netflix, the Amazon, different cell phone, your type of things from a subscription model, which, of course, is what you are. So you talk about, I guess, do you think about that number in that way? And just the percentage of the addressable U.S. population maybe doing not just the bottoms-up work site by site. I know that you do, but just thinking about some of the big top-down numbers as well?

Sure. Yes. If you think about -- say, we have 15 million members. And to your point, if we were a state, we'd be the fifth largest state in the country already, at 15 million. And we had 7,500 members average per store when we closed down in March of '20. And if you look up to that point, we had 53 straight quarters of positive comps, right? And that averaged 12%. So for over 13 years of positive comps, averaging 12%, and that was mostly a large majority of member growth. And even in mature stores was member growth was not done through pricing. And again, 80% of the U.S. population doesn't have a gym membership, and that was pre COVID, before the 25% shutdown, right? So you look at the opportunity to get people off the couch, how we continue to drive member growth, right, in mature stores and new stores. The Gen Z population, which we talk about a lot, right today, we have about 8% penetration of Gen Zs over the age of 14, which is only half of Gen Zs or even age to join. So you have another 5, 6 years or so of Gen Z population coming into the mix. And at 8% of population, there's almost 70 million Gen Zs out there who are already 8% penetration of the ones of age. So the whole another generation coming into the mix. And you look at today, we've got 2,200 stores. If you look at the Northeast, John, we're about -- from like sub-Pennsylvania all the way up to New England to New York and such, we're at about 6% penetration of the total population. But now you go far out west where we went last, we went to California last, in Hawaii, for example, but we're only like 3.5% out there. So there's so much more room for growth here for unit growth and the younger generations and people pay attention to health more so now than ever.

In terms of reaching that 4,000, how do you imagine the brand -- the growth of the brand to be best accomplished? I mean it's the 170-plus or so placements that you've talked about for this year. I mean, is that a number that you think can and should be accelerated? Or is it more moderate, higher quality rate of development at this stage in the company's growth more preferred?

Yes, I think as we come out of COVID, we opened -- look over the last 2 years, the COVID year and then last year coming out year, we have opened 260 collectively, which the previous year 2019, we opened 260 or so. So I think as we build up our pipeline of real estate and franchisees now are hitting the pavement, that number should continue to grow over the years ahead, for sure. I look at the advertising flywheel, which we talk about a lot, John. And as this thing has continued to spool up last year, and like I say, 80% of the population doesn't have a gym membership and our marketing budget here with 2,200 stores is roughly $250 million between the local ad and the national ad front. So what's that look like when it's 3,000 stores? And what does look like when it's 3,500 stores? And that's why it's very interesting if you look at even mature stores continue to comp positive and it's mostly member growth. And these are markets that these clubs have been into for 20-plus years and we're still getting them to grow because it's more people getting awareness of wellness, the marketing machine we use to penetrate deeper into the markets and get people off the couch. And what's really interesting to note is I look at is this 140 million people around the current plan of fitness footprint. So 2,200 stores within 10 miles, there's 140 million people of age that aren't members of any gym. So what haven't they heard? Is it affordability? Is it mental health? What hasn't gotten them off the couch yet? That there's low-hanging fruit. So just imagine, there's 140 million people are on the existing footprint that aren't members of any gym.

And that's of the existing 2,200, not the potential 4,000?

Yes, that's the 2,200 right, right. So that's where the same-store sales comes from, right? Just so many more people that are willing to finally get into fitness.

Very interesting. $250 million, I mean that's a number we should probably be talking about more. That's a lot of money to spend. So let's talk about your confidence both the art and the science behind are you confident that, that money is being the most effectively spend to retain members and obviously attract new ones as well to both new and existing stores?

Yes, we continue to use data more and more to make that money work better, right, to penetrate deeper, momentum into the markets we're in. In this first quarter here, it was the first time we kicked it off with our New Year's Eve sale through January and then Super Bowl. It was the first time that we actually highlighted the importance of fitness other than strictly waist line, right? Hasten makes your sleep better, helps with anxiety, helps with depression, all the other benefits of exercise. So hopefully, that's more messaging that get more people curious against fitness and try which I think is important. We did move to 1 ad agency in the fourth quarter of last year. And now we're actually going to unwind that slightly to go to 3, it looks like. And the data that we captured just even the month of January was stuff we had never seen before. And it was really the spend, it was the marketing mix, the different DMAs, the franchisees were using. We had never seen that before. We knew the natural ad fund we control that 2%. But the majority of it to 7%, which was done by franchisees individually. So streamlining our ad companies down to a few, right? It was up 1.16%. We had no visibility into what they were doing, where they were spending it, how many GRPs or TRPs they were buying in TV, what channels were they on? Was it network television or cable? So that insight is going to be hugely important to really that dialing best practices to make sure the money works better than ever.

