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

Good morning, everybody. It's Randy Konik, lifestyle and growth platforms and fitness analyst at Jefferies. Welcome to, again, our sixth annual fitness and wellness summit again in a virtual format this year. We'll probably be in person next year. Very pleased to have with us the CFO of Planet Fitness, Tom Fitzgerald. Joined with him is Stacey Caravella, the company's VP of Investor Relations. We're going to be speaking to Tom for the next half hour. And if you have any questions, please, I guess, send those through as well, and we'll get -- try to get those answered. But we have a lot of questions to go over here with Tom.

So Tom, I want to open up, and a lot of questions we've had over the last few weeks is just some changes across the management team. Just give us some perspective on behind those changes that have occurred and just so we can kind of start there, if you will.

Yes. Sure thing. First of all, Randy, thanks for having me. I'm pleased to be in Vegas at the moment. This week is our first franchisee conference since 2019. So -- and my first one at Planet. So Chris wishes he could join, but he's obviously wrapped up in things related to the conference. But I know our franchisees are pumped up about where things are in the outlook. So I think it's going to be a great week. And hopefully, we can answer all the key questions on investors' minds because I won't be able to do the one-on-ones later, but appreciate you having us. So in terms of the changes in management, I think the thing was a little tricky at the end of the day. Most of the moves were planned or anticipated. One was not. And first of all, speaking to Dorvin, I think folks probably realized that Dorvin's role was -- he was playing a less active role over the last several quarters. He had gone to the company, jeez, back in 2018, 2019, saying he wanted to plan for his ultimate retirement all pre-COVID. And that actually opened up the search for the CFO, which I was happy to be able to join the company that way. So he was peeling back his role, and then COVID happened, frankly. I joined in early 2020. And 2 months later, we shut down our stores temporarily. So he didn't want to leave the company in the lurch, so he stayed on. And -- but he's got a couple -- he's got a few grandkids that he wants to spend more time with and had been planning this all along and just made the date more final. We will miss him. It'll be hard to replace Dorvin, for sure, but there's a search underway for that role as President. The other moves was marketing. I think we've talked about that with respect to the transition and how that went and how marketing really evolved to where we didn't think it was right for the Chief Marketing Officer to have so many different aspects of marketing, just as we have grown and evolved and all the activity that relates to marketing in our system. So we really sort of broke that role up where we -- once we hired Sherrill Kaplan about a year ago to lead digital, we pulled digital away from marketing, invested in the team for her and then put a ton of technology investments behind that. And then we also thought that the local support for franchisees -- we have some pretty sophisticated franchisees who have, in many cases, their own Chief Marketing Officer. So we thought getting all of our franchisee support under our Chief Operations Officer, Bill Bode, whether that's new store development, construction, marketing, operations, it's all sort of a one-stop shop to support our franchisees. We thought that was a key move. So what that really left then is, for marketing, was really the national marketing, which we call our NAF -- the brand creative strategy, messaging, all the things related to that. And the person who's been doing that is sort of the #2 in marketing for several years, working closely with Chris is Jamie Medeiros. So we just thought it made sense to elevate her to the Chief Brand Officer to lead those efforts. So we think that really positions us with these 3 aspects, if you will, of marketing to really turbocharge the future going forward and support our growth in the coming years. So we're excited about that. I think the departure of Shane was really -- first of all, we've been asked this question. Nothing has changed in our culture. We think our culture is great. Nothing changed that caused any of these departures. It was really all individual decisions, as I mentioned. And in terms of Shane, I think it was really an entrepreneur meeting a corporate public company culture and where -- both in terms of maybe having to ask permission for things that he never had to ask permission for, but also just the workload that goes with being in a public company was different than he expected. And he was at the point in his life where he thought the workload would reduce coming on as part of the acquisition, and it actually went the other way. So he just didn't think it was the right fit for him and wants to go do other entrepreneurial things. So we have a search out for that as well. So the timing was not ideal. Again, some of it was planned, but that's the short story of a longer version.

Yes. It's actually very thorough and very helpful. And I think it really gives a lot of investors, a lot of answers to their questions. So I appreciate that. Moving on to the last reported quarter. Membership continued to grow. You talked about different trends within the different cohorts. Something I've noticed over the years is Planet Fitness members is, 7 years ago when people would tell me, 80-year-olds go to Planet Fitness. You don't see that as much today, and you see all the teeny-boppers or high schoolers and college kids going into the gym, online visits more these days. So just maybe give us some perspective of what's been changing around just general membership trends, differences in the cohorts and how things have changed over the years and how we can think about those changes into the future.

