Planet Fitness, Inc.

Good afternoon. My name is Suzanne, and I will be your conference operator at this time. At this time, we'd like to welcome everyone to the Planet Fitness third quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. In order to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. I would now like to turn the call over to Brandon Frank. You may begin.

Thank you for joining us today to discuss Planet Fitness' third quarter 2020 earnings results. On today's call are Chris Rondeau, Chief Executive Officer, Torben Lively, President, and Tom Fitzgerald, Chief Financial Officer. Following Chris and Tom's prepared remarks, we will open the call up for questions. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness' judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness' business. Accordingly, you should not place undue reliance on these forward looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward looking statements included in our third quarter 2020 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today With that, I'll turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness.

Chris? Thanks, Brendan, and thank you, everyone, for joining us today. It's been nearly eight months since we temporarily closed all our stores in March due to the COVID-19 pandemic. And while the operating environment continues to be volatile, more than 95% of our stores are currently open and providing a safe and healthy in-store environment for our members. I want to start off by talking about our membership levels and how they've changed over the past few months. Looking back, we ended Q2 with 15.2 million members, down approximately 1% from the end of Q1. For the clubs that reopened in May and June, membership levels remained relatively steady through the end of Q2. As Q3 got underway in July, there was a surge in the virus in several states, which appeared to shift consumer sentiment. This has also coincided with the normal billing resuming for the clubs that reopened in May, and some members being billed their annual fee on July 1st. As a result, we saw an acceleration in the attrition rate. New joint trends also slowed, which we attribute to the virus surge and the fact that we didn't repeat our typical national sale in July, since the majority of our clubs were not open. As we previously said, by the end of July, membership stood at 14.8 million. Per today's earnings release, we ended the third quarter with approximately 14.1 million members, down approximately 5% since the end of July and flat compared to last year. The biggest change in membership between the end of July and the end of September occurred in the roughly 1,100 clubs that reopened in May and June and resumed their billing monthly dues and collected annual fees. We have seen a clear pattern of pent-up cancels upon reopening and the resumption of billing. However, on a positive note, we are starting to see this trend begin to normalize the longer clubs are open, with a total year-to-day cancellation flat to prior year in the system. Also encouraging, we are seeing a similar pattern with the usage rates as the early clubs were 74% of a year ago levels in September and the system average was up to 67%. In September, we were excited to turn on our national marketing engine back on for an eight-day national sale, our first national acquisition driven marketing since before COVID. The results were very encouraging as consumers responded positively to our messaging which reinforce the importance of exercise and the toll the pandemic is taking on people's physical and mental health, combined with our commitment to keeping members safe. The sale helped accelerate our marketing flywheel and meaningfully slowly declined in membership with a number of the stores experiencing positive member growth in September. For the approximately 500 clubs that reopen in July, August, and September, we are seeing similar attrition trends as annual billing resumes, usually in the second month post reopening before beginning to stabilize after the third month. The good news is we expect this to be somewhat offset by the higher gross new joins driven by our national advertising resuming. Based on the encouraging results of the September sale reinforcing consumer demand, the management team and the board of directors made a decision to invest incremental national marketing funds throughout the remainder of the year, starting with another national sale in October. These results were also very encouraging, with even more stores in October experiencing positive member growth compared to September. At the end of October, overall membership totaled 14 million. Speaking of marketing, our United We Move initiative, providing free workouts on Facebook since we temporarily closed our stores in March, also continues to see strong results, with 45 million viewers in 36 countries since the pandemic began. This has proven to be a great opportunity to keep people engaged and motivated outside the gym. Looking ahead, Planet Finish will once again be the title sponsor of Times Square's New Year's Eve celebrations. While the celebration in New York will be largely virtual given COVID-19, the Planet Fitness brand will be front and center as the world says goodbye to 2020 and rings in 2021. New this year, we're excited that Planet Fitness will be the presenting sponsor for the first time during the 11.30 to 1 a.m. time slot, which will increase our brand's visibility at a critical time during the night celebration, including the coveted midnight countdown. With social distancing and limitations on gatherings around the world, viewership could be at an all-time high level. Turning to our digital initiatives, adoption of our mobile app remains at an all-time high, with the new join app adoption rates more than 60% in Q3. Currently, nearly 30% of total membership base has adopted the mobile app, which allows us to engage with them while they're at home or in the gym with new features like in-app messaging, a QR code reader for instructions on how to use the equipment, and the crowd meter checks the capacity of their club in advance of going to the gym. We believe the crowd meter has played a role in helping to balance visits during the week as have changing consumer habits given the increase with remote work schedules. This will be even more beneficial during peak usage months. We also continue to be encouraged by the mobile app Black Card upgrades and member referrals. Providing members with an ability to quickly upgrade to our Black Card membership and refer a friend to join have proven to be beneficial, particularly as app adoption continues to increase, and we see a lot of opportunity in the future. Our digital content journey continues to accelerate. We're seeing strong engagement with our business content via the app, with meaningful percentage of users representing non-members. This creates a large opportunity for future conversion and further validates Plenty Business' brand recognition as a trusted source in health and wellness. As a result, we are currently in the process of testing a digital-only subscription membership for $5.99 a month via the mobile app called PF+. Thank you. Thank you. We view our standalone digital membership as a gateway to our traditional bricks-and-mortar membership, not a replacement for it, and this provides us with an opportunity to further engage inside and outside the gym. The ability to provide even more content for an additional fee introduced prospective members to the brand. During the testing phase, we will assess consumer feedback on content and usability to perform any broader rollout plans. Longer-term digital content could potentially strengthen our value proposition to members throughout expanded or bundled offerings potentially in adjacent categories. On the store development front, 29 stores opened during Q3, with 2,086 stores at the end of the quarter. Based on the current visibility, we expect 2020 new store openings to be down roughly 50% or more compared to 2019 record levels of 260. Our franchisees emerged from their store closure period and have continued to gain strength as operations approach more normalized conditions. Across the system, the focus remains on keeping our staff and members safe, our stores open to service members, and now more recently rebuild membership levels. Relative to the rest of the fitness industry, we believe we are a much stronger financial and strategic position, evidenced by the bankruptcies and reported store closures and a number of national change, as well as feedback we've received from many franchisees about locally owned gyms and their markets that aren't reopening. We expect this trend will continue and over time potentially result in millions of gym goers looking for a new place to work out, and we believe our unrivaled value proposition will ensure we continue our trend of gaining market share. While the near-term operating environment is likely to remain volatile and pressure our near-term revenue and profitability, I am confident that in the long run, once this pandemic is behind us, PlanetFinch will be able to significantly widen our competitive moat for several reasons. First, the strength of our franchisees, which has been underscored by how well they have navigated through this unprecedented situation. Second, we are well-positioned to capitalize on the industry consolidation that has already taken place and likely to continue. The real estate market will be even more attractive in terms of available primary locations and lower rent costs and enhanced landlord incentives for our system because not many brands will be adding hundreds of locations in the coming years. And fourth, the encouraging early results and the opportunity we're seeing as a result of the accelerated digital content strategy, focusing on the needs of first-time and casual gym goers. And finally, the demand and uptick in usage we're seeing as a result of the marketing efforts reinforcing the overall increased focus on health and wellness This will further enhance the tailwinds of the category, and we feel our value proposition is second to none. I'll now turn the call over to Tom.