And you do a decent amount of television. I mean certainly some of the restaurants that we cover, casual diners especially have pulled back significantly to the point where there's 0 in some cases. So let's talk about the effectiveness of your marketing mix. And even as we think about '22 and '23, how much more do you get for that money? I mean in terms of the 3 advertising agencies that they're saying, I'm sure they're all competing for 100% of the business. What are they telling you in terms of how significant your advertising dollar effectiveness can be in terms of overall net member adds?

Yes, what we're seeing and even this goes back into 2019 and 2018, we did a lot data research back then from internal numbers. What we definitely found was that TV drove more volume even though people have kind of gotten away from and got into digital. TV drove more volume. And towards the tail end of 2019 in January of 2020, we actually spent more on the TV than we typically did and actually cable TV, believe it or not. And what we found over the previous years is as in the last grew the national advertising and local advertising, we were disproportionately throwing more money into digital, right, which from outside and it looks like the right thing to do, that's where everything is going. But what we found is the volume was really driven by TV. So we didn't hear that back towards the end of 2019 and January 2020. And January 2020 was a phenomenal January, one of the best January we've seen in a long time. So the more data we captured around the country, we get to dial-in really, what is the right media mix, marketing mix and what is the right channels. But that being said, as I mentioned, in the Gen Z population during the fourth quarter call, Gen Z population is growing, joining at about 3x the rate we ever see. So we have to be nimble, right? We've been nimble to see a digital starts to have more value going forward because the Gen Z population is joining so fast.

I want to re-ask a previous question, just in terms of the pace of unit development, I mean how much -- I understand what you opened in '19? I understand what you opened combined '20 and '21. But when do you -- and when do you imagine getting back to that 200-plus run rate that you were consistently hitting or even 250-plus run rate that you were consistently hitting pre COVID? Do you think that happens in '22? Or do you think that's more of a '23 or longer term event?

Yes. I think and Tom feel free to add to it. But I think it's -- I think what we've talked about in the past is as the real estate pipeline fills up and negotiations begin and like I said, the franchisees have hit the pavement, we guide to 170 or so this year. And as you know, we have about a 6-month view into the future on -- by the time they find a location, negotiate the lease, start the construction and open. In fourth quarter, in the last few years, we opened a couple of hundred stores pre COVID majority or half of those are in the fourth quarter alone, right? So it's so back-end heavy. So we'll know more this summer, but I think the run rate of 200 plus probably hit later this year. So the 2023 is probably set up in a good way.

Okay. That's helpful. I mean you obviously have -- you have franchisees that have been in your system I should know at the top of my head. I mean, the brand has been around nearly 30 years. And many franchisees have started off small kind of consolidated and become very wealthy. You also have a large number of private equity franchisees in your system. So we recently saw one of your largest, not the largest, one of your largest franchisees become acquired by you. I mean how do you imagine the changing mix of the franchisees that you have? I mean should we expect more consolidation to the company amongst each other? Does it make sense to have smaller franchisees that maybe are hungrier than some franchisees that are happy generating the cash flow that they are at least in 2020? How do you imagine the franchise mix changing and what opportunities or challenges might that give the brand?

