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

Hi, and good afternoon. I'm Sharon Zackfia of William Blair. I want to thank, everyone, for joining us. Really happy to have with us from Planet Fitness today, Craig Benson, Interim CEO and franchisee; and Tom Fitzgerald, CFO.

I think I want to start actually by talking about the fundamentals of the business and then maybe delve into the development landscape. So you obviously announced record memberships year-end. Can you talk about what you're seeing and actually the appeal of the concept, where new members are coming from? And how the underlying health of the business is at this point.

Yes. Sure. Thanks, Sharon, and hey, everybody. So I think we reported 18.7 million members by the -- at the end of the year, added 1.7 million across the year. So it was a good year for us in line with our expectations. For context, the next biggest gym operator in the U.S. probably has 2 million members. So we have a pretty sizable lead. And our job -- our mission is really to get people off the couch to start their fitness journey. We're not necessarily trying to steal members from other concepts because only about 20% of the U.S. belongs to a gym. We're really trying to get the 80% who don't belong to a gym to start their journey. They usually make up about 40% of our joins new members are people who have never belonged to a gym in their life. Another 40% used to belong to Planet at some point in their life and came back. So in terms of the drivers of that membership growth, we're fortunate that unlike many retail brands and some I've been associated with where the average age of your customer or member goes up every year, as it actually comes down because we're penetrating the younger generations more so than we did the boomers and the Gen Xers. So just to set the stage, about 3% of all boomers belong to Planet, about 6% of all Gen Xers in America belong to Planet, but about 9% of all millennials and 9% of all Gen Zs who are of age belong to Planet. And Gen Zs and millennials now make up over 60% of our membership base. So it's great that we can see that kind of traction with the younger membership. And what we saw with millennials is while there are 9% of members -- of millennials belong to Planet now. Several years ago, that was 6%. It tends to grow as they see more ads and we build out more stores and we become more convenient for them to work out. So we like those trends and excited about it. And one of the elements that we offer a couple of years running now is a high school summer pass, where over the summer, any highschooler in America can come in and join Planet for free for the summer and work out, has a lot of benefits for them. We know the struggle kids are going through in their lives exacerbated by the pandemic. But it's at virtually no cost to us, and we get over 0.5 million joins new members from that last year, and we expect good results that we'll report here on that shortly.

I want to delve into maybe a big topic amongst investors, which has been kind of the lagging franchise development and that challenging landscape. So if we could maybe set the stage on what has caused those challenges. And then delve into some of the initiatives that you're testing to help spur that development.

Yes. So inflation has changed a lot. And in new construction, especially inflation has been hard. In addition, interest rates have gone up. So borrowing to satisfy the higher demands for cost in building, it's double whammy. So we realize that. And what we are doing to deal with this, we've come up with this thing we call the new growth model. And we've asked franchisees to participate, and actually, we asked them to make mention of whether they'd be doing it or not by the December 31, and we're overwhelmed by how many people want to participate in it. And what's part of it is changing some of the things that we've done in the past. So we've extended our ADA from 10 years to 12, giving a longer time for return. We've also done a change in our remodel requirements. So we're the most aggressive remodeler in the industry. We've relaxed a little bit. We've gone from 10 to 12 years. And then reequips. We reequip our gyms quite often every 5 and 7 years prepandemic. It's now going to be 6 and 7. It doesn't sound like a lot, but these are big capital investments. And by changing those criteria, it changes a lot. And so what do we ask for in return? Well, we used to get 70% of our joins online, which we got $5 join fee from. We've gone to across the board, all joins are going to pay a join fee back to Planet. So that's a give by the franchisees. The biggest one is we asked them to go from grace periods to cure periods. A grace period is 12 years -- 12 months, a cure period is 6 months. So shorten it up. So we had a clear definition of what was coming up in the pipeline. That's to catch up with their development requirements. So there's give and take on both sides. And by doing what we're doing, again, we're overwhelmed with how many people want to move to the new growth model so...

And with that lesser capital intensity and the change in the development grace period, How quickly can that actually impact the development that we see for 24, 25, 26...

