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

Hello, everyone. This will be a fun one.

Can I go over here?

You can pick which chair car you want. I'll go to the other one. Hi, Simeon Siegel. I cover Planet Fitness over at BMO. Excited to have the Planet Fitness team here.

Good to be here.

Tom, nice to be back in person. We did this last time on the screen, so this is kind of nice. The chair is up pretty close too, so we've got hands in the middle.

So since -- what I want to start with is you're now at two ICRs with announcements. One more and we can guarantee that you're going do it every year. So why don't we talk about what you just put out because we got something from you. We got a nice number last night?

Yes, sure. Yes, we have the fourth quarter -- noted our best fourth quarter on record for member growth, approximately 17 million members. So super excited about that, which couldn't be better leading in the first quarter. Those of you who aren't aware, 60% of our net member growth for the entire year is in the first quarter. And this industry and Planet Fitness, if you think about this is the first quarter in almost 4 years have been uninterrupted, right? So this sort of big first quarter for us. And that kind of momentum in the fourth quarter is just a great sign for us.

So talk about the why. We'll have some fun conversations about the what and the numbers, but let's talk about the why because, obviously, this is, I think, a better number than people were expecting, maybe than you guys were expecting, to your point, now we're leading into the strong period. So is this share taking? Is this -- has the landscape changed? We can say we're sort of post-COVID? I mean, why do you think that's happening?

Yes, I'd say a few things. Definitely, there is no doubt that the Gen Z conversations we've been having now for 1.5 years. Gen Zs really took away from COVID the benefits of fitness, not just waistline, but mental health. And the acceleration -- I think about Gen Zs today are our second largest member base of our 17 million, pre-COVID they were our smallest member base. So I think how fast that grew over the last 3 years, right? We just did the High School Summer Pass last summer. We opened our doors for free for all high school age kids to work out, no charge whatsoever, no strings attached. And we've got 3.5 million kids off the couch, done this summertime. In 2019, that was only 1 million. So think about that. And in the third quarter, we announced that 5% of them have already joined. So that's also leading to the momentum in the fourth quarter. And I think lastly, we have the marketing -- three marketing agencies that are working together, been a really great relationship. We're getting best practices and fine-tuning each sale after each sale, which we use the learnings to go into the January sale, right? So I think we have just a big tailwind. And I think the COVID is gone and people are getting back to reality.

And is that 5% number? Is that the right way to go past 3Q as we think about bringing the teams?

Yes. So it's hard to really say, and the 5% is ahead of 2019 acquisition. But in 2019, 7 months later, COVID hit, so it's a little bit screwy on how that all math worked out. But when we launched High School Summer Pass this earlier last year, so May of '22, at that point, the 2019 team is 25% had become members at one point. And 11% were still members last May. So here, we're only at 5%. So there's a lot more tailwind there, and knock-on wood, but no COVID will mess that up.

Are they different customers? Are they -- do they interact differently, different frequency. Like how do you think about that?

Sure. So I think it started to happen with the Millennial generation. And today, believe it or not, we have almost 10% of every Millennial in the country as a current member. And we already have almost 10% of every Gen Z is a current member of the ones of age, so 15 and over. So still another 5 or 6 years of aging in of great penetration, right? But what we know is with the Millennials is definitely more functional training, TRx, [BOSU balls], kettle bells. So we started putting those in our gyms about 5 years ago. And I think with the -- now Gen Z being our second largest part of our member base, that will have more focus on probably a little larger functional areas. Treadmills still get used just as much, but the ellipticals and bikes aren't, not as much.

Cool. All right. I'm going to give you a breath right now. You just had your Analyst Day, it was great. You outlined an algorithm. Why don't you talk to that a little bit and maybe talk about it in the context of where we are now? And presumably you had this somewhat in mind when you provided it, but maybe just help us think through the multiyear versus any color you want to think about right now for this year because I think we are in this interesting time period where hopefully your business will not be predicated on decisions you make as opposed to external factors. So as you think about that, maybe give that context of the multiyear path, what we just got today and how do we blend the two in the middle for this year?

Yes. We thought it was important to lay out what we -- how we saw the next 3 years in terms of the algorithm, something we hadn't done before. And so in terms of revenue growth, we said low double digits, high double digits -- sorry, low to mid -- low double-digit teens, high double digits, high teens adjusted EBITDA growth. And we thought it was important also to lay out the fact that we want to commit to a consistent return of capital of cash to shareholders. And so we committed to buying back a minimum of 1 million shares a year. Historically, we would lever up and do an ASR and take a bunch of shares off the table. And we thought going forward, it made more sense to have a consistent level. We pegged it at 1 million shares a year with the opportunity to top it up where we saw fit. So people could count that. So we'll see adjusted EPS grow even faster. So -- and we thought it was also important to say we'll get to how 2023 looks, particularly as it relates to new stores on our Q4 earnings call when we provide our outlook. But we get asked a lot, when are we going to return back to 200 new stores a year. An important metric. We were at 260-ish in 2019 at our peak new stores per year in 2019. So we thought it was important to not necessarily talk about a given year, but we feel very confident that over that 3-year period, we'll build 600-plus new stores in planted across the globe. What's going to happen exactly in 2023 with some of the HVAC issues, we'll get to when we provide the outlook. But if you look beyond that, because we think it's a temporary problem, not a permanent problem, when we get beyond that, given the trends we see, the rebound sort of from the trough of COVID membership and how it's come back and how our same-store sales have performed, both corporate stores and our franchisees, we think the future is very bright. So we wanted to make sure that we could convey, again, not necessarily a near-term piece, but how we saw the next 3 years in the aggregate.

