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

So I'm Sharon Zackfia with William Blair Company. Really happy to have with us today Chris Rondeau, CEO of Planet Fitness; and Tom Fitzgerald, CFO. As many of you are aware, [indiscernible]. I am not reviewing that. So those of you on the webcast, I'm sorry, but there are people here from Planet Fitness. So we have Chris Rondeau, CEO; and Tom Fitzgerald, CFO. For those of you who've been following Planet since its IPO, this is a company that's completely disrupting the fitness club industry in the U.S. and potentially soon to be globally. Actually growing the market every time they open a club, which we think is pretty interesting and gives them more control over their own destiny than I think the vast majority of consumer companies that you couldn't invest in, in the public markets today. I do need to tell you before handing the mic over, colloquially speaking, that we [indiscernible] list of research disclosures and potential conflicts of interest at williamblair.com. Chris and Tom are going to go through a presentation, and then we're going to do a fireside chat in this room as well. Thank you.

Actually, we don't have a presentation. We're just...

Just fireside.

Are we just doing a fireside chat?

Yes.

Okay. I will pivot to fireside chat immediately. So I guess -- well, let's start off with -- you had a management departure that was announced last week, your President that I think, joined in December of last year. So can you talk about what led to that departure? And I think you're not filling the position, if I understand correctly? And the decision behind that would be helpful.

Sure. Yes. Good question. He started in December. About 5 months he was here. And it came pretty evident relatively quickly that although we had -- coming from Jiffy Lube, some franchise experience for sure, under his belt, that's coming from a very old industry being parent of Shell, also very regulated industry and worked with Planet and the culture being so fast paced in an industry that's still very new in comparison to Shell, for example, that the fit just wasn't really right for him or us. I think also what transpired leading up to even him coming on board, Dorvin, the former President, was on his way to retirement for quite a long time. He was down to one direct report. So the management team at that point had already taken on a lot of extra duties here and ran with it, quite frankly. So there really when he came on board, there really wasn't a lot of shoes to fill. The major team that's in place has been with us for many, many years. The President of Corporate Stores, the President of Franchising. Tom here, the CFO; and many others, Chief Brand Officer has been over 20 years, but there really wasn't a lot for him to do, quite frankly, to really leverage any substance in growth here to continue to drive the business forward. So we decided to make a change here and continue to run the business.

I think something that might be helpful just in lieu of a slide presentation is the pandemic, obviously, was harder on the fitness club industry than a lot of other industries. So the -- clubs were closed down, depending on the state, for an extended period of time. Can you give us an update on kind of your membership recovery now that, I guess, we're officially in a post-pandemic world? And how the clubs, particularly that opened before 2019, how membership levels look there relative to pre-pandemic levels?

Sure, yes. So right now, about 50% of our clubs now are at prepandemic membership levels or more. And revenue is about 60%. So revenue is slightly higher and leveraging higher than that. But the overall average is about 1% down. So it's not very vast. It's very, very tight there. What's interesting though is if you look at mature stores, Sharon, that were mature previous to COVID. So they already had a 3-year ramp there, we consider mature in 3 years. In first quarter -- as you see well know, first quarter was responsible for about 60% of net member growth for the entire year. And think about this, first quarter was the first time we've had a first quarter in 4 years. So if you look at stores that were mature prior to COVID, had there 3 straight first quarters in a row, those stores on average are all above pre-COVID numbers, membership and revenue. It's these stores that were affected on their 3-year ramp, either opened during COVID or just previous to COVID that just had a slower ramp because maybe they've only had one first quarter in 4 years or 2 first quarters in 4 years. So those are the bucket of clubs that are still going to take longer to ramp to technically a mature level. But if you look at newer openings now, newer openings are ramping because of this first quarter, newer stores are ramping close to really 2019 levels. So -- and all the member trends are good. Members are working out more than they used to. They're canceling less than they used to. And Black Card percentage, which is our higher tiered membership, $24.99, the Black Card membership take rate is staying right about on par to a normal year. So the member is healthy for sure.