I mean it's changed. It used to be 6 to 9 months to do a club. It's now 12 to 14 for a number of reasons, a lot more bureaucracy at the local levels to get permits and okays to do things. It's harder to find retail space. The amount of retail space has been developed over the last number of years has gone down dramatically. And while there still is retailers that are in trouble like Bed Bath & Beyond, the demand for retail space is still fairly high compared to what's out there. And so it's a challenge for a number of reasons, not just the cost. And so to be able to predict anything in the short term is hard. We put out in the third quarter, we'd open 150 to 160 stores. We did 165 and that was at the end of the third quarter. So we didn't have much more to go. And that will tell you how much variability is still in the system for getting things going, especially when it comes to permits. But there's still some challenges. We need to find spaces especially, and part of the new growth model is using our scale. We're the third biggest consumer of retail space in the country to work with bigger landlords to get them to make us a partner and let us know what's going on before space hits the market. And by doing that, we'll have [indiscernible] to more opportunities than we currently.

And Sharon, if I could just build on that for a second. So I think back to your question about the pace of growth, right, and where it was before. We know there's a lot of exogenous variables that Craig talked about inflation and so on. So we can only control what we could control. So we wanted to take a long-term change and approach to really help our franchisees ultimately develop more units, then they wait if we didn't make a change. And so by making the changes we made, we don't think it's necessarily going to affect 2024. We'll provide our outlook on that. 2024 is probably more of a transition year and we can update that here in 6 weeks on our earnings call. But we think as we think about the long term, lowering the CapEx, lowering the initial build costs that Craig has the team working on and making changes as we speak, we'll take returns. So if you look at the Planet Fitness pre-Covid, an unlevered IRR was probably 30-ish percent. Here recently in 2023 because of the higher cost to build, et cetera, is probably closer to 20%. By making these changes, we get it back in the 25% range, so we probably closed half of the gap. And as we continue to find more ways to get the initial cost down, that will improve. If we do anything with pricing that's accretive, that will improve. So we think we made a meaningful stride in these changes without significantly impacting our P&L.

I think the other major initiative in test is the pricing, right? And I think through the life of your public company existence, we've always talked about pricing with Black Card. We have never talked about pricing with the other card. So can we talk about what you're testing, why -- I know you're early in the journey, but perhaps how long you need to test before you feel like we've got a good understanding of what this does to member acquisition because, I think, generally, we would all expect that price is going to have some boomerang impact on the other side of the equation?

Yes. So let me start -- we're doing the testing. So we have 2 classes of membership of White Card, which is a membership exclusively at the Club you join. And a Black Card, which has a number of different amenities you can use within that club, but it also allows reciprocity with our other 2,575 clubs. So you can go use any club with that membership. And Sharon has mentioned, we have moved the Black Card, the higher card a couple of different times from $19.99 to $22.99 and $24.99 where it is now. But the classic card, the white card, has always stayed at $10, 30 years. $10 is not what it used to be 30 years ago. So we are now experimenting with different price levels for that entry-level classic card. And so we have 3 tests going, one at $12.99, one at $15. This is per month. And then a third one at $14.99. The two $12.99 and $15 cards just started in August and the second one in September, 100 clubs each with a matching control group. We're still assessing what's going on there. Our pricing is different because our pricing isn't one and done. Our pricing is ongoing. So you joined and hopefully stay joined for a long period of time. So it's not just getting people to join. That's the trick. It's also getting them to stay is the trick. And so pricing has a bearing on how long they're willing to stay theoretically at least. So we've got those tests going in September and August. In December, we started a test in New York, let me go back, the $12.99 and $15 would go back to $10 when the White Card, classic card, was on sale. So it shift to a sale price at the appropriate times. Now fast forward to New York. Our whole New York DMA is now at $14.99 starting December 13, and that will not go back to $10. That stays at $14.99. So there will be no $10 sale on that card. And so we have those 3 different tests going. Again, we just started the one in New York, where we'll see what happens. The whole idea is to model this and what Tom and his group is doing and to see we're going to make a lot of different price tests go because we need to be testing and innovating to see what works and what doesn't. And I'm hopeful that some fail because if we're not failing, we're not trying enough and so Tom if you want to talk about...