Sure thing. So we -- thankfully, we appeal to everybody. And when we look at what percent of the population is a member of Planet Fitness, it varies by age cohort or by demographic cohort. So boomers are the lowest gen, followed by Gen Xers, were sort of low single-digit penetration for those groups. Millennials had been the largest segment where we were roughly 7% pre-COVID, and now we're about 8%, 9% of millennials are members of Planet. The one that really has skyrocketed is Gen Zs. And some of what you're referring to, I think, Randy, is what our incredibly successful High School Summer Pass program where we allow any team to work out in Planet Fitness over the summer for free. We had incredible participation. We can touch on that maybe later, but -- so that program ended in September. We think it's a tremendous benefit both to expose the brand to these kids, but also for them to start their fitness journey. And so Gen Z has been -- even before High School Summer Pass, just the generation that has grown the fastest. So we're now about -- pre-COVID, we're about 5% of Gen Zs of age were members of Planet, and now it's about 9. And High School Summer Pass is not included in that number. We didn't count those participants as members. So as we now have a chance to contact those participants, we think that number will continue to climb. And by the way, each of these cohorts climbs -- or percentage of the population climbs over time as they get more and more exposed to our ads and more and more locations get opened up around them. So we think it's a tremendous opportunity. And frankly, we're not trying to balance our membership. People ask us, shouldn't you have more boomers? I think it will be what it will be, but there are a lot of brands. I was in some retail brands where we would see the average age of our customer in our loyalty program or customer file go up by 1 year every year. Brands just age, so to speak. And our brand is going the opposite way, which we think is tremendous. So -- and by the way, just to touch on the High School Summer Pass. As you know, Randy, we last ran that in 2019 as the Teen Summer Challenge. We had just under 1 million kids participate. And over the course -- and then COVID happened several months later. So -- but still, from then until now, about 25% of those participants joined Planet at some point, and 11% are still members today. And their parents and guardians also had a chance to join, and that's at about 4% are still members. So -- but when they did that back in 2019, we didn't really have an app. They were signing up with pen, paper and a clipboard. And so our ability to connect with them and contact them was pretty limited. And now here we sit, the program this year, we thought we might get 1.5 million participants. That was Chris' goal, Chris Rondeau, our CEO. And we ended up with 3.5 million participants in the program, just wildly beyond our expectations. And so now they've all checked in. They've all registered digitally. They all have the app because they needed the app to check in. So now our ability to message them, either in-app messaging, text messaging, e-mail, just way stronger than it was back in 2019. So we're incredibly optimistic about what that might mean for us going forward, and frankly, to help these kids start their healthier journey with us.

Yes, that's great. And just a follow-up on that real quick because we had an investor asked about this is when you noted 25% of the 1 million eventually joined in the 2018 or '19 cohort summer pass members, any thoughts to what a proper conversion might be from the 3-plus million? Or any thoughts on that or that we could think about or no?

It's hard to say. I mean we're obviously contacting them and doing some A/B testing on what works and doesn't work have been, frankly. So I think we're anxious to share those results as we move forward, but it's such an apples-to-oranges comparison. It's hard to tell, both because 2019 got disrupted by COVID, but also just our ability to contact them is so much greater now.

Yes. It's super helpful.

Could be huge, actually.

Especially on that -- yes, on the ability to kind of interact with them a lot easier now than 3 years ago. I think that's really interesting. So something that want to get clarified that we've gotten asked about is on member comments coming into the -- out of the second quarter conference call, I think it was mentioned that the company should expect to see normalized membership trends in the back half of the year as it related to mature units. And I think a lot of the market thought that meant all units or something. Can you just clarify those comments from the actual second quarter call?

Yes. Sure thing. So we call stores that are open more than 3 years mature stores. That's after they've gone through the initial opening period and high-growth ramp period. And those mature stores, Randy, we said back in Q4 that 25% of them had -- sorry, at the end of Q4, 25% had achieved their pre-COVID membership levels. And then at the end of Q1, that was 30%. And at the end of Q2, it was 34%. And they're generally down about 6% in membership. And what we were trying to say on the call is typically a mature store doesn't have membership growth in the back half of the year. So we shouldn't expect that 34% of stores that have achieved their pre-COVID membership levels to climb in the back half of the year. I think to your point, some folks read that to say total membership is going to be flat. And that's not the case because we still have new stores from this year -- newer stores that are less than 3 years old from the prior years that are still experiencing accelerated member growth. And those joint patterns will be more similar to what we saw in all years, except 2021, where we had that atypical seasonal pattern across the quarters.