Sure. Tom feel free to add. I think we did the Sunshine deal, it was very opportunistic. We had never done a big acquisition like that. We have had a title of small tuck-ins in and around our existing portfolio. At time of the transaction, we had about 115 or so corporate stores. And we'd like to be about -- I think 10% is our target number, 10% of the total corporate stores. So it will remain a franchise company, it will remain asset-light. The franchises have grown so fast that we almost couldn't keep up with, say, close to that 10%. So this acquisition brought us right back to that. But we also inherited a great management team. And to your point, this is our very first franchisee ever in the system. It happened to be Altamonte Springs, Florida, was the very first location in 2003 that opened up with a treadmill salesman and the facility had closed rooming. So he was still there, ran it to put a great management team together that are now running all of our corporate stores and their same-store sales over indexed most of the franchisees themselves and even ours. So I think their influence on our corporate stores will be great in the future, which is great to have him on board here. I think the franchisees, we went public in 2015, we had a little over 200 franchisees in the system. Now we're about 120, so it's consolidated over the years. Most of those consolidations aren't big groups by other big groups. They're mostly franchisees that have 50 or 80 stores or so buying a local franchisees that might have 5 or 10 because they want more dirt, they want more room to build. So if they take a smaller franchisee out, they get more geography with that would now give them more runway to get to 150 stores in the future. So it's one of those things that's they're sophisticated franchisees at this point. I'm lucky that they are a sophisticated to get through COVID, a prime example, right? They are a bunch of onesies twosies, this would have been a heck of a lot harder to weather, right? So they're very sophisticated groups. They have their own CMOs, they have their own CFOs. They have their own Chief Development Officers even, right? So construction crew. So it allows them to just grow, it allows us to manage less people and to really influence the system with less franchisees a lot easier to imagine 2,000 different franchisees.

John, I might just add to that. And we hear a lot that there are a lot of private equity firms in our system. It's only about 10% you can write down those. So it's around a dozen or so are backed by PE firms. But in all cases, those that are backed by PE firms, the original owners and operators rolled a significant stake in the business. So we maintain the brand knowledge, the brand expertise and the operating capability while bolstering, if you will, the financial side of things, which is really kind of the best of both worlds. And so that -- and I think they tend to be among the largest, though not the largest 12, and they tend to be pretty aggressive on the development side. And we've even seen now where folks are on their second or third private equity firm, but the owners keep rolling. So -- and frankly, the size and the capability of the private equity firms coming in, I think, are getting better and better.

Okay. So well, thank you for that clarification. So did you say after Sunshine, there are -- is it 12 private equity firms in your system?

Yes, approximately 10% of the system.

And what percentage of the stores or what number of stores do they own? That's where the lot part comes from, I think, is the percentage of stores as opposed to that number.

If you think about the 12 largest, they're not all PE backed, but a majority of the 12 largest.

Okay. Fair enough. So we'll take a step back. I mean, we spoke just as we were joining the call, just kind of the mood in the marketplace, the mood in Boston, as you pointed out. Chris, I pointed out the mood in Las Vegas, Miami has kind of been its own place for a while. New York kind of coming around just again kind of thinking about your different markets. I mean as we come into spring, and it seems like winter wasn't so bad overall. What's just like overall visitation I'm not asking about member growth, but overall visitation relative to your expectation, the mood in the stores, the mood in the marketplace, people preparing for summer, what have you?

Sure. Yes. So January, we definitely saw it through the first couple of weeks a pullback on workouts. We had generally indexed about 90-so-percent of 2019 workouts. And then at the first time we actually pulled back in probably a year, it was really the first week of January, we were down to the low 70% workout. So definitely, Omicron kept people away. Interestingly enough, though, cancellations was slightly down in previous years. So it tells me that people realize it was a temporary pause, not a permanent change in life. So that's because the cancellation didn't change. But towards the tail end of January, we have actually seen the workhouse bounce back right back to 90% range of normal workouts and actually started to see a handful of days now towards the tail end of January that were our highest daily workouts we've had since before COVID. So it had bounced back drastically and almost overcompensated a little bit maybe. And it's great to see that because what we know now is that workouts are directly tied to joins. So if the workouts tend to increase, the joins tend to follow. So as you know, last year, it was definitely unseasonable. Our second quarter would be first quarter. It's hard to tell if that will be that on seasonal this year or not this January for joins, for example, wasn't pre COVID by any means, although it was about 100,000 more than January of last year, which is good news. But we started having -- we had like April or May, for example, in June that be any year ever so in net new joins. So hopefully, we'll continue some momentum here, a little unseasonal than normal, but it's hard to say if that lasts as long as it did last year.

And you do have -- I just want you to just kind of remind people of this. I mean, you guys do have a labor-light model, you don't use those words, never mind. I think it's probably one of the best things about the system and even covering restaurants. Talk about your store staffing. I mean have there been issues with stores that had to be closed or they have been understaffed during important day parts that maybe have kept away certain member usage that is -- and just you talk about just the overall state of that staffing as we go forward?