Okay. So I want to come back to the HVAC thing because there's nothing more riveting than talking about HVAC. But before that, so just thinking about -- I think the Analyst Day, it feels like it was forever ago, I think it was October.

Mid-November.

November, okay. So from then until now, would you characterize the update we just got as an outperformance versus where we were at that time in line with what you were expecting? Like how do we think about where we can see this number, we don't know what you were thinking into it.

Is that member growth? Or...

Yes, member growth.

Yes. I think the November sale was good. I did not expect December to perform how it did. I knew it was going to be good, but it was really good. So it couldn't have been in a bit of time.

Okay. All right. So let's go to the beauty that is forced air. So when you think about right now that 200 swing factor, what is external versus what are your franchisees wanting to open? What's the financing environment? Like help us think through that path there? How much of it is simply a timing thing because there are simply no HVACs and permitting takes longer in all of those pieces? The secondary piece there is how much just because it's higher build-out costs and so franchisees might want to wait. And the third being there's actually a decision to slow down because they want to take pause.

Yes. So I'll start that. So I think the costs are definitely up to build a Planet. If pre-COVID it was $2 million and change, it's up 20% today. Now some of those inflationary pressures are coming down. But franchisees pre-COVID we're typically ahead of their area development, new store build obligations. We've heard from -- we talk to our top 30 franchisees every year, and we've heard from them -- a few of them that they may slow it down a little bit, wait for some of those construction costs to come down a bit. So if they were ahead by x historically, they might be a little bit less than x going forward. But there's still an incentive to build. The stores generate great returns. We see our own corporate stores and we're quite pleased with those returns. And clearly, they vary by market. But what's also important you may have seen as we raised our annual fee from $39 for every member to $49, every new member that joins. We also raised our Black Card membership, was about 63% of our membership. In May of '22, we took it from $22.99 to $24.99, again, on all new members. The beauty of that is, while there are some headwinds on construction costs, every new store that gets built, will now have virtually all of the new members paying $49 annual fee when they come up and also paying $24.99 for the Black Card. There may be a few transfers from other clubs, but generally, all those new members are paying the new rates. So that adds a few points of 4-wall margin for every new store. It's not insignificant. So that sort of -- depending on the location and the different operating costs, can more than offset the headwinds that they're facing. And maybe the last piece, our system has about 120 franchisees. It was probably 140 or so last time we were here in 2020. So it's consolidated a little bit. About 12 of them are private equity backed. They're among the largest but they're not the top 12. We do have a couple of independents who are in the top 12. They have a defined time frame that they want to get out of this business or exit and take some chips off the table in whole or in part. And so they have an incentive to build because while it might cost you $2.5 million to build a new Planet, you're going to get $6 million to $8 million on the exit for that store. So it's the more you build, the more you're going to make. So we want people to build thoughtfully and not build aggressively so that the membership growth can keep up and support the store and the economics that they're used to, but they do have an incentive to hit the gas.

So that's an interesting point. How do you approach the turnover of your franchisee base? So as that happens, how do you deal with bringing in a new ushering, a new top player, if that is changing?

Yes. We always interview them to be sure that culturally they fit, interests are aligned. They believe in the model. I mean, we are a very different gym model in other ways that we don't have the heavy dumbbells and [tutorials] in the counters and stuff like that and our equipment is purple and yellow, it looks like Barney, So it's little bit different when it comes to a gym model. So we make sure they align and believe in the business and a Judgement Free Zone, we really want to cater to casual first-time gym goers. And still to this day and has been for decades, almost 40% of our joins had never gone to a gym in their entire life. So we're truly just growing that pie and everybody else is catering to the fit getting fitter.

So how do you -- I'd love to talk to you guys about data and low-hanging fruit and kind of curious the progression there. But before we do that, talking about the pricing, How do you test whether it's churn with the Black Card members where you're raising their price or whether it's anticipated pushback from raising the annual fee? How would you test that? And what have you seen?

Yes. I mean, that's the beauty of having corporate stores. We usually always test something even it's a piece of equipment, quite frankly. We'll test in a few corporate stores, if it seems to start working, we'll expand it to franchisees that want to play a part of the test and then watch retention, watch take rates and closing percentages. And if it ends up -- that it works, then we then roll out. But -- and that's why the Black Card, we've done it multiple times now, and reciprocity is the most used function of the Black Card. 1 in 5 workouts are not at their home club. They're traveling and using it, so 20%. So as we open more stores, that's a better value. And the White Card to us, the $10 is really sacred. I call it the get you off the couch price, and believe that 60% of these people come in and they see the benefits and they end up buying the Black Card. I mean, it's a great business. .