And can you talk about in terms of the membership growth, kind of the percent of your members that have never belonged to a fitness club before that's similar to what it was pre-pandemic? There's been talk that potentially you would benefit from the number of competitors that closed during the pandemic, whether you've seen any pickup in members from clubs that permanently closed? And then just rejoin levels, how those look?

Sure, yes. And even historically, about 40% of our new joins are first-time gym members. So literally, we're the first gym they've ever joined in their life, and that still holds true today. And our rejoin levels are about -- 30% of our joins are rejoins, which historically was only about 20%. So not only are our members coming back, they're coming back faster than they ever have, which is a great sign. Back to the whole thing that home fitness is a new trend, which is not the case, for sure. And as far as the different generations, our -- we have now penetrated back to above all pre-COVID penetration level. So boomers are now above GenX, millennials and GenZs are far above. GenZs are the younger cohort that are joining like wildfire. It's almost like they learned more from COVID than anybody else because they're joining quite a bit faster than anybody else. And everybody is working out more. Like I said, they're working on about 6.5x a month. Before COVID, it was above 5.

And Sharon, maybe one thing to add on that. We currently and pre-COVID, had about 3% of all boomers in the U.S. for members of Planet. About 6% of GenXers, about 9% were millennial -- sorry, I'm now quoting current numbers. About 9% of all millennials belong to Planet. And if you look -- and that was more like 6% earlier on, but as they got more exposed to advertising, we penetrate even further. In Gen Zs, we're currently about 9% of those who are old enough to join belong to Planet. So we think the strength in each generation being more inclined to participate in fitness, and we get more than our fair share of that. We feel good about that. And we expect GenZ, like millennial, will continue to grow beyond the 9% as they get more and more exposed to our advertising.

Can you talk about the competitive dynamic? I mean, now that we're in a post-pandemic world. On paper, I always get the question, Planet looks like it would be easy to operate. Like why is nobody else doing this? Why is there not a competitive infringement in the U.S.? And it might just be a matter that now you've got so much scale, right? But I'd be interested to hear -- I mean, Chris, particularly, you've been with the company for a long time, why you think you've been able to get to this level without kind of meaningful competition? And what has been the secret sauce for you've been able to get people off the perpetual couch and into the gym?

Sure. Yes. You can't underemphasize the importance of Judgment Free Zone. And people would think of price is what really is the key to our success and Judgment Free is really the key. The price is the other benefit that people willing to give it a shock because it's cheap, right, inexpensive. And when you look at low-cost competitors in the U.S., and this crunch is about 400 stores, give or take, where we're at 2,400. And then there's some other small regionals that might have 60 stores or 70 stores throughout -- peppered throughout the country. But what's interesting when you look at their low-cost model, they're more like a -- what you consider a Gold's Gym at low cost. They had the 120-pound dumbbells, they have the Olympic benches. They have the squat racks, they have the power racks. They have the classes of the pools or the basketball courts. So in a lot of cases, with those heavier freeways, they're really catering to, just the fit getting fitter, right? And they're not getting that 40% off the couch that never belonged to a gym before, which is really why we have some in members per store, right? And that holds true whether we're in the U.S. or we're in Mexico or we're in Panama is as these people have never had access to fitness. Price is important, but Judgment Free is that important. And then I worked out at a low cost competitor, [indiscernible] is actually one of them. And it's like going back in the Gold's Gym days in the '80s. I mean it's scary. And I'm in shape, but I was like these people are animals. And my girlfirend was with me and she was like, and she hadn't belonged to any other gym but Planet, true story. And she wanted to leave because she was like, she didn't know this existed. I'm like, oh, yes, it exists. And that's what we speak to is we advertise it. And you're right, now we're so much larger. You think about every incremental member at 9% goes into marketing to get another person off the couch, right? So we have 18.1 million members. We added 1.1 million during the first quarter. At the low point in COVID, we had 13.5 million. So think about that. We've added 5 million give or take. So every incremental member is another 9%, which gets more people off the couch. So what's interesting is the marketing budget of a single store in a single market, our same-store sales was 9.9% in the first quarter. Majority is member growth, and it's always been the majority of member growth, right? So that same store has spent more money on marketing this year than it did last year, did the year before that. It goes back in history. So there's always more people to get off the couch. And they're more exposed to marketing. So a little bit to your point now is low-cost competitors, they try to be us, but not all the way. And the mote is so wide we're just so far ahead is how do you break through the marketing and run awareness. It's just I wouldn't want to -- I know what I do, and I wouldn't be able to do it.