Super helpful. Now that really clears a lot up for everybody. Another kind of the area we get a lot of questions on is just thinking about the next 5 years how the industry is going to shift, and mom and pops going out of business and so on and so forth. Just kind of walk us through how you think about those next 5 years in terms of those share shifts in those mom and pops in your business?

Yes. I think pretty exciting, and that's really almost gravy on top. We don't target, as you know, the folks who are already members of other gyms. We really go for people who, as we say, are on the couch, and we want them to start their fitness journey. And we try to take price off the table with our incredible value at $10-a-month membership. But over time, will more people find that there are fewer options as 25% of the gyms in the U.S. permanently closed because of COVID, and we had 0 closures, which is just an incredible testament to our franchisees and the model that we have that we could go through what no one ever anticipated and not have a single closure and develop 260 stores, new stores between 2020 and 2021. So we are the one that doesn't look like the rest when you look at the financials of the business. So we think, over time, some of those members may go from a closed gym, that was a cycling studio because the closures were disproportionately studio-based or boutiques. They may go to another cycling studio, but that may struggle. And ultimately, as we build out more stores and become more convenient to people, the two most important things we know are price and convenience for people to join a gym. So we just think our collective offering will get better and better. And so more of those people will ultimately come our way. But we're really focused on the 140 million people that we know live within 10 miles of a Planet Fitness and who do not belong to a gym today. That's our target. That's our opportunity as we continue to try to get more people off the couch.

That's great. And then how about -- people that are have a couch and where they're working out, meaning the home -- at-home fitness. Obviously, we've seen what's happened to the rise and fall of Peloton. What's the view of the -- your house view of Planet of just how home fitness more -- or does over the next 5 years? What should we be expecting there? What do you guys think?

I think it is interesting to see how all this has played out. And frankly, Chris Rondeau, our CEO, has been saying this for years, I think, prepandemic and certainly during the pandemic that the folks who are really into fitness, they tend to get bored. This is the 15% or 20% depending on -- 15% historically, 20% more recently that belong to a gym. And if they're doing something, and some new fad opens up, whether that's high-intensity training or spinning or whatever, they tend to go to that because they get bored with that and then they go to the next fad. So the fads are sort of -- they come and go. And home fitness is part of that. And certainly, during the pandemic, people thought gyms were dead, and it's all going to -- everybody is going to work out at home. But that turned out to be another boom-splat phenomenon when it comes to some of these fads. And so we think at the end of the day, people -- nothing replaces the in-person workout, particularly for people who were not familiar with what to do. So we view, I think, pretty consistently that in -- at-home fitness is complementary, not a substitution to what we offer. And I think that certainly has borne out during this cycle of Pelotons of the world with the boom splat.

Yes. How about this? So pricing power. You guys have the best price in the industry. We have inflation. You've taken price in the Black Card. We've seen other companies that their price value leaders like BJ's or Costco or Sam's Club or what have you in other areas of the world take price on membership. Kind of walk us through just real quick how you think about Black Card pricing changes. Is there a set kind of every 3, 5 years you think about it? And given that still 40% of your business is White Card or thereabouts of the membership base, do you ever think about ever nudging that $10 to $11 or so or $12 or anything like that? Just want to get your thoughts there.

