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

All right. Good afternoon, everybody, and thank you for joining us. I'm Joe Altobello, leisure equity research analyst here at Raymond James. I'm very pleased to be joined today for a fireside chat, by senior management of Planet Fitness, including CEO, Colleen Keating; and CFO, Jay Stasz. Welcome to you both. I'm sure you know this already, but Planet is a leader in the global fitness industry as both a franchisor and operator of clubs throughout the United States, and is also an emerging player in several international markets with over 2,700 locations and nearly 20 million members worldwide. The company has experienced a fair amount of change since the start of COVID, and there's a lot to talk about. So let's jump right into things. Part of the change that I just alluded to includes the senior management suite. As both of you are relatively new to Planet, Colleen you joined last summer. And Jay, you've been here just a few months.

So given that, I thought it would be good to start out -- start our conversation with your initial thoughts on the company and the opportunities you see in front of it.

Excellent. I'll kick off, I guess. I joined in mid-June. And a couple of things. One of the things that really attracted me to Planet Fitness was I love the fact that it's a business that does well and does good and highly profitable asset-light model that delivers fantastic returns for franchisees and really makes fitness and wellness accessible for everyone. Coming into the business, I started to think about the strategic imperatives. And maybe just for level setting, I think many of you who followed our stock have heard about our strategic imperatives, but I feel like that's a good point -- a good place to start and kind of anchor and really 4 overarching things. The first was the opportunity to kind of refine our brand promise and pull that through in our marketing. This business is very much a top line play and making sure that our brand promise and our messaging is really relevant for today's consumer and that we're pulling it through in our marketing in a way that really communicates with our prospective membership. And then the second is leaning in on member experience. And when I think about member experience, it's about how we enhance our relationship with our members, both inside and outside the four walls of the club. Inside the four walls of the club, I'll talk about the experience in just a minute. Outside the four walls of the club, today, we have the most downloaded fitness app on the App Store. And the fastest growing proportion of our membership is Gen Zs. And we know Gen Zs and Millennials are very connected to their devices. Really, all generations are. But there's an opportunity to enhance our relationship with our members there. And then from the standpoint of inside the four walls of the club, really format optimization and getting the equipment mix right, making sure that we've got the right complement of cardio and strength that we've got the floor plan and have optimized the floor plan of our club in a way that enables our members to achieve their workout and really their work out their way. And when we get all of that right, so the right brand promise and the right marketing messaging that really lands and we drive that top of the funnel and increase the number of joins and the experience and the stickiness that we have with our relationship with our members also contributes to that top line optimization. The format optimization is beneficial to both the members and to our franchisees because on a per square foot basis, a more balanced complement of strength and cardio is actually less expensive to build and strength equipment has a longer lifespan. So we get all of those things right and lean in on real estate availability and a number of other factors, that enables us to turn up the afterburners on growth and really achieve our growth ambition. So that's the fourth strategic imperative. So those are the things that attracted me to the business and as we've really kind of codified, brought that strategy to life.

I just want to follow up on that last answer. Planet has always been viewed, I think, as a place where people go to start their fitness journey. Your former CEO used to joke that his biggest competition was [ Chili's ] and the couch. And I don't think it was joking, by the way. You recently talked about trying to stay longer with that member on their journey and even attracting fitness enthusiasts. At the same time, I think your member base has gotten younger. Gen Z, obviously growing as a percentage of your overall member base. So maybe talk about how the model has changed. You mentioned equipment assortment, things like that. But how is the Planet this model changed to attract more fitness enthusiasts and younger members?

Yes. So I think we are -- the model is evolving. So too -- I think when we talked about or when my predecessor talked about competition being [ Chili's ] and the couch, we talked about the 80% of people who haven't considered joining a gym or having a fitness routine being on the couch. We think -- I think -- we think that 80% has changed. 80% is maybe they haven't joined a gym or a club before, but they're more fitness aware. So this generation today has seen their parents with a gym membership or grown up with a treadmill in the house. Just fitness is more about their -- a part of their lifestyle, perhaps than generations before. And I'll just anecdotally say, I think our biggest competition is not the couch. I think our biggest competition is fear of walking in the front door, right? If you've never been in a gym or club before, you feel gymtimidated. "I won't know how to use the equipment. I'd really like to start, but I don't know." So I think our welcoming judgment-free environment, I think answers that call. And then to your point about the fitness evolution, part of our communication and our brand promise and our marketing messaging, what you're seeing is brand promise of grow stronger together, which conveys that we are a fitness community where you can get stronger together speaks to the sense of community. And when we say we're all strong on this planet, which you're seeing being pulled through in our marketing messaging, is really a way of conveying that wherever you're at on your fitness journey, you can get stronger at a Planet Fitness.