Yes, sure. So thankfully, the model runs at about 12 to 15 total employees. So in any given time, in the busiest time of the day, you might have 4 on including the manager. So it's very light, which is great. The other thing that's benefits with that model, unlike a QSR or even a lot of other gyms in this business is, it's not dependent on volume. So if you add another 500 members per store, right, it doesn't mean you need more staff. You don't have more classes, you don't have more towels to wash, you won't have more daycare hours, you don't have more juice bars. We don't have all those things that drive more labor. So as business increases or as workloads increase, it doesn't demand on us to have more labor and more staffing. Through the high day, it's getting a little better now for sure. It's not 100%, but better now from a staffing standpoint. We do have some clubs that were formally 24/7 that have rolled back from 24/7. So not the end of the world, but they're not overnight anymore in some of them. But hopefully, we get back there because workout lines is back to 100-plus percent or so of what we've seen in the past. But hasn't been that big. But maybe, Tom, you talked about like the wage inflation or how that.

Yes, sure thing. And John, we've had no stores that had to close because they couldn't find labor. So thankfully, it's one of the many benefits of the model. And I think when it comes to inflation, we're paying higher wages in some markets than we did a year ago or 2 years ago. But I think to Chris' point, compared to the competition, they just have more labor. So that's going to affect them more than it would affect us. And you go back to the 53 straight quarters of positive same-store sales, the simple average of that being 12% pre COVID and we did 7-plus percent in Q3, and we announced 12-plus percent in Q4. That kind of growth will allow our model on any given store, any given geography to absorb some wage inflation. But yet you still have the bottom line 4-wall EBITDA margins expand, right, just because everything else is so fixed that basically, we used to say for every new member dollar, $0.84 struck the bottom line because all you have to do is pay the incremental marketing dollars on monthly dues and our royalty. Maybe there's a couple extra pennies for wage inflation, but it's not like 84% goes to 24%, right? It's still a lot of it flows to the bottom line, which I think back to your point about franchisees and their development as those store membership levels on average come back to where they -- as they approach pre COVID, we've got about 25% of our mature stores are back to their pre-COVID membership levels. But as they start seeing that, that's just further -- yet another sign and further indication of the strength of the model and the rebound, and that will only add fuel to the development engine.

And even $0.91 for a company store. So I guess, as high as 84 is even higher for yours.

Yes, yes.

So I clearly understand. Yes. So consumers have an expectation of inflation. I mean it's a very, very long-standing price points are now being raised across the industry. I mean, price points that were sacrosanct. Talk about your White Card, if you will, at $10 and let's talk about Black Card. Where the system does have direct pricing power, maybe there's some shadow pricing power that you can take of providing more service and charging more in it now is the right time to pursue that?

Sure. Yes, we get that question a lot. And I think the $10 price point, I'll touch on first and it's something that we pioneered back in the '90s and have been the reverse, right? I think when we're trying to convince somebody who's never worked out before, and 40% of our joins today are never gone to a gym in their entire life, right? So I think as long as our margins can be as healthy as they are in that high 30%, low 40% range, I think the $10 price point gets you off the couch. I think that's a price point that is everybody know they can afford it, it's worth giving a shot. So -- and if 80% of the population doesn't have a gym membership, it's not like I'm fighting for share from somebody else, right? I'm fighting with the couch. So that's my competition. So $10 to be sacred, and I don't think we need to raise that in order to make up for inflation or anything like that. So now the Black Card, for example, will go up from $19.99 to currently $22.99 over the last handful of years. And that's really our lever that we use to raise price. And today, we're a 62.5% Black Card penetration, so out of the 15 million members, over 62% are paying that higher price. So it's a beautiful model when we advertise $10 a month on TV, and then the customer comes in and they end up paying more than double that, right? So and that provides you all these other forms, right? It provides you rest of porosity, which is the most used, right, price you get privileges, so you can bring free guest workout with you every day, may be a same guest or different guest. And then a Black Card spa area in the clubs, which has massage beds, hydro-massage beds, as massage chairs like you see in the airport and tanning. And now we're getting ready to roll out lot of meditation pods in those areas as well. So something else to maybe get a few more acquisition dollars or will price and time will tell on that. But we'll begin to roll out the meditation pod. So we're always looking to drive more service. We never raised it just to raise it, we'll raise it because there's more service and more value. The rest of porosity, that's kind of the one that's always about back pocket, right? Every year, pre COVID, every year, we open a couple of hundred plus stores. And that's the most used. There's more value there. So when there's 2,500 stores or 3,000 stores that also give us more flexing power on the price of Black Card. So today it's $22.99, we are testing $24.99 in 100 stores roughly. What we are doing in those ones are unlocking the PF plus digital in the app. So we have free content and then we have paid content. And if you're paying $24.99 on those clubs, we unlock the paid content in the app for that membership. So that time will tell, we'll test that on the rest of the first quarter and determine if that's something we roll out system-wide. But we really look at the Black Card as the way we drive average ticket across the system.