Thanks, Chris, and good afternoon, everyone. As Chris mentioned, approximately 95% of our store base is now open, with approximately 500 stores reopening during the third quarter. In terms of development, 29 new stores opened during Q3 compared to 41 new stores added in the year-ago period. Our primary focus over the last several months has been on reopening stores and more recently relaunching our national marketing efforts. And as previously communicated, all development requirements have been given a 12-month extension. As you'll hear in a moment, the change in equipment sales to new and existing stores was the biggest driver of our top-line decline. For the third quarter, total revenue was $105.4 million compared to $166.8 million in the prior year period. As a reminder, the vast majority of our stores drafted monthly membership dues back in March and then closed shortly thereafter. Therefore, those members that were drafted had a 30-day credit to utilize once their home store reopened. Q3 includes the recognition of $7.3 million in previously deferred revenue related to monthly membership dues collected in March before stores closed. This is broken down into $3.9 million from franchise royalty, $2.2 million from corporate owned store monthly dues, and $1.2 million from NAF contributions. Now, before I get into the specifics of same-store sales, let's spend a minute on our same-store sales definition. When stores are closed, then don't draft monthly membership dues or don't execute a full draft upon reopening because members have credits to utilize from prior periods. They are not included in our comparable store books. For some context, we reported 53 quarters of positive same-store sales before COVID hit in March and shut down all of our stores. The average of our same store sales growth over those 53 quarters was 12.0% and averaged 9.6% for 2018 and 2019. Our model and historically strong same store sales results depend on the ability to continually grow net membership levels across our store base month over month and quarter over quarter. Additionally, in our recurring revenue model, our same-store sales performance at any point in time is a function of what's happened to our membership levels over the trailing 12 months. When our stores shut down due to COVID, we were unable to grow net membership levels in our stores. And as Chris discussed, we've seen higher attrition in the first couple of months post the store reopening as the initial billing of monthly and annual membership dues results in elevated cancellations before starting to normalize after the third month. As we have moved farther away from our first monthly and annual billing event for many of our reopened stores and resumed marketing our brand and our national sale in September, we saw sequential improvement in underlying join and cancel trends as Q3 progressed. However, overall membership growth remains negative and importantly for the same store sales calculation, the change in membership levels or growth rate was worse this year than in the prior year period. As a result of these dynamics, we have seen same store sales growth slow and turn negative. Of the 1605 stores that had at least one full draft in Q3, 1,416 of those stores were in the comp base. These stores had a same-store sales decrease of 5.6% with franchise stores declining 5.6% and corporate stores down 6.6%. The 5.6% same-store sales decrease was driven by a 6.7% decline in build memberships, partially offset by a 1.1% increase in average rate due to both higher black card penetration and higher black card pricing compared to the prior year period. Note that although the monthly decline in membership levels improved sequentially in each month of Q3 because growth rates remained below that of the prior year period, this led to a worsening same-store sales trend through the quarter. As such, our system-wide same-store sales growth worsened across the quarter and was down high single digits in the month of September. As I previously mentioned, since our same-store sales trends are based on what has happened to our membership levels over the prior 12 months, in order for same-store sales growth to improve, the growth in membership levels in our comp stores must exceed the member growth in the same period in the prior year. Moving on to a review of our segments revenue results, franchise segment revenue was $59.8 million compared to $66.7 million in the prior year period, a decrease of 10.4%. Let me break down the components. First, royalty revenue which consists of royalties on monthly membership dues and annual membership fees was $43.1 million compared to $46.0 million in the same quarter of last year. The $43.1 million of revenue includes $6.1 million attributable to catch-up billing of annual membership fees and $3.9 million of deferred revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened during the quarter. The average royalty rate for the third quarter for the stores that drafted was 6.2% equal to the same period last year. Next, our franchise and other fees of $2.6 million compared to $3.2 million in the prior year period These are fees received from online new member sign-ups, the recognition of fees paid to us from franchise agreements, area development agreements, and the transfer of existing stores, and fees received from processing dues. The decrease was primarily driven by lower online joint fees in the quarter and lower commission revenue. Also within the franchise revenue segment is our placement revenue, which was $1.5 million in Q3 compared with $4.3 million a year ago. These are fees we receive for the assembly and placement of equipment sales to our franchise-owned stores within the U.S. and Canada. The decrease reflects the lower new store and re-equip placements we executed in the quarter compared with a year ago. I'll discuss the number of new equipment placements later when I discuss equipment revenues. And finally, national advertising fund revenue was $12.5 million compared to $12.7 million last year. The NAF revenue in the current quarter includes $1.2 million of previously deferred NAF revenue that was collected in March but not