Is it a challenge to appeal to a fitness enthusiast as well as your traditional casual gym goer?

Yes. No, I think we're firmly entrenched, continuing to focus on that 80%. And to Colleens point, that membership base has evolved from a fitness standpoint, but we're entrenched in the 80%. We don't want to go too for up the chain and compete with those that are focused on the 20%.

So in 2019, you opened about 260 new clubs, which is, I think, still the high watermark for the company. Since then, the cost to build, cost to operate has obviously increased. So in response, the company introduced what's called the new growth model, right, to try to bring down those costs to build cost to operate for the franchisee, the goal being to accelerate new club growth. So maybe talk about what that new growth model entails and what sort of success you're seeing so far.

Yes, absolutely. So we've pulled a few levers to try to accelerate growth and make those IRRs better, get back to where we were pre-COVID, and we've made some good headway on that. Post-COVID, the unlevered IRR was probably in the low 20s with the new growth model, which is really about getting cost out of the build and extending some of the [ reequipment ] timelines. We reduced the cost by about 10%. We got to the mid-20s on an unlevered IRR basis. And then we pulled the next lever, which was a Classic Card price increase lever that had not been pulled in over 20 years on about 40% of our membership base. And that's driven the unlevered IRR up to the high 20s. So we're getting very close to where we were. I don't think that's necessarily the goal, although that's a data point for our franchisees that have been there a long time. At high 20s, that is world-class IRR. And we're going to -- we talk about it, we're not done. We're going to continue to refine and work with the franchisees to continue to value engineer and to continue now with some of the new team that we've brought in with the CDO and CMO especially, continue to focus on making marketing more efficient and driving the top line as well.

And what's some of the feedback you've gotten from the franchisees from this new model?

Yes. Look, I think -- and then Colleen may add in, but I think the sentiment has been great. I think they appreciate the levers that we've pulled on the new growth model as well as the Classic Card price increase. I think they appreciate the partnership with the entire leadership team, both of those that have been there for a while and some of the new members that we've touched on and the focus that Colleen talked about on strategic pillars and kind of getting to that next evolution of growth. What Chris and the team did before we got here was wonderful and amazing. But now we're getting to get to that next evolution in chapter of growth, which is exciting, I think, for all of us.

And I'll maybe touch on franchisee sentiment. I love a proof point or two, and I think -- we gave our franchisees the opportunity toward the tail end of last year as part of a signal of change with our new brand positioning. So growing stronger together, and we're all strong on this Planet, conveying that you can get strong at a Planet Fitness that we're welcoming for a beginner, yet we can meet your needs along your fitness journey. You don't need to graduate to another gym. We gave our franchisees an opportunity to purchase a few pieces of plate-loaded equipment and put it in their clubs. And this was something that they didn't have budgeted. We rolled out this opportunity in the fall of last year, and we had franchisees opt in 65% of our clubs ordered the plate-loaded equipment to be placed before the end of the year last year. So that was in the year, for the year financial investment. And I think that speaks to franchisee sentiment and buy-in around our move towards a more balanced complement of strength and cardio.

So I mentioned earlier, you opened 260 in 2019. Last year, you opened 150. The goal at some point is to get back to 200-plus openings a year. The guidance for this year is 160 to 170. So good progress obviously. But I'm curious what gets that number back to 200? Is it -- do you need to improve the franchise economics even more? Is it a lack of available real estate? Or is there something else that's kind of keeping that number from getting that number to 200, or is it just time?

