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

Great. Thanks a lot, everyone, for joining us this morning. I'm Max Rakhlenko, Cowen's retail and fitness analyst. And I'd like to welcome Chris Rondeau, Planet Fitness' CEO; and Tom Fitzgerald, CFO. Planet Fitness is one of the largest and fastest-growing franchisers and operators of gyms in the U.S. with over -- with about 2,300 locations across the U.S. and select international markets. We have an outperform rating and $110 price target. And the company recently reported strong 1Q earnings, which included member account reaching 16.2 million and comps of plus 15.9%. So Chris and Tom, thanks so much for joining us.

So just to kick things off, Chris, can you provide an update to where your key member and workout KPIs are today? And are your expectations for the pace of the recovery to continue to improve over the coming quarters? Or how do you think things will play out this year? And then just any comments on Gen X and boomers now versus pre-pandemic?

Sure. Yes. Thanks, Max. Thanks for having us, and thanks for joining me -- joining us today. Yes, we had a really great first quarter. I couldn't be more pleased with the headwinds of Omicron the first 2 weeks of January. We finished with a net member growth of 1 million members in the first quarter, which is pretty close to par of a normal quarter for us, so ending with 16.2 million. Some key metrics that we watch is the usage, with what we've really learned through COVID is -- one of the things we learned through COVID is that remember, workout is directly related to joins. And all of last year, we started to get to the 90% range of 2019 workout volumes. First 2 weeks of January, it actually fell quite low almost into the 70s. But believe it or not, by end of January, it was back in the 90s again. And in the month of March, the boomers hit their highest usage since COVID started. Gen X also hit their highest usage since COVID started. Millennials and Zs have always -- already been there. So that was great, and we expect their joins will follow, although the joins still pull back from typical but they are going in the right direction, which is great. Other key metrics too is 40% of our joins are first-time gym members. That's been historically the same in pre-COVID. So even today, 40% are first-timers. And one thing that's been a new trend since post-COVID is that the rejoin percentage is quite a bit higher. Typically, over decades honestly, is that our rejoins, former Planet Fitness members coming back, was about 20% of the joins. Today, that's 30%. And that was true even post-COVID which is at reopening. So not only are they rejoining. They're rejoining faster than anything we've ever seen, which is a great sign. And last, I'd say the Gen Z population is joining at an unbelievable rate. They're about 150% to 180% of pre-COVID levels. So the Gen Z population is reportedly to be more active. And I think through COVID, being cooped up and so on, that they've really gravitated towards bricks and mortar and gravitated towards fitness. Even pre-COVID -- they're about 25% of our base today. They're 15% of our base pre-COVID. We've doubled our -- almost doubled our Gen Z population in our clubs since pre-COVID. And to think about the Gen Z population for a minute, half of them aren't even of age to join yet. So we think of how that translates on the future, it's going to be really, really great, great for the industry and great for Planet.

Right, right. No. That makes sense. And yes, the Gen Z stats are really compelling for the longer-term playbook for you guys. How would you assess the recovery compared to your own expectations? You noted on the last earnings call that 30% of your mature gyms have now returned to pre-pandemic member levels. What about the remaining 70%, do you think that's something that's achievable this year or maybe a little sooner, a little longer? How do you think that the rest of the recovery is going to play out?

Sure. Yes. We're back to more of a seasonable growth trend here. Last year was very unseasonable, where second quarter was better than first quarter, which never happened. Now we see it being more seasonal, normal typical seasonal joins. In mature stores, typically through third, fourth quarter, historically don't grow much or at all or even sometimes pull back slightly throughout the summer months, although they'll be net for the year because January and February, March is like a big thing. So I do expect it was 25% of mature were at or above pre-COVID. First quarter was 30%. I think every quarter, we'll constantly add a little bit more to that thing, but it will be a longer cycle. It won't be like, all of a sudden, that 70%, come third quarter back to normal. But I think it's important to note that pre-COVID, 53 straight quarters of positive comps leading into COVID, which is mostly member growth, a vast majority of that is member growth, and that holds true for the last couple of quarters that are positive again. So it's just a matter of time. It's not if. It's just when.

