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

Good morning, guys. Thanks for making it here. Kicking off the first panel for the day, we have Chris and Tom from Planet Fitness. Thanks for joining, everybody, and I could just get it started.

I mean like first things first, like I wanted to check like, what are you seeing out there in terms of the consumer mood and health, like anything like insights in terms of like even qualitatively, like new member joins or rejoins? Or anything you're seeing in terms of how new stores are ramping or anything from your data analytics team, you can share like which could be a good like start for it?

Yes, sure. I'll start and Tom can add to it. Yes, we saw a great first fourth quarter. It happened to be the largest fourth quarter member growth we've ever had, honestly. And that was a great sign coming into the first quarter, which as we've talked about in the past, first quarter accounts for about 60% of our net joins for the year. So first quarter is extremely important to us. And also, if we think about with Omicron and the virus and all that's going on over the last few years, this is really the first quarter in 4 years uninterrupted. So it's exciting times for us finally. So that's great to see. Workouts are doing great, right? We're doing -- the people that are working out are working on slightly more than they did in the past. Our cancellation rate is slightly better. So even with the recessionary talks and layoffs you see, we actually have occasionally just slightly better. All generations are going penetration-wise throughout the country. Boomers are at about 3% and going up. Millennial, Gen X is at 6% and growing and millennials are 9%. So 9% of millennials in the country is a member today. And the Gen Z population of the ones that's over 15 that are already able to join, we already have 9% penetration of them. So you see every newer generation isn't [indiscernible] to join. So a lot of great trends there.

Chris, it's interesting that you said the first quarter is normally 60% of new gym joins and yet the fourth quarter was your strongest fourth quarter ever. There is at least some chatter that the fourth quarter may have seen some pull forward of member growth that may be possibly came out of the first. Is that a phenomenon that could have happened? Or do we get back in the first quarter '23, where it again represents 60% of net member growth for the year?

Sure. It's funny, John. We've debated that quite a bit over the years. Is there a way or if you have a strong portion, do we really pull forward? And we've really never seen any proof of that, that actually happens. But yes, you can pull, join forward. We believe that when you're ready to join, you're ready to join, you just got to have [indiscernible] to get you off the coach, but you're not necessarily getting off the couch earlier than you were -- maybe you kind of do on your own.

Like people ask like how gym memberships performed during the session. I know like back in 2008 and '09, you had a very strong performance on same-store sales. But during that period, the ramp in new units was a big driver of the comps and especially today, people like look at their list of subscriptions and be like we're canceling which they're not using. So I mean one of the stat, I think you guys had back then is like 50 members don't use the gym in a 30-day period and in the most recently, it's 25% in a 3-month period. Why isn't this a risk if times get tighter?

Yes, it's been -- historically, it's been like that for decades, even for -- since the '90s. It's always been that same ratio of users. And in every 3 -- every month, there is a different subset of people that are using it differently than they were in previous month. So we've never really seen that affect the cancellation rate. Even through COVID, honestly, we had -- you think maybe the Black Cards would have canceled faster. And it's actually at $10 a month, believe it or not, we're actually [ selling ] slightly faster than the Black Cards. And then you're right, if we go back to '08 or '09, we some great same-store sales. Anecdotally, we think we have a lot of people trading down from the higher-priced gyms, people that decided that I never used the pool. I don't need the towels. I'll bring my own. I'll drop that membership at $50 a month or more, and I'll join Planet for $10. So I -- we've done -- we've had some great times in those periods.

I think, Rahul, just to clarify 1 thing you said. In the last 3 months, you said 25%. That's a different stat. So what we were saying on the last earnings call was with all the new brands that we bought to our -- brought to our Perks program, which is pretty much available to all members, there's a little bit of differentiation for Black Card members. 25% of the people who have not used a gym, a PF in the last 3 months, took advantage of these perks and savings. So that's part of what we're trying to do, where even if -- because we really cater to casual first-time gym goers. This is not the center point of their day or their week, to your point about the frequency and what Chris is saying. So if we can make the membership even more valuable when they're not using our store, we think that's a win. So we're -- we have -- in the last couple of years, we spooled up a small digital team to really focus on driving that. And we're starting to see some of those efforts pay off.