Can you talk about membership trends being so strong, but franchise development is still, on an annual basis, kind of below where it was in pandemic. So can you talk about kind of the pushes and pulls on franchise development in the near term? And last November, you had talked about 600 new clubs over the next 3 years. If you looked at the pace this year, you're kind of below that run rate. So what gives you the confidence? Or do you still have the confidence in hitting 600 clubs over the next 3 years?

Yes. So I'll start with that one, Sharon, and then to wind back to where we were versus our peak. So at Investor Day last year, we committed to -- or we said we're very confident that we can deliver 600 new units over the coming 3 years. So if you do the simple average of 200 a year, we said 2023 being the first year, we would be below that. We put out an updated investor presentation today, where like on our last earnings call, we reaffirmed our outlook for franchisee placements for 2023 to be approximately 160. Now you have to take that and add corporate store growth to essentially get the proxy for total store growth. Now last year, we did -- we said we would do about what we did in corporate store growth this year as we did last year, so call it 15%. So that takes the total for the year to 175. And again, we always said this year would be below 200 and it would ramp over the 3 years to act to total 600. And if you look at our franchise agreements, where we exist today, what we said in the 10-K is in existing markets, you add them all up, it's over 500 for this year and the next 2 years. So that's 500 to that, you have to add corporate store growth, which you want to think about. We have 230-plus corporate stores you want to think probably mid high single-digit growth in stores per year. We're going to enter some new international markets. We're building out the team. We've talked about that even before Investor Day. And adding new markets into that will be additive to that tally we're building up here. And then lastly, pre-COVID, our franchisees in 2018 and 2019 built approximately 15% to 20% of the new units for the year were ahead of their development obligations. So they were building faster than they needed to. This year, we said they're basically on par with their development obligations for headwinds that I'll get to in a second. But we see over this 3-year horizon that, that number will tick up again to where -- not back to 2018 and 2019 levels, but we do believe they'll be ahead of their obligations to some degree over the 3-year horizon. So that's how we still feel comfortable with 600. Now the headwinds are the headwinds, which is why this year is still well off our peak from 2019, primarily cost of construction is up. It's up for everybody. Anybody building anything at the same spec today, we know they're -- we are and they are paying more than 2019. So our costs are up about 20%. And I think we were one of the first brands just given our size and our scale to flag that a while ago -- a couple of years ago now that HVAC supply was an issue. It's gotten better, but it's marginally better and moving at a glacial pace. We expected it would be better by now. It's not -- so our lead times there went from 4 to 5 weeks, typically with the big 3 carriers to -- it got up to 40-plus weeks and now it's 30-ish, one's inside of 30. But it's not still anywhere close to where it was before. So in that case, franchisees are committing to HVAC units before, in many cases, they sign the lease, which is tricky because HVAC is not fungible. It's very much -- it has to be configured to the box you take. So this is -- these couple of things really are the primary factors, Sharon, that I think are causing franchisees, particularly on the cost side to say, why do I need to be ahead of my obligations if I think costs may come down. I'll just wait it out, and I'll stay on my obligation path now and maybe get ahead of it as costs come down. So -- and it's really idiosyncratic. We can't describe our entire franchisee base of about 115 with one statement. They're all in very different situations. But we still feel good about the amount of space we're taking down. We looked at last year, if you take the total growth square footage that we took down as a system with the new units we built, we're in the top 5 from what we can see, couple of the dollar brands, TJX. So we're still taking down a tremendous amount of space. We're not taking down 2,000 square feet, 3,000. It's 20,000 on average. So we still feel good about the growth. And I think to Chris' point, the model is very strong. Same-store sales growth of 10%, basically in Q1, building on what we've delivered most of that being member growth. Corporate store segment is doing well. So franchisees are seeing -- as we're seeing in our corporate stores, the margin is improving, the margin rate's improving, the 4-wall margins. So I think all things bode well for the future. It's just these couple of headwinds, I think, are impacting us.