recognized until Q3. The year-over-year decline reflects the impact of temporary store closures as NAF is not collected unless stores are open and draft monthly dues. Now, it's partially offset by higher NAF contribution rate of three and a quarter percent that began in September and will run through the remainder of 2020. Our corporate store segment revenue was $28.3 million compared to $40.7 million in the prior year period. The $12.5 million decrease was driven by lower membership fees due to the closure of many of our corporate stores for a portion of that period. The $28.3 million includes $2.2 million of previously deferred revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened in Q3. Turning to our equipment segment, revenue decreased $42.0 million or 70.8% to $17.3 million from $59.4 million. The decrease was driven by both lower new store equipment I mentioned earlier in the call, along with lower replacement equipment sales to existing franchisee-owned stores. Replacement equipment sales in Q3 were $2.7 million compared to $42.5 million in Q3 last year. In the third quarter, we had 28 new store equipment placements, which was down 18 from the prior year period. Beginning in Q2, we launched a 15% discount offer on all equipment orders to support our new store development and replacement orders. This offer applies to all equipment purchased and placed by the end of 2020. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise-owned stores, amounted to $15.3 million compared to $46.2 million a year ago. a decrease of 66.9% in line with the revenue decrease as previously discussed. Store operation expenses which are associated with our corporate owned stores decreased to 21.4 million compared to 22.3 million a year ago. The slight decrease was primarily driven by cost saving measures due to store closures including lower payroll, marketing and operating expenses partially offset by higher occupancy expense associated with nine new stores opened and 12 stores acquired since the end of the third quarter of last year. SG&A for the quarter was $18.3 million compared to $20.9 million a year ago. The decrease was primarily driven by reductions in variable compensation, decreased travel, and lower equipment placement expenses. National Advertising Fund expense was $20.2 million compared to $12.7 million in the prior year period. The increase in expense for the quarter was the result of overall higher full-year forecasted NAF expenses, which resulted in an adjustment in Q3 to reflect the proper rateable year-to-date expense. Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation, and amortization, adjusted for the impact of certain non-cash investments, and other items that are not considered in the evaluation of ongoing operating performance was $32.0 million compared to $65.7 million in the prior year period. Included in this quarter's adjusted EBITDA was approximately $7.3 million related to the recognition of deferred revenue previously discussed. A reconciliation of adjusted EBITDA to GAAP net income or loss can be found in the earnings release. By segment, franchise adjusted EBITDA was $31.6 million, corporate store adjusted EBITDA was $6.7 million, and equipment adjusted EBITDA was $2.3 million. Adjusted net income was $1.6 million, and adjusted net income per diluted share was $0.02 a share, a decrease of $0.34 per diluted share. One last point on the P&L before I talk about the balance sheet. As Chris mentioned, we resumed our national marketing efforts in September with our national sale, our first step towards expanding membership since before the pandemic hit. The results were very encouraging, and we decided to make an incremental investment in national advertising of $10 million from October through December. As a result of this incremental investment in NAF and the projected NAF revenues for the year, on a full year basis, NAF will be a net expense to our P&L. However, we believe that the incremental advertising investment was the right long-term decision for the business, given the encouraging results of our September sale and the competitive dislocation occurring within our industry. Now let me turn to the balance sheet. As of September 30, 2020, we had $501.6 million in total cash, with cash and cash equivalents of $419.7 million compared to $423.6 million on June 30, 2020. In addition, we ended the quarter with $81.9 million of restricted cash compared to $86.4 million at the end of Q2. Based on the current situation and our focus on preserving liquidity, we announced in March that we were halting all share repurchase activity for the time being. We also took additional measures to reduce our monthly cash burden including previously announced compensation reductions for our leadership team and our board of directors. And during Q3, we made the decision to right-size our headquarters and field teams in an effort to refocus on our core priority of maintaining and growing our membership base. Total long-term debt, excluding deferred financing costs, was $1.80 billion as of September 30, 2022. consisting of our three tranches of securitized debt and $75 million of variable funding notes. Our securitized debt structure is covenant-like. We have two maintenance covenants, a debt service coverage ratio, and a total system-wide sales threshold. Both are tested quarterly. They're calculated on a trailing 12-month basis and reported roughly on a two-month lag. In our most recent debt covenant reporting period of September 8, 2020, We had a 56% and a 108% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant, respectively. Similar to our liquidity position, we believe we have sufficient headroom for our two maintenance covenants. Given the uncertainty surrounding the evolving nature of the pandemic, we are continuing to refrain from providing guidance. While the near term is difficult to predict, we believe that we are well positioned financially and strategically compared to the rest of the industry to capitalize on the many value creating opportunities we believe will emerge over the long term as a result of the pandemic. I'll now turn the call back to the operator for questions.