Yes. Maybe I'll touch on a couple of things, and then I'll let Jay chime in, too. The -- so first of all, I think about 4 levers when I think about really kind of chasing growth. I think one is the top line, and Jay talked about the impact that we made with the pricing change on the Classic Card pricing. And I talked about a little bit the investments we've made in branding and marketing and bringing on a new Chief Marketing Officer, so a new addition to our leadership team, which was wildly supported by our franchisees as well. And then the unit economics and the build cost, which we've touched on, we think there's something around real estate availability, right? So we've come through several years coming out of COVID with positive absorption of kind of strip mall retail space. So not in closed retail but strip mall retail, positive absorption over the last several years and pretty tight availability of space. I think just a recent report by CoStar, just over 4% vacancy rate. So that's been a factor, right, in finding that great well-situated 20,000 square foot box to build the Planet Fitness. So we've augmented our real estate team. We have a Vice President of Real Estate, who's really partnering with our franchisees to help them identify where space is coming online. And then we think with some of the retail, either downsizing or retail bankruptcies and retail closures, that should also help ease some availability of space. I think last quarter -- the last quarter of last year was the first quarter that didn't have positive absorption, citing a JLL report I read. So getting -- helping them avail themselves the space and telling the Planet story about the resilience of our business and the durability of our cash flows because think about COVID, a once-in-a-lifetime global pandemic, and we did not have one club permanently closed due to financial reasons during COVID. So if I'm a landlord or I'm a developer and I'm thinking about a prospective tenant for space that's coming online and I've just had a retail bankruptcy, we need to be telling the story, of the strength of Planet Fitness as a tenant and helping marry those space opportunities with our franchisees who have development opportunities in the geography. So I think that helps. And then the fourth is the interest rate environment, and we don't control that. But to go back to your year of printing a 2 and change, money was free, right? So there was a little extra incentive to pull forward some of the building in that year. I don't know if you want to chime in on that at all?

Yes. No, I think you covered it.

Understood. So if you think about the clubs that you've opened, over the past, call it, a year or 2, how are they performing relative to expectations?

Yes. They're in line with our expectations. They're performing well. And this is a backloaded business, right? So we opened 86 clubs in Q4, backloaded in the year, so those are new and early. But we're excited by the ramps and the clubs that we're seeing. And that set of clubs is going to grow membership in the coming year, which is exciting. It's not part of the comp base, which we might talk about. Yes, we're right on track.

In fact, that's where I was going next, staying with the guidance for a second.

Good segue.

It's like we planned this almost. So you're calling for 5% to 6% same-store sales or same club sales growth this year, pretty similar to what you did last year, maybe a little bit better. I've covered Planet for years. And I can remember when most of that comp growth was coming from member growth. It used to be 75% member growth, 25% rate growth. That's kind of flipped now. You're getting more from rate growth versus member growth. I guess first question, does that concern you? And second, what do you view as a good mix between member and rate from a normalized standpoint?

Right. So it's a great question and a few call-outs. We did end the fourth quarter, the year strong. We had a 5.5% comp, for the fourth quarter, we did grow membership to 19.7 million members. And what we saw there -- and before we did the Classic Card price increase at the end of June last year, we did significant testing, so we had expectations around the headwind on joins and the attrition level. And in the fourth quarter and really starting in the third quarter, we experienced slightly better trends on both of those components, on the joins and on the attrition rate being lower than anticipated, and that drove the increase in net member growth in fourth quarter. So from that launching point, we did get the benefit of the Classic Card price increase. And the other benefit we're seeing because of the price points between the Classic Card and the Black Card are now only $10 part. We're seeing an increase in the Black Card penetration, ending the year 64 versus 62, so 200 basis point increase. As we think about the comp guide for next year, we continue to expect to get those benefits because as our membership tenure is multiyear, it's longer than 1 year. So even as we come across the anniversary of that Classic Card price increase in June, we're going to get a multiyear benefit because of -- our membership tenure is long. And we're going to continue to get that also on the Black Card penetration. And we are expecting membership growth as well. And kind of back to the point I mentioned, like a large part of that this year is going to be driven by those 86 clubs we opened in Q4 of last year, which really doesn't factor in the comp base. So some of the back-of-the-envelope math, you might not be getting that same level of increase from the membership that we do.

So as we get further and further away from this Classic Card price increase, would you expect that to be more 50-50?

Yes. I think longer term, right, and we're not guiding, we do expect to give some long-term targets later in this year; but right, generally speaking, yes, 50-50. We understand that this is a combination of driving membership growth as well as potential continued rate growth.

So if we stay with your guidance, you're looking for, call it, 10% revenue growth this year and 10% EBITDA growth. So effectively no operating leverage, which is kind of unusual, given your model. So maybe talk about what's keeping that leverage from happening and maybe when we might see it.