Yes. No, I think it's good. And I think we're coming from a position where we're not trying to fix anything. We're trying to enhance what we have, which we think is pretty good. Almost 9% same-store sales growth for the year. About 70%, 75% of that is member growth. The rest is [ dues ] growth. So we want to just amp that up if we can. If we -- if one of these test works, we'll roll it. If they don't, we'll continue to challenge ourselves to find something that beats what we do today. But it takes a while to unlike a QSR, retailer, it takes a little while to read our test because they are subscription. You have to see not only how people behave differently on the way in when they're joining, but also to Craig's point, how long they stay. And honestly, what happens in August and September or November, isn't necessarily predictive of how people will react in January, which is our big time of year. You all may know of the 1.7 million new members that we added last year, net. About 60% of that comes in Q1 and about 40% of the 60% comes in January. So if we didn't spool up this test in the New York DMA, we'd almost have to wait another year to be able to replicate that. So we're trying to learn as much as we can as quickly as we can, as I said, to see if we can find something that beats what we have today. And so we expect to read those through the better part of Q1 and then make our determination and then we'll discuss it publicly when it's appropriate.

I remember a few years ago as well, there was a lot of talk about, well, I shouldn't say a few years ago, it was prepandemic. So it was now more than a few years ago. A lot of talk about how to increase member engagement because it seemed as if not going to the club is #1 risk factor for somebody to leave the club. I have been -- and I know member engagement has been good, and you've talked about member engagement. But I'm not aware, and maybe there are some initiatives that are being trialed as well to improve engagement as you're also thinking about these price point levers?

Yes. So we are at a high point now for engagement. It continues to get better. I think part of that is because a lot of our younger members are much more intuitive when it comes to using technology to guide their workouts. So they come in prepared to understand what they need to do and come in better educated than an older member might. And again, I'm not picking on different age groups. But when they come in prepared, they know exactly what to look for and what they're trying to do and so on and so forth. So I think technology has helped us in general. And then what we've done within the clubs is to make it more and more convenient by having more locations and make it easier, so you have to drive 15, 20 minutes, maybe it's now 5 minutes away from you. I know we've located a lot of clubs close by to each other for proximity purposes. And so it's little things that matter. We have a lot of initiatives that I think we need to do to still take some of the stigma out to joining a gym. And Tom talked earlier about some of these weight loss drugs. There's a stigma to -- now you're going to start your journey with weight loss drugs, what else do you need to do to make it more effective. And I find people that are on weight loss drugs are more cognizant of what they eat. They're also more cognizant of what they do for exercise. And Tom also mentioned, you do get a fair amount of muscle loss from these drugs. So they have to be prepared to deal with that sort of issue as well. So all these things, I think, are starting to play to our benefit. The one thing that I would also like to mention is we talked earlier about people that rejoin, 40% of our members are rejoins. We have a sizable population of former members that we need to target differently than the general population. They already know Planet but we need to talk to them in a different way, and that's something we haven't done as much as I think we should to get them to engage with Planet as a former member knowing us, they'll know some of what they're walking into and be a head start, but we have to take them to the next step. And then we still need to talk to the general population. So there's some different marketing angles of this too...

And Sharon, if I could add 1 thing. We have a program called Perks, which we need to -- we're in the process of rebranding. And it's a program kind of like AAA, you join and you get a whole bunch of savings from other brands as a member. And so we have that. And as we've grown our membership, we've become more and more attractive to bigger brands. So it used to be brands like Reebok, 1-800-Flowers. We love them. We've been with them for years. But now we're also getting folks like Garmin and Nike and Verizon, so as a Black Card member -- sorry as a member, some discounts are deeper for a Black Card member, but all members get some level of discount. Even if you're not using the gym, using your Planet, you still have benefit from your membership to save on purchases, Crocs. It's a long list of attractive brands that are now featured on our site, Puma, I could go on and on. And we just keep getting better and better quality, not just quantity of brands that want to work with us.