Sure. Sure thing. So for years, we only had 2 price points. We had the $10 price point, the White Card, as you mentioned, and the Black Card, which was $19.99. And then in '21 -- in 2019, we took price from $19.99 to $21.99. And we did that because we had built out so many stores that we thought there was real value. And now having that most used feature of the ability to use any Planet Fitness in the world, we built out so many stores that made sense to raise the price. And we raised the price and the Black Card mix of our membership continued to go up. And as a former retailer, usually, you take the price up, and you're going to take the quantity down. We're going the other way, which is -- which just is a testament to the value that we offer. And then we -- about a year or so later, we took it up to $22.99 and saw the same thing. So then as inflationary pressures were coming on, we were getting a lot of questions about pricing. But our philosophy is we're not going to take the Black Card price up unless the increase in value warrants it. So as we again built out more stores and added other features, better perks for our members in general and some are specifically for Black Card members as well as enhanced Black Card massage areas in many of our newer clubs, we thought that we should test $24.99. We did for about 9 months, and it was so successful that we rolled it out here in this past May. And the results since rolling it out nationally have been better than our test. So it's really, I think, remarkable that we continue to take the price up, and our mix of membership still goes that way. People don't really join as a White Card member and then upgrade. They see the $10 add-on TV. They come in to join, and 6 times -- 6 out of 10 of them walk out with a Black Card membership at more than twice the price. So it's really, we think, a great model. And we can continue to experiment with that. There are other pricing mechanisms that we can deploy that just aren't around monthly fees. And we're now testing the annual fee going from $39 to $49. But like the Black Card, all of these are applicable only to new members. So it takes a couple of years to cycle through to where it's a significant part of the membership mix, except for new stores. So new stores, when they open up, the vast majority of the new members are going to be paying that $24.99 Black Card price unless they're transferring from some other Planet Fitness. And I think to your question about the $10, Randy, we go back to would we get more members coming in and off the couch at $12 than $10? I think the answer is no. And we still have that population that I mentioned, 140 million people living within 10 minutes or 10 miles from a Planet Fitness. We want to use that $10 as the means to get them off the couch. So we don't see that changing, but we do see where the average member dues collectively continue to increase based on some of the things I mentioned.

Yes. That's great. And obviously, you have a ton of membership opportunity with a huge amount of the population above. I guess the minimum age is 14 or 15 to go there. So there's plenty of people to kind of get off the couch. Super helpful. How about in terms of just some math of just different things we should be thinking about around income statement impacts from royalty rate changes that have occurred over the years that don't impact all companies, all franchise or stores, the ones that are grandfathered or what have you, and then other things like the Sunshine acquisition, how does that impact numbers? How do we think about that? Give us some help there.

Sure thing. So in terms of the royalty rate, yes, we've been at our stated rate at 7% for a while. We don't see that changing here until we get back to our pre-COVID levels, both in terms of membership, 4-wall profitability, and we think that's just a matter of time. There's nothing standing in the way of that given the nature of our model, which, as you know. But for the benefit of others who may not, it's a very fixed low-cost operating model. We could have 6,000 members in a store today; 2 years later, add 2 more thousand, and our operating costs are virtually the same. Very different than other gym concepts. So whenever we add a new member, about $0.84 of every new member dollar goes to the bottom line. All they have to do is pay our royalty and pay 9% marketing fees. So that's highly accretive, and we see that will increase over time. So as it relates to -- so once we get those levels back to pre-COVID level and then some I think we can start talking about should the royalty rate go up, but not any time before that. But at 7%, we know we're towards the high end of the range comparatively speaking. And so as -- so to your point, Randy, some of the franchisees have rates that were slightly lower than that depending on when they opened up their store. Now the royalty rate gradually creeps up because any new store that opens up is that the new -- is at the then stated 7% and also any transfer where a franchisee is sold in a private equity, party comes in and takes -- and the owners take some chips off the table, those transactions kick those royalty rates up to 7%. So there's a gradual inching up over time of the royalty rate. And we're -- I think we're at 6.4% in Q2. So we're getting pretty close to that ceiling. But still accretive, nonetheless, quarter-to-quarter and year-over-year. As it relates to pricing -- so the Black Card rate increase, as I mentioned, that feathers in over time as new members join. And so our royalty rate is rubbing up against now $24.99 instead of $22.99 every month. And that helps -- that's how that works for about 90% of our system that is franchised. The 10% that we now own after the Sunshine acquisition, that drops to the bottom line. So that incremental $2 of membership dues, 9% still goes to marketing. We pay ourselves a synthetic royalty, which really kind of gets eliminated. So the vast majority of that flows to our bottom line as well, which will help improve both our legacy stores and our -- and the stores we acquired through Sunshine.

That's great. Another question we get is around future store growth. Just obviously, we don't need to give a guidance number, but people just want to understand the drivers of real estate builds over the years ahead and just get a general sense of franchisee demand for new builds. I think the peak is over 200-plus units. We're not going to hit that this year, obviously. Just trying to understand like what's the normalized level realistically long term annually of, like, what this business should do.