Right. Okay. And then as usage for boomers continues to improve, do you anticipate sign-ups will also soon accelerate for this demographic? And then is this really the unlock that you need for stores to get back to where they are? Or is there something else?

Yes. I mean I think it's important to note that boomers are a pretty small part of our base as a whole. Pre-COVID, they were about 15% of our member base. Today, they're about 12%, 12.5%. So it's not they're a huge mover of our membership per se. They're almost more of the cherry on top as we get them back. It's really the Gen X and -- I mean, excuse me, the millennials and Gen Zs are the big ones. Millennials, pre-COVID, were about 40%, 45% of our base. I'll tell you about 40% were the Gen Zs, now 25% of our base joins. So it's really that cohort that's growing the fastest. Gen X grow too, but the boomers is good, but they're not -- they're definitely not what's needed to get back to the -- where we were.

Got it. And then so as Gen Z is going to be one of your biggest, if not the biggest growth driver over the longer term, just curious what you're doing to stay top of mind for this demographic, whether it's marketing channels, grassroots at the franchise level or anything else. What are you going to do to continue to drive growth there?

Yes, that's a great question. This is really exciting topic for me, and I've been talking about it for a handful of years now, and it's interesting to see it really happening right as we speak today. And so we -- besides the TikToks and the SnapChats and everything else we're on, which is important to be in front of, they -- so they're aged from about 6 to about 24 years old today. And so about half now of the -- they're the largest generation, believe it not. There are about 79 million of them. And about half are aged, old enough to join, over 14 years old. We launched a program called Teen Summer Challenge in 2019, which was a great initiative. It's really to do a few things. And mental health was always a big deal with teens growing up with social media and what they go through as well as expose them to fitness. And a lot of schools these days don't have even phys ed, right? So we decided to launch this program in summer of '19 that was basically, we unlocked our doors for free for all high school age kids to come and work out, no charge, no strings attached for the month -- for the whole summer and had unbelievable response. We had almost 1 million kids sign up through the summertime and worked out for free, no charge. Today, 11% of those teens are still members today, and about 5% of the parents are still members today. We've relaunched it again this year, took a 2-year hiatus because of COVID and everything else going on actually. And it couldn't be -- I mean it's -- we haven't even released the numbers, but it's quite epic. I mean it's just gone -- and mental health now with kids is magnified. I mean you can't turn off the news without hearing some really unsettling stats around it. But we were up to a point of launch of opening day, which is this past Monday -- or a week ago this past Monday. We were signing up 800 kids a minute, a minute. And it was -- it crashed the website for 2 hours. It was that much volume. It was good thing, bad thing, but it was that busy. So -- but I couldn't be more pleased with the response. It's really the right thing to do, get some exposed to fitness and for longer term for the industry. But I think with the generational mix we have, which is important to note because it's grown over the years of each generation, and the propensity of each newer generation to join is quite a bit higher, okay? So today, we have about 3% of every boomer in the country is a member of our gym, about 3%. And if you go back 5, 7, 8 years ago, that was about 2%, 2.5%. So that grows as time goes. So just more marketing, more locations, more exposure to the brand. Gen X today is about 6% of every Gen X in the country is a member. Millennials is about 8.7% of every millennial in the country is a member, and that was lower. I mean it just grows with more locations and more marketing. Of the Gen Z population, to think about it there, only half of age have joined. They've only heard of marketing for a few years. They haven't been around for 30 years yet. And we already today have 8.5% of every Gen Z that's old enough to join is already a member today, already. So historical trends show that when they're all of age, in over 6 years or so, to join, we should have upwards of 15% penetration of the Gen Z population when they're all of age. So just that by itself is 12 million Gen Z members over the next 5, 6 years. So that trend and propensity to join as you get younger generation is all in our favor. And well, some brands, not even in fitness, just trying to figure how to get Gen Zs to like their products, they're running to us and gravitate to us. So it's really -- it's exciting to me because I've been talking about it and seeing the trend slightly happen 5, 7 years ago. And to see it really happen in fruition now is just crazy. And the Gen Z, the High School Summer Pass program, we just launched has gone [indiscernible].