Can you, on that note, compare and contrast new unit returns for franchisees today versus 2019 and the margin levels that they're seeing post-royalty and add?

Yes. We don't see their economics when they're doing new stores. We see our own. And I sit in on those meetings every month for our corporate segment. The returns are good. They're very good, whether that's in our legacy markets, mostly in the Northeast and the U.S. where we operated our stores for years. And more recently, our Sunshine markets. We acquired Sunshine Fitness, one of our largest franchisees, February of last year. And they're predominantly in the Southeast. Different cost structures there, but the returns are attractive in both markets as we look at new store opportunities. And depending on the market, they may be a little higher in this market, a little lower in that market, but generally very attractive. And I think we're hearing the same thing from our franchisees.

Yes sure.

[indiscernible].

Yes. So again, one, can't describe all our franchisees in one fell swoop. But the vast majority of them are smaller. They're not onesie, twosies, but call it less than 10 stores. And they may or may not have debt. And if they do because the cash flow of the business is so strong. The 4-wall margins pre-COVID for a franchisee were high 30%, low 40%. Many of them are north of that. So that's just tremendous cash generation. It's very low OpEx model essentially. Any new member they add, they pay us royalty, they pay marketing and they get $0.84 of every dollar is flowing through to the bottom line. So it's quite strong. As franchisees, as you move up the ranks and they get a little bigger, they may have debt, generally, they're very conservative. And rates likely are impacting them, but not to a degree that is significant. As you get a little further up, there may be some private equity firms. And again, you can't talk -- about 10% of our franchisees are -- have some private equity investment. And you can't talk about them in one fell swoop either, right? Some are more conservative, some are a little more aggressive. Sunshine Fitness, the one I mentioned earlier was backed by TSG, who originally invested in the company and took it public. Just as an example, their covenant ratio, when we acquired them, was just inside of 4. So not where they were, but where their covenant was. So I would consider that fairly modest leverage. So it's hard to talk about it in one fell swoop, but what our franchisees do know is, regardless of their capital structure, they have to meet their obligations because the value of the franchise is significantly greater if you have pipeline than if you don't. It's probably -- if you exit, you're going to exit our system at a 9x multiple if you have a pipeline, you're going to exit at a 5x multiple if you don't have pipeline. So making sure they're staying on their obligations is critical to them.

Can you talk about initiatives around making it easier to cancel, so click to cancel and so on? I know you're in some areas where that's already kind of the rule of the land. What does that do to your business? And how do you view that as a risk, if you will, going forward?

Yes. I mean if you would have asked me that question 5 years ago, I'd say, it was high risk. Let's say, I think now we have experience with it in about 7 states. And it was actually [indiscernible], California pre-COVID, it became locked, I think pretty right before COVID hit. And what we see in the states when we turn it on, but click online -- cancel online, is we'll see a slight uptick in cancels that runs for some who have run a 5 weeks, some around 10 weeks, and then they normalize to what we've seen in a normal state that doesn't have online cancel. The thing that's a little different though in the first states [indiscernible] is they're all a little different. What I mean by that is some of the [indiscernible] if you cancel, if you joined online, you have to be able to cancel online, only those or some are win this low into effect. If you joined before that date, this doesn't apply to you, a little bit over place. Tennessee is the first state, they just put it in on December 29 that regardless of how you joined or regardless of when you joined, you can cancel online. So that one went in effect December 29. Again, an uptick slightly like we saw. It hasn't quite normalized just yet. So we're waiting to see how that happens. My -- I'm inclined that once we see how Tennessee pans out, which is basically full bore, right? There's no hurdles there that I envision us just proactively making it nationwide. I think it's the right thing to do for the customer. I think especially today's world with the younger generation of joining our clubs, setting a letter is not -- probably not something you've never done before. And the thing we also see in those states that have the online cancel is their rejoin rate's slightly higher than the rest of the systems. So I think people see that's easy to come, easy to go. That they're not realizing that they jump through hurdles to cancel that makes them more inclined to start it again. So maybe more to come as we see how Tennessee pans out, but I imagine it's actually rolling it out nationwide.