It's interesting. I mean, I've quoted that for years, 50% of members don't use an in a given month, but probably it's obviously much lower than that in a given year. Have you ever updated that 3 months? I heard that too. I was like wow, that's interesting, I didn't know that. Have you ever updated that 3-month usage that? Is that something that you share?

Yes and no. Yes, we've updated it. And no, we don't share it publicly.

Yes. So what is interesting in the age of subscriptions, people have many more subscriptions than they've had before. But a lot of them are at base and you can literally swipe on, swipe off, whatever, so it's very easy to cancel. So you just do the nature of your membership and how people sign up, you can sign up on the app, but you can't cancel on the app. I mean do you think that gives you maybe a stickiness that other subscriptions don't going forward. Or would you ever, for example, have app cancellation? Or it's -- is that something that customers are maybe angling for?

Yes, that's a great question. And we've bought several states now that required online cancellations. And corporately, we actually turned all our clubs on to digital to online cancellation, even in states that don't require it, more as a test for a corporate to see if there's a higher attrition. And we saw a slight uptick in attrition for the first month or 2. And then after that, level set back to normal, which is a great sign. Even today, we have one of the easiest cancellations policies in the country. Basically a 7-day notice, you come to the club, you cancel on the 10th, you're done. Our billing days are [ 17th. ] So most of the -- our competitors have like a 45- or 30-day cancellation policy. And you hear me talked about recently that about 30% to 35% of our joins or rejoins coming back to us. So we're not burning the bridge. So we really believe, especially because the casual first timers as to Tom's point earlier, our members are already asking, how do I cancel before I join right? I've never done this before. Almost 40% of our joins that they've gone to a gym in their entire life. So they already say, okay, I don't want to be locked into this, if I'm not going to make it. So back to your question, it's great we're seeing no uptick in attrition with online cancellations, and we'll probably see us mandate this nationwide before it's actually even a large nationwide just to make the customer's experience that much better and then drive more rejoins in the future.

You alluded to -- you don't normally use the word churn, but that was a big word as part of your IPO many, many, many years ago as people are looking at other subscription-based models they were, I guess, more unique than they were now or more rare than they were now. Could you -- how are you measuring your current last 12-month churn on a pre-COVID basis. I think you used to talk about 2% to 2.5% a month after the first year. Is that -- where are we in that range? Or is there a new range?

Yes, I'd say above 2.5% a month. So after members has been a member for you, we feel like we turn them into a full lifer. After that 12 months is about 2.5%, 3% a month. And the Black Card and White Card is virtually the same.

Okay. I mean I think like lending concern for like some of the small businesses or franchise businesses elevated, following some of the developments we have seen this past week. Tom, like any thoughts there? Like I know it's early, but have you had any conversations with any of your franchisees or like anything you can share there?

Yes, sure. So we meet once a year with our larger franchisees, the largest 20 or so, and we did that earlier this year -- sorry, late last year. And at that point, no one was really raising the concern about interest rates. And most of them are dealing with the Fifth Thirds of the world, those kind of regulated banks, so who tend to be a little bit more conservative on leverage anyway, right? And they know the model. We're typically in a franchise segment of the lender. We talked -- I've talked to [ investors ] quite a bit since 2020, as you could imagine. And whether it's the lending community or whether it's investors trying to get into our system, they know the returns are pretty strong. The ROIs are strong. The cash generation is strong. Pre-COVID a typical franchisee's store after paying us 7% royalty round numbers and spending 9% of monthly member dues on marketing, they were still earning for a mature store, 3 years plus, old high 30%, low 40% EBITDA margins. So that's pre-COVID. Now depending on how they were affected during the years of '20 and '21 with their membership and how politicized, frankly, it was in their markets. Some have come back and then some to those levels. And some have -- are still not there yet because their membership hasn't fully rebounded, but we don't see anything getting in the way of ultimately all of these stores rebounding. And I think back to your question, the amount of cash they generate allows for the development engine to keep going. And now if rates go back to the Jimmy Carter, that's a different story. But I don't think anyone is predicting that, thankfully. And I think franchisees and people trying to get in and still see that relatively speaking, this model produces things that very few do, if any.