And how productive they? Are they more productive than older generation as far as usage as well as maybe lower churn?

It's interesting because they're -- it's funny. It's -- regardless of age, it's like humans are humans. So they work out the same amount, and the gender is about the same. From our system, it's -- now it gets just the high school football team. It's about 50-50. I mean it's really a great thing. So what's in -- but the trend is the same. And even like our usage, even nationwide, geography to geography, regardless of ethnicity, regardless of age, they're all -- they work out normal. They work out about the same. I'd say the one thing about post COVID is even though we're not quite at 100% of workouts, the ones that are working out are working out slightly more than they did pre-COVID, which is a great sign.

Yes, yes. No. That makes sense. And then if we were to just take a step back, one of the themes of the conference is consumer at the crossroads. We've heard a lot of retailers report over the past few weeks different things. So just curious, how would you rate the consumer today on a scale of 1 to 10? And then just any callouts on the lower end or the higher end? Any changes in trend that you're seeing?

I haven't seen any of them. What I think is interesting is that even we just raised our Black Card price in the $24.99, and we did that, we tested about a year in about 100 stores and had great results. So when you think the economies not do well or people are holding on to their pocketbooks maybe, they still spend the money, and our Black Card percentage continues to go up. So that's a great trend. And attrition is actually slightly better, a little bit, not a lot, but a little bit, which people aren't canceling more now than they were pre-COVID. So I think it's -- I think health and wellness, post-COVID, the silver lining I guess behind the whole thing is people are going to, I think, pay attention to what they should have been doing for decades. Unfortunately, what -- who's affected the most. So I believe the tailwind in the industry has -- is good. And at $10 a month, anyone can have access to fitness and have a $2.5 million, $3 million facility at their fingertips, which you can't do that at home or anywhere else for any -- that amount of money.

Do you think that tailwind will be sustainable? We've heard both sides of this. Obviously, you said before, we've all -- we're all sort of natural creatures and everyone tries to be maybe a little more health-focused coming out of the pandemic. But do you think people will just revert back to their old lifestyle eventually? Or do you think that this really will be a permanent trend of just greater focus on your health and wellness?

Yes. I mean time will tell. I think -- I mean I think with time, people do tend to forget. But I think as the younger generations are aging, which is back to the Gen Z population, the propensity to join is just going to be higher than Gen X -- than millennials and Gen Xs anyway, even -- regardless of the pandemic started. So I think the pandemic just adds another layer of gravity to fitness. How long it lasts? Time will tell.

Got it.

And Max, I think one thing, back to the consumer folks who may not be familiar with the story, we have 2 price points, $10 and now $24.99. We primarily only advertised $10. But even as inflation was ramping up, still, 6 out of 10 people who see the ad for $10 and come in to join sign up for the more expensive Black Card. So while inflation was going up, they were still choosing that because it's such a great value.

Well, you actually lead my next question. But can you remind us how the business did during the last recession? Did you see a trade down to your price point? How are comps? And then anything on churn or cancel rates that's worth calling out?

Do you want to...

I wasn't here. You were here, but I don't know the history.

Yes. We had great double-digit comps in '09 -- '08 '09, '10. We had great double-digit comps back then. Anecdotal, we had thought of people definitely trading down. People realized they don't use a rock wall or use the pools, so why am I paying for it. And I also think and even some ways, if you go back to the dot-com era, which we only had 4 stores back then, but there is -- some of our stores were around this big giant tech park. And the clubs were so busy because they didn't want -- they do -- they're all late often. They were working out at 10:00 in the morning if they weren't working. So what else can you do for $10 a month, right? It takes time, and it's good for you. So I think it's -- I don't think -- I mean nobody wants recession but I don't think -- our model, I think, stands the test of time.

Got it. Okay. And then just switching gears, but are you guys seeing an acceleration in sites being submitted by franchisees? What are you hearing? And then is there a risk that permit delays or other factors out of your hands could continue to reach further delays in openings?

Tom?