I want to make sure we go back to the white space potential in the U.S. So Chris, I don't even remember how many years ago the IPO was at this point, I know it was before the pandemic. Is it 2018?

2015. Yes.

2015. Yes. I mean, at that time, you talked about 4,000 clubs in the U.S. I don't think you've ever updated that. But my guess is your demographic penetration, particularly among younger groups, is higher than you would have thought at that point. So how do you think about the white space potential now in the U.S.? And is there any market like New Hampshire or so on that you can look at and say, if we extrapolate New Hampshire to the rest of the country, this is what our white space looks like?

Yes. I mean we are just starting the process now with our third-party market planning company. So hopefully, by end of this year, we'll have something to announce on the 4,000 unit potential. And a little bit at the investor show we had, we talked about certain markets. And we showed how Houston, we thought would fit x number of clubs. And then we fast forward 4 or 5 years from what we know from the join and penetration rates, we can actually add more than that. And then we did it again, we can add more than that. So it seems as the more we open, the more we can open. And the more we open the more marketing dollars, we'll get more people off the couch. And you're exactly right, like 10 years ago, we wouldn't have thought millennials would be at 9 -- over 9% and GenZ were infants, right? So -- and so in every new generation, we see -- we continue to penetrate higher. But also the boomer penetration continues to grow. It just is to grow as fast as the younger generations. And then in 5 years, GenAlpha comes into the mix, which, if all trends hold true historically, they'll be higher than 9%. And probably by the time GenZ [indiscernible], that will be higher than 9%. So that just means is what people are going to be working on, and more exposed to it. So more to come on that one for it's finally the end of the year. But if you look at New Hampshire, we're opening, I think 2 more stores this year?

Yes.

In New Hampshire, which brings New Hampshire -- there's only 1.3 million people in New Hampshire and hasn't grown really much in 20-something years. And it will be our 22nd or 23rd club in New Hampshire on 1.3 million people.

I think something that has changed more recently has been, I guess, notable breakthroughs and weight loss drugs where it seems like that will be kind of a more prevalent and more readily accessible supply develops over the next few years. How do you think about appetite to work out, particularly with the 40% that have never belonged to a fitness club before, if they're given the option of like take this drug, lose 20 pounds fairly safely, I mean how as an organization do you prepare for that? Do you think about that? Do you view it as a threat at all?

Yes. I actually look at it as a positive. I think first, working out is not just about weight loss, right? Is it done -- many other things it does, relieves stress, helps you sleep better, makes you stronger. It helps with osteoporosis. [indiscernible] the list. So weight loss is just one component. But I think like any supplement usually pair it with other things. And I think also, especially for first timers or somebody who's really obese, this might be their first step to get off the couch, right? And now they think they can -- you know Judgment Free maybe is their stop, they say, now I feel comfortable enough to go to the club for the first time. So I think it's -- I don't think it's necessarily a bad thing, as long as it doesn't hurt the supply chain, the people who really need it.

Sorry, Sharon, there's a question here.

Sure.

[indiscernible] you have that are in Downtown [indiscernible] like going back to work or are you more [indiscernible] generally?

We're mostly suburban, we have run on block you see from the room. We [ haven't ] been in Manhattan, and we [ haven't ] done on Chicago, we [indiscernible] downtown Miami, L.A., for example. But generally speaking, we're more suburban than rural.

[indiscernible].

I could say it's slower to come back, but I don't think there's not a big difference, generally speaking, no.

One question I had was, as the store base matures and the 3-plus years stores become more important, how should we think about the top growth of those 3-plus years? [indiscernible] accelerated growth. What about 3-plus years for [indiscernible].

Do you want to take that?