Thank you. In order to ask a question, and the number one on your telephone keypad. We'll pause for just a moment while we compile the Q&A roster. Again, that was star and the number one on your telephone keypad. Our first question comes from the line of Randy Connick of Jefferies. Your line is open.

Thanks a lot and good evening, everybody. Can you hear me? You can hear me? Yes, I do, Randy. Thank you. Awesome. So I guess the most important metric that everyone wants to key in on is the membership trend. So if I do the math, from June to September, it looks like the membership rolls went down by about 1.1 million members. And then in the last 30 days, 100,000 members. So I guess what I'm trying to get at is, if we look at those two different time periods, always seeing a clear deceleration in the overall cancellation number, and especially as we get going into this last 30-day period, it's only 100,000, a net change to the downside. A, is that the case? And B, how do we kind of think about the different moving pieces between the three cohorts? Because there's an 1,100-unit cohort that opened in June and July. It looks like there's a 500-unit and many more. It also looks like in the last 30 days or so, assuming that 95% of your overall gyms is open, that's another 400 that are just recently, recently open. So could you give us a little education on, I know it's a little complicated, but I think it's really important, on the different membership trend changes or cancel rate changes in the different time periods, again, June and September, and now more recently in the last 30 days, and then between the different cohorts. Because I think if we can get some real conviction that the membership number is starting to stabilize, that's what I think is going to be the most important thing going forward.

Thanks. Thanks, Randy. And I couldn't agree more. That's exactly what my main focus is. And you're right. All those numbers were right where we dropped about a million one from the end of June to the end of the Q3 number. and then you're right this last 30-day period of October was about 100,000 so we began to see it slow in September and then even more so in October and a lot of what I said in my opening remarks says you know the big part of the thing about we had no marketing acquisition marketing out there since you know before COVID started so you know it was pretty much you know the pond was was going down every day with no rain you know and finally we're we're marketing here we're filling the pond back up so It's a lot of that. At the same time, the older cohorts, you're exactly right, too, the older cohorts, the May openings especially, and then now June, which have been open for a few months. There's cancellations are beginning to come back to more normalized rates. So you got the plus side of driving member growth and then the slowing of, especially the older cohort stores, cancellations are slowing. And also, mind you, we had a portion of those last few hundred clubs that opened up, which I think you mentioned, where the first annual fee for them was October 1st and another one was June 1st, November 1st, excuse me. So We still have some of those cleaning out of those pent-up cancels from those more recent openings, but a much smaller section of clubs compared to the 1,100 that were opened up early on. So you're exactly right with all those numbers and how the marketing now is starting to really encourage the fact that it's happening and that people are listening. And as I mentioned, I think one of the calls is that, you know, the September sale, we were a little bit cautiously optimistic. Were people ready to join and listen to our marketing and really, you know, be proactive and get off the couch? And they were, which is why we decided to use some corporate backing to throw in another sale period to capitalize on the demand that's out there. And, in fact, that competition is struggling and going down. And I think the other interesting thing is when you look at the cancels year to date, which I mentioned, is, cancel year to date, although looking really high for these few months, but the cancels year to date are actually on par to last year. So a really interesting thing, too, is we look at reason codes, which COVID virus is now a reason code for cancellations that didn't exist last year. You know, we had, you know, a couple million, give or take, approximately that were non-use, no time last year. which now that is about you know less than a million and there's a million people that cancel because of COVID so it's interesting you don't have any more or less cancels they're using COVID as the excuse as opposed to saying that they just don't I'm motivated to work out so so I think now it's really a matter of not really a cancel problem as much it's just the remarketing and getting that flywheel going to start to drive those sales.

So you're then saying that if you if the cancel cancels are on par to last year The real problem was a lack of ability to get people in the door to join because the units were kind of closed and there was no marketing. So are you then saying that the cancels are kind of normalizing and now you are seeing some notable I think the acceleration of joins, to put it maybe another way,

Getting the joins to be on part of last year. We had all these sales last year, which we didn't have up until the September sale. So I wouldn't say acceleration over last year, but more normalizing our last year's acquisition because we didn't have any acquisition marketing. So now we're playing catch-up, I guess is the way to put it. So it's the older cohorts that are really having the net ads. In September, we had a good section of clubs having positive member growth. In October, we had even a larger section of clubs having positive member growth. And this is older cohorts. So when you fast forward now, you know, the next two or three months, we're going to have pretty much all of these 2,000 stores have gone through their entire membership billing cycles for a couple months here, and also the annual fee cycles have gone by us. So, you know, by the end of the fourth quarter, especially the first quarter, honestly, is have all gone through this clean-out period of pent-up cancels because of billing and hopefully now start to show that member growth again.