Yes, I'll take that one, Max. So I think we provided our outlook that we'd have 170 new franchise placements for the year. And what that means is stores that will open with new equipment, which will impact our equipment segment. And that excludes -- so we often get asked about when are you going to get back to 200 new stores a year. So if you take what the corporate store segment now with Sunshine included in it, may typically open 15 to 20 new stores a year. So if you add that to the 170, you get pretty close to the 200. And we believe through this -- as we approach 2022, that at some point during the year, we would be ramping to 200-plus new stores a year. So we still feel pretty good about that. I'd say the permitting is less of an issue anymore. It's really -- if there's one thing on the horizon, it's -- that's not only affecting us but everywhere are -- is the HVAC unit availability. The supply chain has gotten tight on that. We've worked with the main suppliers to try to secure our share of that for what we need for our openings. We think we've factored all of that into our outlook that we affirmed for the 170 here on the last call. But that's the only thing. I think everything else -- franchisees are bullish. They've seen the membership rebound, as Chris described. Profitability levels follow given the flow-through of our model, where pretty much the cost of running a gym, whether they have 5,000 members, 6,000 or 7,000, is the same. So all of those things are pointing in the right direction. It's really just this one minor blip with HVACs.

Yes. And what's your philosophy? Prior to the pandemic, I think, especially 2018, 2019, you were opening well above 200. So once things normalize, once you get to your run rate, whether it's later this year or next year, are you thinking sort of well above 200 or maybe come back down to that 200 level per year? Just curious how you're thinking going forward longer term as far as openings?

Do you want me to take that one?

Yes. Sure.

Yes. Sure. So prior to the pandemic, you're right, our record was 262 in 2019, and each year prior to that was a little bit lower. So it's clearly ramping up. And then things got disrupted. But even through the pandemic, important to say that while 2019 was 262 new units. In 2020 and 2021 combined, we basically did that number again. When there was a lot of multiunit folks who really pulled back on their new unit growth, we still had a pretty good performance and then the number I quoted earlier for this year. So I think it's all sort of pointing in the right direction. We feel good about it. Will it ultimately get above 260? We don't see anything that would stand in the way of that. It's just a matter of things building back, franchisees rebuilding their development capabilities. Some took a longer pause, depending on how long they were temporarily closed in their geographies. So -- but ultimately, we don't have a number per se of we want 10% or 12% unit growth. It's really more organic. We want people to put units in their existing markets primarily. There's no new market really in a way that is accretive and allows the marketing flywheel to build for that new store and that new member base so that the margins are still what they've been historically and strong and doesn't deter anybody by building too fast.

Got it. And what's your outlook about potentially opening up to new franchisee groups? There's so much demand out there to be a Planet franchisee, especially from whether it's private equity or the broader institutional community. So just curious if that's something we could see down the road.

Are you asking for a friend, Max? No, we get that question a lot. The U.S. is pretty much sold out. So the only money coming in are groups that have maybe a private equity owner who was there for 4 or 5 years, and the duration of their fund gets them to sell and then a new private equity firm comes in. Now we talk about private equity a lot. It's only about 10% of our franchisee base but tends to be the bigger ones. And there's been a lot of activity in our system, which we think is another healthy sign, smaller PE firms exiting, bigger PE firms coming in with the penchant to grow even faster. We typically -- not typically. We always upsize our area development agreements whenever there's a transaction. The number only goes up, never comes down as we think about the potential new unit growth in those territories. So -- and the multiples are pre-COVID multiples for these transactions. So it's really, I think, another sign that, to your point, there's a lot of interest to come into the system. And frankly, some recent folks that -- who we were able to secure their entry into the system by winning the bid have said they've tried multiple times to get in. So I think...

There was one that was just recent, right?

Yes.

End of April, I think. I think it was 5 since our last call, excluding, I think, your...

Sunshine, yes.

Yes. So there's definitely been a lot of people changing hands. Do you think that that's just a catch-up that not happening during the course of the pandemic? Or do you think it might be a signal of there's just a lot more interest now in being a franchisee than it was previously?

I think a couple that transacted wanted to go to market, so to speak, before COVID hit. So they put that on hold and then have recently sold. So there is a little bit of that. But I think there's always a fair amount of activity in our system, which we think is another healthy sign. And our franchisees are very well capitalized. So you may know, for some of the folks newer to the story, 25% of the 41,000-plus gyms in the U.S. closed permanently due to COVID. We had 0 in that number, which we feel very good about, and it's a real testament to the strength of our franchisees and the model that we have.