So the comment -- so the members per gym is still is what you can track in terms of whether the restrictions are not. So it's like the -- I don't even know how to call it that. The COVID-aggressive states versus the COVID-loose states, if you will. So that -- like that's what determines like whether your membership has come back? It's literally like North Carolina was COVID-restricted and that's a tough state and others take [indiscernible].

A state like in Michigan, where it was very politicized and -- but I think at the end of the day, thankfully, most of this is behind us and it's just a question of how these states recover. There's no new competitor on the horizon that's preventing membership from getting back to its previous level, it's just a matter of time. And the recent changes we made back to your question about interest rates, the changes we made May of '22, we raised our Black Card price, which is more than 60% of our membership base to $24.99 from $22.99. And then here at the beginning of this year, we raised the annual fee from [ 39 to 49. ] Those 2 things alone will improve the 4-wall margins of new stores by 300 to 400 basis points, depending on your mix of Black Card. So that really goes back to these returns are -- while there's a little bit of headwind on construction costs, there's a little bit of headwind on interest rates. Those prior margins are now further enhanced because every new member is paying those higher rates in a new store.

In the context of like opening up the territory for a franchisee that took on significant leverage before COVID, are there any opportunities out there open up like to open up like previously assigned ADAs, like where like some franchises choose to be more aggressive like they can like get the opportunity? Or is this like a one-off situation or like we should expect like any small developments like this going forward, like where -- at that scale, it wouldn't really matter or like impact the 3-year outlook you gave on the total store openings? Like is there anything else we should be mindful there [indiscernible]?

I would say that we've pulled back ADAs in the past, small ones off and on, because the clubs weren't doing well, but they didn't keep up their development schedules, take it back and resell it to somebody else. And we have really haven't brought in a new franchisee and over 5, 6 years from new franchise. They're all existing franchisees that want to buy more dirt. They bought a 20 club ADA, they're at Club 18, [ one more ] runway. So they're in line to get in and e-shops looking to get in as well. So as that happens or if that happens, there's always people wanting to go in and take a little more territory.

There have been a franchises in 5 to 6 years? I actually didn't know that.

There are new investors who come in.

As part of existing group? Okay.

Right, right. And then the owner's role typically -- not typically always, just matters how much. No, I think back to what Chris was saying, runway -- new-store opportunities within their area development agreement are a huge part of their asset. The stores they own and operate make a bunch of money, but it's also the value of the stores that could be developed and people want more runway. So if there's a chance to build another store, they're going to want to add it to their area development agreement obligations, right? Now if they don't develop, they'll lose that runway. Without runway, a multiple -- if somebody is transacting in our system, the EBITDA multiple on the business, if there is runway -- significant runway, it's probably going to be 8 to 9x. If there is no runway, it's going to be probably 5 to 6x, right? So not having your pipeline is an important asset that people want to keep, first point. Second point is at the exit, and again, exit meaning somebody's taking some chips off the table, the value of a club is probably going to be $6 million to $7 million. It's going to cost you [ $2.5 million to $3 million ] to build these days with higher inflation. So the more you build, the more you make on the exit. So there's built-in incentives to keep the development in here going.

Yes. So your system is 1 of the very rare systems, if not unique systems that does have value in the franchise, right? I mean you would have to pay for them yourself, reacquired franchise rights becomes as an intangible asset. But yes, I mean, we have heard that a lot. So you touched on -- there's no new competition. You kind of like threw that out there, but it's a very important part of the story. So we had spent -- got you, I mean, I don't know how many dozens of hours kind of talking about what the gym landscape was going to look post-COVID versus pre-COVID, at-home gym use, [indiscernible] taking over digital fitness, the whole thing. So -- no one's laughing. It is what it is. Well aware, by the way, it's like the fact. Transcripts are what they are for a reason, right? So people are going to be sick at work in the home by them like what kind of fun is that? So anyway, so let's just get back. So where are we? So 2023 gym competition versus 2019, give us a state of the landscape of how it looks today and is this more or less competitive environment as the consumer has been affected in some way, clearly -- maybe it's positive or negative?