Thank you. And our next question comes from the line of Oliver Chen. Alex, your line is open.

Hi. Thanks for all the details. So the commentary on normalization of the pent-up cancellations was helpful. I mean, your expectation is that that will continue. Were you seeing that across regions? and many more. Going forward, it was more challenging over the summer when it first happened. Thanks.

Yeah, thanks, Oliver. This is Chris. I think real quick on the resurgence, too, which is one thing that's interesting with the joins, a little bit to Randy's question and your question, is that You know, although we're seeing all these resurgence right, you know, as real time, you know, last few weeks here, what we're not seeing now that we saw back in July, you probably remember me talking when the resurgence happened in Texas and Florida and then we were forced to shut down our stores in Arizona and California. We saw nationally in all regions a slowdown on the joins and a heightened cancel rate. We're not seeing, even though all this media is pretty much as crazy as it was in July, we're not seeing that sort of reaction from the consumer sentiment side of things. So it's almost, I think the COVID fatigue people are talking about, I think, is probably real. People are not listening quite like they were in July when they were freaking out and not joining. So I think that's one good thing there. You know, as far as the cancel trends and demographics, we're not seeing anything regionally. It really comes down to, Oliver, how long the clubs have been open or reopened. You know, it's really just we stopped billing people and then how, you know, we clean out all those cancels that we didn't have all this closure period because, you know, people can cancel. by mail, or we're actually taking some phone calls to those clubs. But really, until we stop billing is when we begin to see the cancer resurgence. But demographically or regionally, we're not seeing any trends there. It's more so just how long have the clubs been open. And they act more normal the longer they've been open. Thank you. Best regards. Thanks, Oliver.

And our next question comes from John Heinkelbacher of Guggenheim Securities. Your line is open.

Chris, two questions. How do you guys measure metrics and measure the effectiveness of the national sale campaigns? And how did September perform versus pre-COVID? How did October perform versus September, if you know? And then lastly, when you think conceptually about 2021, normal seasonality would seem not to apply next year. for a lot of reasons in terms of membership additions, meaning more back-end loaded. Is that fair, and how do you think about seasonality next year?

Yeah, I mean, I think, you know, I think some of the membership trends as well as the member workout trends that we're seeing, which I mentioned have picked up since we started national advertising. I also think that's because of seasonality. You know, we were reopening the first section of clubs in the middle of July where, you know, it was beautiful out there. I'm looking outside now, it's pitch black already and it's cold in the Northeast, so people aren't walking outside. So I think the I think seasonality, I don't really think that January is going to not be a joining month. I think it'll be, you know, I think the New Year's Eve resolutions and the winter months will be busy like usual. You know, as busy or depending how the spikes and the unknown, no one really knows right now. But, you know, granted, I think if we stay on this trend, This trend we see today, or better by the first quarter, I would think things would even perform great. But if the resurgence comes and we end up having to shut down a big section of clubs, that will change things, as well as the marketing budget. I think what we've seen right now, though, on the closure side of things, is that we're not seeing... We've had a few clubs here and there close and reopen a couple weeks later, so there hasn't been any big regional, like three states closed down on us or big areas that would affect any kind of budget from a marketing standpoint. So Granted, that doesn't happen. Everything should probably go as planned there. The September sale, we've never really had a September national sale, so we didn't have too much to go off of. The October sale was pretty comparable to last year. We usually measured on a baseline of the previous week to figure out how the lift was. So we were pleased with both of those results from both sales, which is why we decided to do some corporate sponsor dollars for that NAF to keep that flywheel moving and take advantage of the joint demand that's out there.

Okay, thank you.

Thanks.

And our next question comes from the line of Sharon Zakia of William Blair. Your line is open. Hi, good afternoon.

So I think a lot of us, hi, we're all trying to disentangle the member trends. And I guess it might be helpful just in October where you're down 100,000 from the end of September. Is there the possibility of dimensionalizing for us what was the attrition versus the ads, if that makes sense? Trying to figure out how the marketing is really impacting the dynamic here so far in the fourth quarter. And I guess I'm thinking, and I apologize, I'm thinking of that original cohort, the 1,100 clubs, because I recognize there's a lot of noise going on with the clubs that are more recently opening.

Yeah, there's no doubt that the majority of the net member growth clubs are all that first cohort. The May, it was about 500 or so May clubs that opened and another 500 or so in June. So the majority of the the net ads were definitely in those section of clubs and then the higher cancellation rates were definitely in the newer joints, the newer clubs that open come August, September clubs that again they had their billing cycles and annual fees which has been the trigger since the very beginning and the trend is holding the same even with the newer clubs opening.

Maybe I'll just shift gears. On the digital content, how are you going to – well, I guess I'm wondering about the economics of a digital-only membership with a franchise base. Like, are you sharing some of those economics with the franchisees? I mean, how does that – I know it's a test, but how does that kind of flow through the P&L, and how do the franchisees feel about it?