Yes. No, it's a great question. And I think pre-COVID, we had a record year in 2019 of 260 new store openings. And I think the year before that, it was like 230. So it would have been gradually going up. And in those periods, franchisees collectively were ahead of their required new store development obligations, which is just a testament to them having the financial wherewithal to do that, make those investments and plowing the money back into the business because the returns were so great and the profitability was so high. I should say, again, for people less familiar, pre-COVID, the typical franchisee store that was mature again more than 3 years old was generating a 4-wall EBITDA profit in the high 30%, low 40% range, maybe we're 50% and above. So it's just a really strong model that allowed them to plow development dollars back -- pile cash back into develop new stores. And then even during the worst of the pandemic in 2020 and 2021, as I mentioned, we opened about 130 stores in each of those years when nobody else was really opening stores. So the appetite is there. And now as everyone is facing higher cost, I don't think there's anything that somebody is looking to build today that costs less than it did in 2019. Everything is up. But hopefully -- unlike wages, which are probably sticky upwards, I think some of these construction costs and the supply chain constraints that have caused some of these costs to go up may abate over time. So -- but currently, the cost is definitely higher to build a new Planet than it was pre-COVID. But that hasn't slowed down the appetite because while the returns therefore may be a little bit lower, they're still really strong compared to anything else that folks could invest in. And we have had recently some pretty big private equity folks come into our system as some of the operators took some chips off the table, as I mentioned earlier. So they're coming into this knowing that costs are higher, not substantially, but definitely higher and very aggressively developing to grow the business. So again, they tell us they don't see any place where they can earn the kind of returns they can on a new Planet. So we're still working our way through some of this. Clearly, the recent HVAC issues that we've been talking about now for a few quarters have hurt our ability in the near term. And I think without those issues, Randy, this year, we probably would have had our new store opening numbers start with a 2, not with a 1. So back to that 200-plus range. So we think it's all just a matter of time, and things are still kind of choppy on the supply chain side. So -- but taking the longer-term view, we think we'll definitely be back to that 200-plus new unit pace.

Super helpful. And we have a couple -- only a couple of minutes left. So I just want to, I guess, jump around. So I have a lot of questions, but you've been very thorough. Just on -- anything on international. We had a couple of companies this morning present or do firesides, The Gym Group, PureGym, it sounds like the U.K. is a pretty interesting place to do business. Just -- you have some business internationally. How do you think about just international long term? Do you guys think about organic acquisitives? What are you guys thinking about anything international?

Yes. I think so far, work has been organic, and we are excited about what we've seen. The pace of what's happening in Mexico is above our expectations. The new member counts on opening day for the new stores down there with our new franchisee are well above what we've seen in the U.S. We haven't met a market internationally where what we do judgment free and our price point doesn't work. So we're going to -- part of our restructuring here -- not restructuring, but work changes that we made, we want to have a more dedicated international team because we want to go from one or so countries -- new countries a year to at least double that. Now we've got to work our way into that, but that's our plan. So we're excited about that. Having said that, if there is also an opportunity to enter a more developed market that we think makes sense, we'll take a look at it, either through an aggressive partnership with a franchisee or looking at somebody. There's nothing on the horizon per se. But I think as we look to continue to build out the U.S. with 4,000-store opportunity that we've talked about and probably now higher given what's happened with COVID as well as grow internationally, I think we want to keep all options open to whatever makes sense financially and strategically for our brand and our business.

So that was very good. Very helpful. And last -- we have less than a minute ago, so I want to ask one last question, and it relates -- we get a lot of questions around the marketing and advertising. There's been some changes there with your -- who did you use for marketing and so on. Just quickly because we have to go, but quickly, what's been changed? What should we expect from those changes going forward?

The short story is we went from a lot of fragmented agencies, about 15 in our system and in -- and here recently, we converted into one, Publicis. And frankly, they couldn't catch the pitch from an executional standpoint, either locally or nationally. So we moved back to 2 large agencies to serve our franchisees locally who were in our system before, and we moved to a different national agency, Barkley, who we had used before. So we're back with people who know our business, can execute it well. We have far fewer agencies, now 3 when there were 14 or 15. And we're working our way out of the Publicis relationship. They're still our agency for the rest of the year, but not after that.

Very helpful. All right. Good. Look, Tom, Stacey, really appreciate your help today. I think everyone got a lot of great education out of the discussion. And I hope you have a great successful event in Las Vegas, double down. And really appreciate your time today. So thanks. And everyone, will have our next session that is our technology panel in 4 minutes. So thanks again to Tom, Stacey. And everyone, we'll see you in 4 minutes.

Thanks, Randy. Thanks, everybody. Have a great day. Bye.

Thanks, guys.