Yes. So we had about 25% of the gyms in the country close through COVID. So 10,000 of the 41,000 that were in the country, pre-COVID, most of those are made up of boutiques. So like just the cycle clubs, the [indiscernible], that kind of stuff. About 30% of those closed and 14% of full-sized gyms closed. So that's part of the consolidation. I'd say some of the more substantial [indiscernible] the low-cost providers, they [indiscernible] weather the storm as well a few closures as well, but they're still there. But as we've heard us talk, Tom about talked about a lot of is that of the 17 low-cost competitors, all of them put together are only.

We're 60% larger than all of them combined.

60% larger than the number 2 through '18?

Store count, so membership is even a bigger number. The next closest competitor would be crunched at about 400 stores.

Yes, Crunch had 2 million members, we have $17 million. It's what they report.

So we had previously talked about kind of the opportunities that were existing from closure of certain made to large-format retailers, a lot of like shopping centers and what have you and suburbs. But obviously, there's kind of a migration of people from urban to suburb. So let's maybe take it the other direction. So as certain offices in urban, the occupancy is obviously a lot lower. In other words, open space is a lot higher in 2023 than years ago. I mean how might the site profile change as their commercial tenants, the office people aren't coming back, and you can fill 20,000 square feet and provide a service to an area that you guys currently aren't in. So how might that be -- is that actually an opportunity? There obviously is a lot of conversation around commercial real estate, mostly urban office. Like how might that actually give you an opportunity?

I think it depends on the market, John, right? And I think the whole -- we could be wrong, we think the whole work from home thing is probably shifting. Mark Zuckerberg's letter this morning, notwithstanding or maybe validating that. But I think franchisees are keen in their markets of where the availability is and how to site. I think the other thing is, unlike a QSR or some other concept, we know exactly where our members live. And we know how far they're willing to drive, and that's -- what does that look like in suburban versus urban or a central business district like precincts. So I think it really is -- depends on the market. But we know that people want to drive max kind of 15 minutes to a gym. Convenience is a big part of what we offer, and we do have some downtown locations. They tend to have more -- same price, same price in Manhattan as it is in some other smaller town in terms of the dues that members pay. It's just they tend to have a lot more members. So the economics still work. So I think it's really a market-by-market basis.

Is that beginning to change, just commercial? I mean, are you beginning to know a lot more from commercial?

[Indiscernible]

Okay. Interesting. I wonder if -- I wonder if that will happen in the next 12 months.

Yes, I was thinking about that. That's a more typical Bed, Bath & Beyond, old Toys "R" Us boxes. Those are the ones that office -- Office Depot-like boxes we like.

Just getting back on the franchisee side here. Can you discuss like the franchisees' cash conversion status at this point, like how the health of the entire franchise system has been evolving with like more focus on franchises, which had like most impact from the closures like California or like the Michigan market we just talked about, who was lowest to open? And like how -- are they seeing a ramp in new stores versus what you guys saw pre-COVID like year 1 like 40% to 50%, year 2, 20%. Like those are some of the numbers like we can from the past, like how has that changed? And if you can give any insight on how you plan to backstop any kind of like growth in the near to medium term if it comes to that, like where like you can talk about like franchise release, like abatements of like royalties or like advertising anything like of those sorts of discussions? Like anything you can share there in terms of...