Sure, yeah, yeah. It's early stages, and we've worked with our – and independent franchise counsel on the whole program. And as we've done with everything since day one, as you know, Shannon, we've always made it a win-win with our franchisees. So the digital subscription will be something that we'll look to see the way that we share this back to them as well so that we all win in the process. Because we want them to endorse it, which helps them sell it so that we all sell more subscriptions at the end of the day. I think the interesting thing with the subscriptions we're seeing is that you may recall the free content, which we'll always have, there really is a good way to get people introduced to the club, to the brand, and about 20% of our content consumption are non-members of our store, so they're looking at Planet as a trusted source in wellness. It's really early. We only launched this thing a couple weeks ago with no marketing. We kind of have it just slow-paced to kind of make sure there's no bugs or anything in it. But, you know, even right now with the few subscriptions we have, 20% of the subscriptions are non-members, too. So it really is a gateway into getting people introduced to the stores and our brand. So it's just really intriguing to see the potential we could have with this. And, you know, at $5.99, it's really kind of a lost leader to get people introduced to the brand and get them in to message them to try the bricks and mortar out.

Okay. Thank you.

You're welcome.

and our next question comes from Jonathan Cobb up there. Your line is open.

Yeah, hi, great. Thank you. Chris, maybe this first question, when you think of the reclosure risk, do you think the message is getting out that there's really not been a lot of direct transmission tied to gyms and certainly the health benefits? Do you think there's some separation in how gyms are being viewed versus, you know, other enclosed, you know, interactions or any thoughts there?

Yeah, we've had some pretty good luck in states that, you know, it's a matter, John, if we hear the scuttlebutt, you know, before they close us and we can get ahead of it and get to the governor's office or the mayor's office or what have you, we've had some pretty good luck with all the data we have. And we've done, you know, tens of millions of workouts with no No breakouts and very few people that have, you know, the health department have come back to us saying that somebody worked on your club that had it and you've got to go down to a, you know, six-hour deep clean or let the members know. So we've had some pretty good luck getting that changed. And even the very few closures we've had or reclosures, they haven't been really large, like big counties. There's really been like one or two clubs in it for a couple weeks maybe. But I think, you know, definitely going forward, I don't think the industry, unfortunately, we haven't been vocal enough on the benefits of exercise. We hear it, but I don't think we get the appreciation or the attention the industry should, especially Planet. Getting people off the couch for $10 a month. I mean, we're doing a service to American citizens, let's face it, that is keeping people active and building their immune systems, and we see who this is affecting the most. So they're listening. I think a couple mayors in New Jersey maybe and one other said that they were going to closures of nightclubs again and bars and restaurants, and they said they weren't going to do gyms because there's been zero evidence that gyms are a cause of any of it. So we've had some pretty good luck.

Great. As you think ahead in the environment, and clearly you're going on offense as a system with the marketing, given the positive signs that you've seen there, when you think about unit growth and really franchisee willingness to really embrace unit growth at higher rates, What do you think you need to see in terms of continuation of some of the usage patterns or the net member trends? What do you think to really support confidence in the growth outlook that you need to see as a system?

This is Dorvin. I think you're hitting the nail on the head in terms of the system today, obviously, is from a franchisee perspective, is they're looking at their clubs that – Hopefully, we're all open, although we have some franchisees that have some clubs open, some closed, and a handful that still have their clubs closed out in California. They're looking at the same kind of trends we are. What is the usage rates in the clubs? I think to Chris's point about how we viewed the September and October sale, that was very pleasing to the franchisees, too, because we didn't really know what it would be like after Thank you for joining us. and some of the guys are doing some deals but by and large they're setting back the weight and they're doing it for two reasons. One, they want to see can clubs get open and stay open because that's obviously very important as opposed to open, close, reopen, etc. And then what's the demand? Demand both on just usage and from our existing members, and then demand for new signups. And I think what will happen is we're virtually now into wintertime, as Chris said earlier. January is just around the corner. I think that's kind of a key time period people are going to look to to say, has things kind of died down a bit on the COVID resurgence scenario? or not. What's going on with usage in terms of our members coming into the clubs? Is it kind of hanging in there? Is it increasing, et cetera? And then really probably more important than anything in kind of real estate world is what is going on with space, retail vacancy? And will there be a number of retailers that are kind of hanging on to get through the Christmas holiday season? and then there'll be closures and there'll be more opportunities. The bigger guys that do a lot of development and have their own real estate teams, most of them did not get rid of their real estate guys. They kept them on, they didn't furlough them, etc. because they know they're going to get back into development. And when you talk to those guys, they're saying that there's going to be more opportunities out there and more than likely at cheaper rents, but certainly landlords are more willing to put some tenant improvement dollars on the table. So there's a bit of wait and see on both of those fronts when it comes to thinking about overall development.

And our next question comes from the line of John Ivanko of JP Morgan. Your line is open.

Yes, I actually wanted to follow up on development, and then I have a follow-up as well. You did open 29 units in the third quarter, which is actually a good number, all things considered. Was that a catch-up number? I mean, I guess it's kind of the first question. I mean, should we expect a material acceleration into the fourth quarter? I mean, as would normally be the case for the company is, I guess, part A of the first question. Then secondly, We had heard before that some franchisees were sensitive about attracting new members to new gyms. Is that a concern that was well-placed, or are you seeing trends that are slightly different than that? That's the first broad question. Secondly, just in case I get cut off, the headquarters and field team restructuring that you talked about, how much does that actually net to as a run rate into fiscal 21 and If you were to consider fiscal 21 as the headcount for what it is, maybe some ads, full incentive compensation, is there a sense of maybe what fiscal 21 G&A can look like relative to fiscal 19, if it's fair to ask at this point?