Yes. Absolutely. And you touched on Black Card just a few minutes ago, but you obviously raised your prices by $2 earlier in May. And then you're very well known for grandfathering in the members that had a previous lower amount. So just curious if you have a sense of like what's the breakdown of the amount of Black Card members that pay the various prices, whether it's now $24.99 or $2 less or I think it started at $17.99. So what's the mix and how has that changed over time?

That's a good one. We definitely have some of the people at $19.99 still for sure. We charged that for forever really until 2017. I think we changed to the $21.99. But our thought is -- with the grandfathering is a loyal member of Planet for years, decades even sometimes, I have a hard time rewarding them by raising their rate. So that's why we've always had kind of a grandfathering effect. And I think it can drive some retention as well. I mean if they know they have this grandfather rate, maybe they're taking a year off or a couple of months off or whatever, at least they know they -- why would you want to cancel it knowing you'll pay $24.99 in the future. So I think grandfathering is a good thing.

Yes. And then you previously sort of discussed having a ceiling for the Black Card just given what you provide versus what some of the peers. So just curious what your latest thinking there is. Especially as some of your peers are taking pricing, do you think the ceiling has maybe gone up? Or what's the latest philosophy there?

Yes. It's -- you're right. I did think that, and I think now it's up in the air because if you ask me could it be $24.99 and $10 would be the next level, I'd probably say no 7 or 8 years ago. I think that $15 will be a big spread. But I think it's showing that -- the value that we continue to add. And again, the $24.99 was not an inflationary move. We were already testing this year. I mean this is really -- we look at raising rates only based on raising value. And $10, I think, is our sacred, gets you off the couch price and anybody can give it a shot. And the fact, to Tom's point, 60% of these people walk in, see the value in the Black Card and say, well, it's a better value. Even though it's $24.99, it's cheaper than the $10 really when you think about it. And from the last price raise, we opened more than -- 400 more locations, and reciprocity is the #1 use function. 1 out of every 5 workouts is a member using not their home club. They're going somewhere else to one of our other Planets. So -- and the guest privileges where a member can bring a free guest to work out with you. It can be a different guest, same guest every day. It doesn't matter. So the value is always increasing, and with more reciprocity means a good thing. We're also starting to add -- very, very preliminary, we're starting to add these meditation pods to the Black Card Spa area, which is accessed only by Black Card members, which is a meditation pod you get in, gives you like a virtual experience, whether it's you want to energize or invigorate or rest or relax. And it brings you through this like -- either walking through the forest or the beach. You actually have scent. You can actually smell the ocean. You can smell pine. And the sounds is really neat and talk you through meditating. And that's a new thing and also to increase value of the Black Card bundle. And also, we launched the digital component in the app. So we have regular free content. And then we have premium content that you can use to either work out in the club with our equipment or at home. And that unlocks the premium content too. So the $24.99 price unlocks premium. So as long as we add value, then I think we can add price. So I guess back to your question, do you think there's a ceiling, I did think there's a ceiling. And I'm sure there is. I just don't know if we know what it is yet because I think when we have 3,000 stores, that value is even better. And we add more features to the Black Card Spa area or whatever or we enhance the digital content that now includes diet and nutrition in the feature. So I think as we increase the value, we'll see how high it costs.

Right. As the ecosystem grows, the value increases.

Absolutely.

And the ceiling obviously goes higher. So Tom, we've seen a lot of retailers report lower margins over the past few weeks. To those newer to the story, can you maybe discuss the margin profile of the 3 segments? And then we've seen higher rents. We've seen higher labor and all sorts of other expenses go up. So just curious if you can discuss how that's impacted Planet?