Yes. So I think the first thing is the -- all the markets are in a different place. But the good news is 75% of the units are owned by franchisees who operate more than 1 state. So if they were in a state that was more impacted negatively, say, folks in California, a lot of closures and reopenings, they might have had stores in Florida that weren't nearly as affected, right? In 2020, the average Planet build members 6 out of 12 months. So that was a pretty -- and we don't have drive-through or takeout to offset some of that loss of -- however, once you reopen, we turn the switch on and everybody gets built. And so it's not like there's a ramp back up to billing and revenue. It's sort of immediate. So again, depending on the franchisee, we collect financial information from our franchisees. Twice a year, we have done so in 2020. So we know where they are, we know where their leverages, we know where the covenants are to the extent they have debt. Most of the bigger guys do. And so I'd say everybody is definitely moving northeast on the chart, so to speak. Everybody is getting better. some have eclipsed where they were in terms of membership and revenue pre COVID in those older stores that were kind of at their peak in February of 2020. Others have not yet come back, but they're close. As a system, we know the gap from where we were to where we are is narrowing quite a bit on membership and even better on revenue for the reasons I mentioned earlier. And in terms of new store ramp, each successive year of COVID, so we opened 130 stores, by the way, in an industry that lost 25% of all the units permanently, we opened 130 each, roughly in 2020 and 2021, which matched our record year of openings in 2019. So we were still growing. Now where we expect those stores to be in revenue to where they were each year, 2020 wasn't as good, '21 was better, '22 was even better. So we're up in the 80%, 85% of what we would expect it to be on a membership and revenue basis.

For the stores opened in the 2021 -- '20 and '21 class. And how is the '22 class opening relative to your expectations?

Strong. Yes, yes. So everything continues to move in the right direction. But I would say, back to the -- what Chris mentioned earlier about the best way margins expand is member growth. Even our first store in Dover, New Hampshire still has member growth. And we had 53 straight quarters of positive comps, pre-COVID. The simple average of that 53 quarters was 12%. So it wasn't just barely positive, it was incredibly positive. And about 75% to 80% of our same-store sales growth is typically member growth. And part of that is because every new member who joins, 9% of their dues are going back into the marketplace to market. We spent roughly $0.25 billion marketing as a system last year. It's a scale that no one can really match. Most of our competitors, if they're advertising, they're advertising in January and then their radio silent for the other 11 months, we're not. So we're constantly marketing, trying to get people off the couch, driving member growth. And the way our model works is if you have 6,000 members in a store or 7,000 members, your operating costs are basically the same. We don't add labor for more traffic. The only thing we probably spend a little bit more on is water, electricity and cleaning materials. It's very minimal. So it's a simple, low-cost, relatively fixed cost model. So every new member that joins from 6,000 to 6,500 and whatever the growth is, $0.84, they have to pay us royalty and pay marketing dollars that I mentioned earlier, $0.84 is flowing to the bottom line. That's how the margin expands.

I want to make sure we hit 2 things. Marketing, very important. Nobody spends in restaurants, as you know, my lends spends 9% of sales and marketing. It's anywhere between like 0% and 6% in the very high end with probably 3% to 4% of the average. Completely different business, but just as a point of fact. Secondly, no one spent other marketing, no one spends the vast majority of it on local, because national is much more efficient. So talk about just say, hey, listen, like we're the good outlier because we're getting so much ROI, and we love that split between -- of the 9% advertising, 7% local, 2% national. Or is there an opportunity to say, hey, listen, we're spending $0.25 million a year.

$0.25 billion.

$0.25 billion, right, $250 million. Thank you so much for that. $250,000 doesn't get you far, does it? I didn't even know that we're on a webcast or not. But anyway, it's always going to speak specifically. That's -- listen, that's why our [ holds ] here. Okay. So the -- all right. So you get my question, $250 million on marketing. Is the next $25 million as incremental? Can you make the shift? Can you change the percent? Just talk about that spend overall because you are different than some of the things that [ I've ] worked out.

Yes. I think it's -- when you look at secular cater into casual first-timers, and almost 40% of our joins are first-time gym members, we haven't seen a level of marketing be diminishing return, right? And our cost per acquisition compared to a lifetime value was light years apart. So -- and 80% of the U.S. population doesn't have a gym membership today. So there's just so many people to get off the couch and get working out, we don't see any reason to ever pull back the total spend. Now to your point, I do believe in time and working with the 3 marketing agencies, we have 1 that handles our national ad and then 2 that the franchisees worked with for local that we will continue to learn best practices and then maybe determine or decide that we begin to move some of that 7% over to the 2% national and divided some. And then the next level was after that would be is 9% when we've got 4,000 stores which is another thing. We haven't seen diminishing return yet, so it's hard to see that happen. But there definitely could be a point where we need to spend really $500 million a year marketing.