Sure, I'll take the first part of that. Maybe, Tom, you can talk about the run rate question on S-G&A. I think, John, in terms of... I wouldn't call what happened in Q3 as a catch-up. You think about a development of a site, it's generally six to nine months out from the time that you really start. I mean, if you're negotiating on an LOI, that could take 30, 60 days. It may take you another 30 days, 45, 60 days to get your permitting and your drawings and everything approved. If it's a pretty good box, it takes about three months to ultimately get all the build out and everything done. And so to a certain extent, I'd say it's a little bit of a couple of things. Number one is there were sites that most likely would have opened in Q1. We talked about that back on the Q1 call that all construction stopped, you know, stopped. and so on. They're able to kind of either slow things down or push it out a little bit further because, you know, they didn't, I mean, you didn't want to open a store when you were shut down in your state. So they were able to do some, you know, pushing things out, deferring, you know, certainly no acceleration of development, etc. And all of those are the things that led us into saying that the overall store openings for the year could be, you know, 50% or more down than from the peak of 2019. So in reality in Q3 here, John, there's probably, if nothing would have happened with respect to COVID, number one, we'd have more sites for the whole year, and we probably would have had more sites, you know, a little bit of Q2 would have been in Q1. Some of these here might have been in Q2, and then there might have been some, you know, from Q4 that will open, you know, this year's Q4 could have actually happened in Q3. So It's such a fluid deal, John. In fact, some were able to just totally push things out for next year. They've gone to landlords and just say, I want to negotiate this deal we were going to do in November, December. We want to wait and do it in Q1. So there's a lot of that happening. And it really happened because things were shut down and closed. So it's like, I don't want to open a store up and then it closes right back down again. Which kind of leads into, you know, part of your question, I think, about attracting new members. I mean, we, you know, as you said, we open stores this quarter. We'll open stores, you know, every quarter this year. And I think it kind of ties a bit back into one of Chris's comments earlier is that, you know, there is a demand for memberships. You know, for mature clubs that were closed, once they opened, you know, we had people start to use them and we had people join in. I would say that the new clubs that, you know, opened late last year to, you know, early part of Q1 this year, they, in essence, missed, you know, call it three to six months. You know, the clubs that closed down in the middle of March and they're still not open today, you know, they've lost, in essence, call it six months, whereas some clubs that maybe opened in, you know, July or August, you know, maybe only lost, call it two, three months. so they're not going to be on par with total memberships and ultimately you know monthly revenue to where they're you know the same class from the year before would have been you know last year and in the first you know call it six to nine months of this year so they're definitely behind but what we're not seeing John is that when you open up a club you know it's It has activity, I guess, so to speak. It's in a market where we're bringing a high value, a very affordable option to a place where we didn't have a club. And in some places, particularly today, John, with the closures of 24 Hour and Goals and some of the other guys, we're bringing the gym to places where maybe there's not much competition. And so we can attract members in and around that particular store.

Hey, John, I'll pick up on the right-sizing question. So I think in the quarter, it was neutral between the savings and the severance, but as we look on an annual basis beyond that, we're in the $6 million to $7 million range of savings from that action. Now, really why we did it is we want to focus on our priorities, as Chris said, net membership growth, What we're doing with the app and with digital as being really the top two priorities, and clearly those are interrelated. And as we look to 2021, we're in the midst of planning that now. There may be some of that invested back in against those initiatives, but we thought that that was the right thing to do given where the business was and really get focused on our priorities and what's important for the next while.

Thank you. And our next question comes from the line of Peter Keith of Piper Sandler. The line is open.

Hi. Thanks. Good afternoon, everyone. Chris, you talked a bit about the new member sign-ups and cancellations. I was hoping you could give us some of the sequential trends in that usage rate. I'm just checking the notes from the prepared remarks, but I think at the end of Q2 you said the usage had plateaued at 60, and now you're saying it's at 67. Even as we march forward with October, November, did we get the time change, colder weather? Are you seeing usage continue to sequentially step up?

Yeah, especially the older clubs that opened in May. It's definitely, as I mentioned earlier, the longer the clubs are open, the more normal they act. So the May reopenings had an increase from 64% in August to 74% in August, and now in September we're up to 76%. So you're seeing the longer the stores are open, the more normal they're at. But the overall system average is 67%, but that's also skewed because we have a lot of stores that open in the last 30, 60 days.

Gotcha. So the clubs that have been open the longest are almost getting back to a normal usage rate?

Yeah, it'll be interesting to see what happens over the next couple weeks, too, with time change. Like I said earlier, it's pretty black here in the Northeast already, so there's definitely something to do with that, and I think some of the seasonality we saw changing in September, where people can get back to routine when the kids go back to school and stuff, which I think helped with our marketing, but it was interesting when we started marketing in September, it was literally overnight that we started seeing usage pick up, so I think a little bit of just I think our marketing was probably speaking to non-members as well as members, highlighting our cleanliness, that give it a shot once you come in, you'll be surprised at what you see. I work out of my local planet here in Seabrook, New Hampshire, and you feel totally fine in there. And I've noticed just when I go in the mornings, I go early mornings, but it's definitely, I can see even today compared to three weeks ago and two months ago, it's night and day as far as how the people are, the crowds that are in there working out. So it's been really good.