Okay. You've mentioned and it's -- now it's accepted as a fact, but the 25% reduction in overall fitness supply, I mean we call it gyms, but it includes studios and a number of other things as well. What do you think that reduction is an effective supply? I don't know if you want to call it usage or square footage, however you kind of think about it in a more practical sense. And what is your current thought in terms of just the amount of workouts or the amount of gym usage '25 -- excuse me, '22 versus '19? How much has the demand equation changed?

Yes. I mean it does skew more studios, so more boutiques. It's about -- I think it's 30% of all studios have permanently closed. And most studios might have 200, 300 members. So it's a very small number, right? So in the average members per store in the U.S. if you blend full-size club boutiques is like 1,200, I think it is. So in a phase if you close, you're probably not a successful club, so it's probably less than that in boutiques. So it's not like you have a bunch of 5,000 member clubs at close. So it's not that big. I think longer term, what it does for us is it -- I really look at new business, how that affects it, meaning somebody who's thinking of give fitness a try. There's less doors to shop, right? There's less advertising of different competitors. It's just pretty much us. So now we might be the only show in town and maybe one yoga studio is left as everybody else has closed down, this is just less space of the shop. So I think the longer term benefit is probably better than like a one shot in the arm or a bunch of joins.

And on the demand side, I mean, do you have a sense of -- maybe it's impossible for you to measure.

Yes. Well, we do survey in the fourth quarter, 1% of joins were -- first were coming from a closed club for example.

Okay. Right. And equipment, I mean, you have a very strict reequipped parameters in place for your system. Let's talk about the enforcement and the participation in those. And maybe we can kind of talk about the Planet Fitness reequipment or just kind of the freshness of your gyms versus some of your competitors where consumers may have an option to join?

Yes, John, I'd say it's both a brand strategy piece, brand standard piece and also a financial piece to that question maybe. And I think Chris has said for years, we don't want to be out new. And we know the fitness brand graveyard is littered with people who never reequipped their store. So if it was a 15-year-old gym, you had 15-year-old equipment. Typically, your -- treadmills that were breaking. And so I think that's a key component of our -- we -- the only time to my knowledge that we really lapsed that was during the pandemic in 2020, where we provided those extensions that you know about 12 months for new stores and 18 months for reequips. But any store -- and we were clear with the franchisees, any stores that were built in 2020 forward were back to the 5- and 7-year cycles. So we just think that's an important part of what we offer as a brand that we don't want to just focus on the new stores that we're building like a lot of multiunit folks do. We want to also take care of the members in the existing stores. And there's probably no better way to do that to make sure the equipment always looks fresh and new compared to anyone else in the market. So thankfully, as we talked about, our franchisees have a model that they -- not only do we make a lot of money, but they make a lot of money. And the reinvestment into that is something that they understand is a key component of our brand and what we offer. And so we're not blinking on that obligation going forward.

Final question. The current company store ownership, how has that or will that change your long-term targeted leverage ratio as you used to leverage so well in the past?

Yes. I think it's a good question. And I think we're still waiting for all this to play out. Hopefully, there's no new variant around the corner. But I think longer term, the approach we had makes sense, we think, going forward, where we lever up to a certain degree, is it back to the 6x or maybe it's a little bit less than that just to be a little bit more conservative. But I think when we do that, John, we want to make sure we have enough cash on the balance sheet should any unforeseen circumstances come around the corner that we don't get so aggressive. And frankly, we say the same thing to our franchisees. People ask us what the threat is. It's hard to see that there's a real competitive threat take us out. And what we want to make sure we don't have and our system doesn't have is a great model with an overly aggressive capital structure.

Okay. Guys, I'm teasing with myself so I enjoy your meeting. But thank you. Thank you so much. Thank you for your time. Good luck. Congratulations.

Thanks, everybody.