Sure thing. So we do have the 3 segments, and they're very different. So the franchise segment, principally made up of our royalties, which are -- they average about 6.5%. That has about a 70 margin and holding pretty steady as we think about Q1 and also for the full year. On the other end of the spectrum is our equipment segment, where any Planet Fitness franchisee has to buy their equipment from us, whether it's for their new location or to reequip their existing locations. And our reequipping schedules are probably the most aggressive in the industry, where you have to replace your cardio every 5 years entirely. And your strength equipment, even though we know strength equipment doesn't wear out, we have to replace that every 7 years. So the mix of that revenue stream is the -- as the store base continues to grow, that reequipped segment continues to be a bigger and bigger part of that equipment segment revenue and is essentially an annuity stream. The equipment segment, back to your question about margins, Max, is low 20s. And as a franchisee, you still get -- the price that they pay is still a significant discount from what they would pay as an individual operator or operator of a couple of dozen stores. In the middle of those 2 segments, margin-wise, is corporate stores. Historically, it was about -- we owned and operated about 5% of the units in our system. With the Sunshine acquisition, that's about 10% of the units. And that margin -- so that acquisition was strategically very important, and we're very pleased with how it's all unfolded. It was strategically important for a couple of reasons. One, our legacy stores, 100-plus stores were predominantly in the Northeast, where Sunshine stores are predominantly in the Southeast. And so we like that geographic diversity that we get with the acquisition. Clearly, operating costs, whether you're talking about average wage rates or average rents on a like-for-like basis are cheaper in the South and Southeast than they are in the Northeast for the most part. Cost to build is cheaper. So the margins are definitely accretive to our overall corporate store segment. In addition to that, the team is terrific. The team produced, for the last few years, the best performance in our system or top 3 performance when you look at key metrics like same-store sales growth, Black Card percentage and Black Card percentage growth. And some of those practices, we know they will bring to our legacy clubs and ultimately improve from where they would have been otherwise. So very excited about that. Now the actual margins not back to pre-COVID levels because our clubs in the -- our stores in the Northeast were impacted more from COVID, temporarily closed longer, membership levels took a bigger dip. They're climbing back up, but it's going to take a little longer for them to get back. And I think importantly, back to your question about where we see the mature store membership coming back, nothing systemically or competitively has us thinking we won't return to those levels. It's just a matter of time. Predicting when it happens is a little trickier with the new cycles and everything else going on. But I think strategically, we think our moat was pretty wide coming into this pandemic and feel it's even wider coming out of it. The last part is on inflation. So we are lucky. We have an incredibly simple model. We don't own and operate a DC. It's not required because we don't have any inventory. We have a couple of gym bags and a couple of water bottles. Well, that's about it. And so our wages in the stores themselves are really pretty low on a percentage of -- percent of revenue basis or also just number of people. We typically have 12 to 15 people on staff, if you will, in a given store and maybe 3 to 4 on the floor at any one time. So it's not like there's a tremendous labor component in our stores, and there's certainly no labor component in the DCs that don't exist. So it's an elegantly simple model that produces fantastic returns. And I think as we rack and stack our model across other competitors, even high-value, low-price competitors, we still like how we sort out.

Yes. Just any quick thoughts, I guess early thoughts on Sunshine, any learnings, best practices? Or is it still a little too early?

I'd probably say it's a little still too early to have that much influence on the current fleet, so to the integration right now. But it's great just to see them taking over the club, looking at new sites, proposing new locations and just having a team that's designated just for that. Because before, it was really a hybrid approach. Like we were running them using our development department that's franchisee development, using our marketing department that was franchisee marketing. And to have their own designated CMO and their own president just running that business for us, it's just much more focused. So obviously, great stuff for us.

Awesome. Well, guys, we have a minute left. Just any closing remarks before we let you run.

Yes. I think it's -- I couldn't be -- I've been here -- this is my 29th year, and the company started 30 years ago. When I think coming out of COVID, the highlight and focus on fitness, our competitive moat that we have, which is quite a bit wider now than in pre-COVID, I mean to competitive standpoint, the low cost -- take 17 of the largest low-cost providers, you put them all together, there -- we're a little over 50% bigger than them altogether. So -- which is -- we're in a really good spot, and I think our next few years are probably some of our best to come.

Yes. Awesome. Well, thank you so much for joining us. Enjoy the rest of the day.

Great. Thank you.

Thank you.

Thanks, everyone.