Yes, sure. So pre-COVID, we would say that mature store, call it, 4 years and on, would generally grow low to mid-single digits. And we've really been with other multiunit brands and you guys follow, we really don't have a cannibalization problem. To Chris' point, every new store we open is going to generate more marketing dollars to get more people off the couch. And today, despite the fact that we have 18 million members, there's 140 million people who live within 10 minutes, 10 miles of a Planet Fitness who do not belong to a gym. So there's still a large population of folks that we can go after. But having said that, our same-store sales growth typically was aided quite a bit by that -- those new ramping clubs because we consider a store comp once it gets to month 13. And here with our -- and that's when we were adding 200-plus new units a year on a smaller store growth -- store base, right? So now with the store growth that we've had, which we think is still pretty impressive coming through the pandemic over the last 3 years, it is having less of an impact on same-store sales, but we just -- as we talked about, posted low double digits last year, essentially 10% in Q1. So the mature stores are actually growing faster than they have historically. Whether that continues or not, I don't know, but we see the mature growth probably being in that low to mid-single digit, maybe a little bit better over the coming years.

Can you talk about the economic vulnerability or defensiveness of Planet Fitness? I know back in '08 and '09, you guys kind of cruise through it. You're bigger now, you've got greater geographic exposure today than you did then, probably a bigger demographic bandwidth. But how do you view just given the choppiness that we hear about in consumer, where you're placed and how you would expect to fare if we see a sustained downturn?

Yes. I think we don't have a lot of data that proves it out, but anecdotally, they have a lot of trade downs from people that aren't going to necessarily stop working out, but they may not need the eucalyptus towels in the basketball court they never use. So they trade down. I mean our equipment -- I think it's important to know if you haven't been to Planet, I mean, our equipment is the same stuff you're going to find it $150 [indiscernible], same treadmill, same workout machine. So you're not jeopardizing your workouts in that sense, you're using a top tier or manufacturer like Fitness or Matrix. So I think they get some trade downs. I think generally speaking, people don't -- I think maybe anybody at the very, very low demographic, you might lose a little there. But I think you've gained from the top demographic that's being smart with their buying decisions in that sense. And if you're already working out, I don't think you're going to jeopardize especially if price is $10 a month, you're going to not work out because of that. So I think we benefit from it. I don't think we get hurt by the lower -- the recessionary tox or inflation in essence. And I think with our member growth the way it is in the same-store sales and the 84% flow-through, it continues to drive the slow performance. So we're not -- and I think it's important to note because what we do is all do is revenue or 98% of our revenue to store model is dues, right, where most gyms in this model are ancillary revenue they're trying to sell personal training for $1,000 training packages. They're trying to use in the day care that's selling $9 juice bar drinks [indiscernible]. I think those things you might scale back. So they're a top line revenue [indiscernible] to appreciate because people might hold on to their membership, but they're not buying other stuff and spending an extra $80 a month in the store.

And if I could add one thing, Sharon, or maybe 2 things. I think we said we've had a lower cancellation rate than the prior year in each of the last 7 quarters. So that's in the face of people getting strained by higher costs, not affecting people leaving the Planet. I'd say the second thing, and we talked about this on the Q1 call, the 9.9% same-store sales growth, Black Card mix was -- would typically go up. It didn't go up year-on-year this year, but that's primarily because we had the high school summer past participants from last year convert as members about 10% of them converted as members, but they converted $10. They're not buying the Black Card membership, which is $24.99. They're buying the $10 membership. If you back them out, year-on-year, all the other membership, Black Card mix was up year-on-year. And that's after taking a $2 price increase in May of last year. So in the face of inflation, at least in our membership base, the members are paying -- more members are paying more for the higher-priced membership if you back the [indiscernible].

And then we have time for one last question really quick. On international growth, Canada, Australia, Panama, I mean are there any -- where you're at now, are there any markets you're particularly excited about? And how do we think about the pace of international near and long term?

Sure. Yes, we just -- I'm happy to say we just -- we'll be announcing here a few weeks we just brought on a VP of International from a very large QSR -- international QSR chain. We'll announce that in a few weeks to help spearhead our international development. Before we always did it, kind of the phone call was reactive, we would take the call and would investigate and be open. Now more of a proactive approach, did some market studies on certain markets we're looking to, Asia is interesting. Some European markets are also interesting. And instead of doing 1 maybe every year or 1 every 2 years, probably more look at it 1 to 2 every year. So I'm not going to go out and just pepper the world with one unit here and there, we're going to be very well planned out, get a good foothold in the market and then go on to the next. So probably 1 or 2 a year.

Great. All right. I'll see everyone in the break.

All right. Thanks, everybody.