Yes, absolutely. And I think it is a unique year. This is really kind of a foundational year and a year of investment. What we've talked about this year is we are building out on the pillars and the Blue Ribbon team to accelerate growth. So we've got to kind of preinvest. Typically, in a normal year, we would expect that the revenue growth would outpace expense growth so that we would get leverage on EBITDA and bottom line and have a gap in the expansion of those 2 rates. This year, we've got a couple of incremental spend items that are in SG&A. We talk about approximately $10 million incremental dollars. About half of that is building out the team with a CDO and a CMO, which we historically have not had. And as well, Colleen is lapping the interim CEO from last year, which was a Board member, which really didn't take CEO compensation. And then the other half of that increment is investment in the strategic imperatives to make sure, one, we've identified some things we want to invest in, but also with the new CDO and CMO, making sure that we've got a placeholder of dollars so that when they come in and take a beat, have a minute, if there's strategic things they think they want to invest in and really drive acceleration of clubs or member experience, we've got the dollars available to do that.

And in terms of when we might see operating leverage, is '26...

Yes. I think this is a unique year. It's a onetime event in '25.

And there is some overlap, right, in bringing in the new resources. And we've got the investment front loaded, but expect to see the return.

Got it. Okay. So one of the aspects that we've always liked about your model, and I think others in the investment community as well, is that you're mostly a franchisor, right? I think you're 90% franchisor...

90-10.

Exactly. And in theory, that's an asset-light model. Your CapEx, however, has been growing pretty considerably. It's going to -- it's supposed to grow another 25% this year. So maybe walk us through what you're spending that money on.

Yes, for sure. And just to reiterate, we are very committed to the asset-light franchise model, 90-10 split. We are not changing from that. Given the fact that we do recycle capital, and we'll talk about it with building Spain on our balance sheet, right; there is some short-term variability in that 90-10, and that's part of what we're experiencing this year and with the capital increase, but absolutely committed to the 90-10 and the asset-light franchise model. The CapEx spend specifically, really a couple of areas are driving that. One is the corporate club build out of Spain. We opened about 5 clubs last year. We're going to open 5-ish, a little bit north of that this year, as well as some domestic clubs. And also on the corporate club standpoint, this year is unique. And now we've got a handful of remodels and relocations. Now we're building out, so causing some increase. And then finally, we do have some dollars associated with IT investment really around data and analytics to continue to build that. So we can scale in the future.

So it's sort of like with SG&A, this is kind of an unusual year?

I think that's fair. And we will continue to refine that model and update our guide as we go forward.

And I think the other thing to point out is that Spain is a moment in time, right? We made the decision to launch Spain on balance sheet, our first foray into Europe, wanted to make sure that we could bring the brand to life in a very healthy way and that we could have the resources on the ground to have a very successful Spain launch, which we have. We're thrilled with the ramp. We were thrilled that we had 5 clubs opened before the end of the year last year, first club in July and 5 by year end and really excited about the opportunity there and how the clubs are ramping. That said, it is our intention to go to market and seek a franchisee for Spain and convert, as Jay said, I'd say, recycle that capital. So launch on balance sheet but then bring a franchisee to the table. And when we sell Spain, we will sell the existing clubs that we've already developed and the runway. So we'll go asset-light in Spain as well.

Got it. Okay. So you talked about the Classic Card price increase earlier. And you mentioned in the past that you expect a fairly decent lift in AUVs by year 2. Is it playing out as you would have expected at this point? I know it's still relatively earl, but...

Yes. I mean, it is early, but yes, it's in line with our expectations and what we've talked about. Again, we're going to -- even though we're going to anniversary that in June, we will continue to get a benefit because of the length of our membership. And I think one other point that I meant to mention on comps was related to click to cancel, right? There was a confusion, I think, from the comments on the call about how we model click to cancel. And we have, in fact, from a modeling standpoint, we've included a click to cancel with rollout in April in our model. And so today, we have approximately 11 states and 35% of our membership base, including 100% of our corporate clubs, that are already doing click to cancel. And again, from a modeling standpoint, we've assumed that we would do the remaining 65% in April, and we've assumed a slight elevation in the attrition rate. And what we've seen from experience is that we have that and then it typically moderates in 8 to 12 weeks. I think from an operational standpoint and given the appeals that are going on in the courts, we may have the ability to stagger that roll out over Q2 and Q3 which would be beneficial from a model standpoint. Just from a practicality standpoint, it doesn't quite get the visibility and awareness if we stagger that.

So just staying with pricing for a second, you've talked about a test with Black Card. Right now, it's $25 versus Classic at $15. It sounds like that's going to run at least through Q1, and I know you're probably not going to comment on that here. But maybe hypothetically, what would you like to see from that test to think about, let's say, a midyear increase on the Black Card price?