Yes, $0.5 billion and what the incremental.

And again, every incremental member does go back to marketing and our member growth, 12 -- the [ 53 ] straight quarters of positive comps were back into the positive comp world again, and its member growth, when the average members per store will continue to grow. So each store will be spending more money to the marketing 5 years than they did 5 years ago.

And the second one I want to make sure that we hit. I mean part of the constraint in development, which is still a great number in '22 as HVAC and other forms of equipment. Not just HVAC, but maybe even getting like junction boxes, panels, what have you, installed, where are we in terms of that constraint? And if that constraint is being better, what's the next constraint you're opening your stores [indiscernible] to think about?

I would say we're marginally better. If our -- depending on which of the big manufacturers, if the lead time was 6 to 8 weeks pre-COVID for an HVAC unit, it got up to 45-plus weeks at its worst and maybe it's just inside of 40, but it's not significantly approaching where it was historically. And I think what that has done, John, is cause franchisees to be a little cautious. We do -- our typical new store opens with what we call a presale where before it opens, you might have 500 to 1,000 members signed up to join. And they know you're going to open on December 15, ready to go. Well if the HVAC unit that you thought was going to be there on December 1 is now going to be there or whatever -- it's now going to be there in January, you got a bunch of people who signed up to join who can't join. If that happens to you once, you're probably going to be a little -- you're going to slow walk the next one. Or if you heard it happen to somebody else, you're probably going to think twice about when you want to -- so it's just -- it's a bit of a drag. It's not a stone wall that people can't get through. It's just altering how people think about that.

So -- and the constraint -- so the constraint after HVAC, like where does it like been like what's -- what are the tight points in there?

The switch boxes and some -- but it's -- what was it? Something like that, I can't remember. [indiscernible] yes, right, exactly. We hope that gets better. It's not gotten worse. It's just has -- it's like HVAC, it's improved slightly, not significantly.

Just like closing out like here on the TAM side, like you guys have spoken up about international opportunities a lot. Like in the last few months, I think that the priorities like went up like 3 or 4 new markets exploring each year versus 1 or 2 previously, can you discuss anything like that has changed a lot here? I mean any specific markets you would like to like give us a little bit of preview of like in Canada, Mexico or Australia or anything? And give us a sense of like how do you view like a regional market like in terms of like ramping or like where you see the economics shake out as you do your initial diligence.

Sure, sure. So we have -- we're in 5, 6 countries today. We'll go in New Zealand later this year. And before our international strategy was more opportunistic, [indiscernible] come to us want to go to a country with better search it out and we let them and begin to develop it. We don't really have a designated international team to ran at and we just more of our divestment team taking on as that came in. We're in the process now of building an international team that is 100% focused on that. With that the final market doesn't work out and then frankly most of these markets now the members per store is actually even higher than the U.S. The -- I think the big difference here when you think about the U.S., when we say 20% have a gym membership in the U.S., 80% doesn't, that's the best [indiscernible] worldwide. Places like Mexico, where it's 2% to 3% have a gym membership. And it's not that they don't want to work out, there's just no access. And then $10 a month, it's extremely affordable. So -- but now with the international teams that are doing 1 or 2 opportunistically, we're going to be more going out and looking for sites with potential franchisees and hopefully do 2 to 3 or 4 years.

Yes. So I think we need to ramp into that, right, for doing 1-ish a year once we get the team set up and with Edward's leadership pushing the gas pedal on that, we'll get to maybe 2 to 3. It's not going to be this year. I think the other thing, too, is what we do when we look around the world, no one else does. There are low-cost competitors, but they're not at our cost. We would put that in quotes, "When we look, but as importantly, no one does the judgment-free, no intimidation, which is every bit as part of important as in our recipe as the $10." When you look at things internationally, they're for what we would call a [ hunk. ] If somebody wants to flip tires, bang heavy weights, it's what you see in most other gyms, where the average person on the couch is afraid to go into that environment because it's so intimidating. And that's an important, but unrecognized element of our model.

Guys, thank you so much.

Yes. Thank you. Appreciate it.

Thank you all. Thanks for the time.