Yes. I think -- so we'll really look for a couple of things, right? And we've talked about this, this we have talked about publicly. So $24.99 is our current Black Card pricing. We're testing two different price points or we've been testing two different price points at $27.99 and $29.99 and wanted to see, a, is there headroom on the Black Card pricing?; b, if there is headroom on the Black Card pricing at the higher price points, do we see any increase or any impact on churn? And third, in the clubs where we haven't tested the increased Black Card pricing and kept them at the $24.99, that represents the narrowest delta between Classic and Black Card since the inception of Black Card, right? So when we first launched Classic with a Black Card, it was Classic at $10, Black Card at $9.99, so a $9.99 delta. We wanted to see if the increased Black Card penetration with the gap back at the $9.99, if that was more accretive. So at the end of the test, I think it is important that we carry the test through the first quarter. It's important to see how it performs in a very high-join quarter. We'll evaluate which is more accretive to AUV, which is more accretive to the four wall. And we have publicly said, in Q3 and Q4, we saw increased in Black Card penetration. As Jay referenced, 100 basis points in Q3, 200 basis points quarter-over-quarter, year-on-year -- or year-on-year fourth quarter to fourth quarter in Q4.

Okay. Just going back to international for a second, you mentioned the 5 new clubs you opened in Spain on balance sheet, obviously. Is that sort of the plan going forward, is opening up 1 or 2 new markets a year on balance sheet, prove the concept and then eventually sell those to a franchisee ?

Yes. So what we've talked about is our Board's comfort that we could look at 1 to 2 new markets a year. At the same time, we'll -- we've said we're not going to get over our skis, we've got a heavy focus on domestic growth. So we want to take a thoughtful approach to international growth and not necessarily always on balance sheet. That was the decision for Spain because we didn't have a well-capitalized partner coming to the table with us. However, where we've launched some other international markets, we have had a franchisee, well-capitalized franchisee to partner with in the launch. So this worked for Spain. It was a decision to launch on balance sheet and then recycle the capital. As you think about our international growth going forward, we will continue to look for opportunities to preserve the asset-light model, where we may have a well-capitalized franchisee to going to a market with us as well.

Okay. I want to shift over to equipment -- your equipment segment. This has always been, I don't know, a puzzle for me. It's very difficult to model, it's very lumpy. And so I'm curious how you're thinking -- and obviously, it's even more so this year because of the equipment that you sold in Q4, for example. So how do we think about the revenue and profitability of that segment this year?

Yes. No, it's a good question. And we're trying to give -- I recognize that's been challenging for the analysts to model. So we're trying to give a few more data points to get some level of clarity around that and help you build the model. So I mean, overall, a couple of data points to talk about. We're expecting the equipment revenue top line to grow between 8% and 10% this year. We've talked about expecting the re-equipped revenue to be approximately 70% of that total revenue. And then from a cadence and timing standpoint, to your point, right, Q4 was quite an increase. From a cadence standpoint this year by quarter, we would expect Q1 to be roughly $25-ish million. And then the remaining total revenue dollars for equipment would be spread ratably from Q2 to Q4, evenly. From a profitability standpoint, we talked about that EBITDA margin in the 28% to 29% range.

Okay. So Q1, $25 million, up $8 million to $10 million for the year...

20 something.

Perfect. Capital allocation. My last topic in the couple of minutes we have here, our stores have been fairly aggressive on the share repurchase front. And you've talked about buying back 1 million shares this year. Is that a good cadence that we should assume going forward, call it, 1 million shares a year?

Yes. No, I think it's similar to what Colleen was talking about on international. We have talked, since I've joined, relatively new in seat. And with the securitized debt, it is something different than what I've had. But I've talked to Colleen, we've talked to the Board, and we really aren't expecting changes in the way we return shareholder value to the shareholder and our overall leverage profile. So when I think about capital allocation, I think that means making sure we're funding growth, organic and inorganic, opportunities. But certainly, the share repurchases is something part of the playbook, something we've done. We did the debt refi in '24. And we did -- we levered up slightly, we left ourselves some headroom, but we did execute an accelerated share repurchase program. So as I think about that going forward, it's going to be growth and continue to deliver shareholder value through share buybacks. We have a tranche of debt that's coming due in Q4 of '26. So that's something that's on our radar. And a refi of that will likely take place, understanding market conditions, either in Q4 or Q1 of next year. And at that time, we'll certainly assess if it makes sense, with our leverage to execute more than the 1 million shares per year.

Okay. Super. Well, great. Thank you, Colleen. Thank you, Jay, and thank you, everybody, for joining us today. I appreciate it, and enjoy the rest of the conference.

Thank you.