Okay, that's great. So I want to ask separately a kind of big picture question just on the emerging trends of home workouts. And I think it's a great idea that you guys are doing the digital app subscription to become more omnichannel. But one question we do get from investors is just the structural change with home workout activity. And does that impede overall gym member growth longer term into the future? How do you guys think about that for your customer base, and do you think there's characteristics of the Planet Fitness member that perhaps doesn't like working out at home or won't stick to that behavior?

Yeah, I think, you know, I always kind of answer the same way, but, I mean, home fitness is not anything new. You know, it's been around since, I would say, Richard Simmons and Jane Fonda. Then it was Billy Blanks with Ty Boat, a P90X with DVDs, and now you have Peloton, you know. And I think it's the, you know, Peloton's a very different customer. First, price point and cost, for example. And then you think about who has the space and who wants to put it in the living room and who has a basement to put it in. So you get space as an issue and you get cost. But, you know, I think when you look at, you know, commercial grade equipment, and the best quick money can buy 24 hours a day, seven days a week. And you got 10 bucks a month. You have an experience that is just unmatched. And, you know, I have a great gym in my basement, naturally being in the industry, but I still go to my local planet because, you know, five o'clock in the morning in my basement, it's not that much fun, you know? So I think it's, I think the energy you feel in a club is just unreplaceable by any home fitness. I think it's a good supplement. But one thing I would say though, through COVID is, and I look at digital, not necessarily as home fitness. I think digital is It's in club, it's at home, and it's outside. And I think people have learned how to use digital to get better workouts and probably be more creative with their workouts and educate themselves how to work out better. and with the app you know we went down this road last summer because we saw two summers ago now because we saw people in our clubs using content in our in our clubs and we didn't provide it to them they were finding it a third party which is why we started to go down this road you know two summers ago and luckily we did you know what it took the COVID though for us to realize that you know 20% of the consumption were non-members so I was like well this is much larger than we realize that people are come into Planet as a trusted source and looking for us for assistance, you know, which kind of led us down this road. Because originally we were looking at it as a bundle with the black card, for example, which is something we're still, you know, probably going to test someday. But, you know, as the subscription model is working now and looking at this rollout is How does this work? And how do we introduce more people to the brand that we can then, you know, invite them into the club to give it a shot? And I think it gives a great brand exposure. It's either, you know, it's either they're super intimidated, Peter. I mean, you know, we're the judgment-free zone. We cater to casual first-timers. But maybe there's a level of people out there that are just really intimidated to walk into a gym. And I get it. And maybe this is a way to, this is their gateway to bricks and mortar. Also, maybe they just don't have a plan in their backyard just yet. And when we get there, they'll know the brand. So I think it's just a It's a great opportunity for us to be front and center to people that are, you know, finding our app as it is, that are non-members and our current members to get better workouts. And I think at the end of the day is, you know, $10 a month is an unbelievable value, but it's a hell of a value if you really know how to use all the equipment in the gym. And, you know, 7,000 members of the store, how do you really get them, how do you get trainers to introduce everybody to every single piece 24 hours a day, seven days a week?

Thank you. And our next question comes from the line of Simeon Segal of BMO. Your line is up.

It's early, and this might just be unanswerable now, but given the obvious dislocation, have you guys done any analysis? Are you willing to share any around updated views of what the market share opportunity does look like? And obviously, we can see the pressures from the larger chains, but could you also maybe just speak to the opportunity from independents? Thanks.

Yeah, I mean, it's Tom. I'll start that and maybe the other guys will add. So, yeah, I think IHRSA just came out recently, the trade organization and said, or trade association said, you know, there could be upwards of 20 to 25 percent of the gyms don't reopen. So if you take us out of it, you know, that means there could be somewhere in the neighborhood of 50 million, that there's 50 million gym goers who are not a member of Planet Fitness. And if 20-ish, 25% of those have gyms that close, that's 10 million people looking for a place to go. And as you know, our share is about 25% today. And even if we got our fair share, that's still a considerable number of people to come into our membership role. And what we're hearing, we've talked about, you're up to date on all the big names and As we've said and maybe talked to you about before, and it continues as we talk to our franchisees, more and more of the local operators who are in their markets that most of us have probably never heard of just don't have the ability to reopen. And also, we're hearing some of the brands that we do know are walking away from sites they were looking at because they just can't do it. So we think that the – and so who knows how that's all really going to play out. But at least, and that's the 20%, those numbers I was quoting, the 10 million people who might be displaced from their gym, you know, to Chris's point, that's not even who we target, as you know. That's just the folks who are already, you know, working out who are typically 40-ish percent of our member base. So we think it's a tremendous opportunity both to get the 80% of folks off the couch and also pick up some of the 20% who are going to be displaced when their gyms close.

Great. Thanks a lot, guys. Best of luck for the rest of the year.

Thank you. Talk to you soon.

And our next question comes from the line of Joseph Otabello of Raymond James. Your line is open.

Thanks. Hey, guys. Good afternoon. How you doing? Good, good. So first quick question. Any update on the timing of the remaining 100 or so store reopenings, given that most of those are in California? Has the state advised you or your franchisees at all, number one? And number two, You mentioned the progress that you guys are seeing in terms of usage rates, but I think the numbers that you gave earlier, the 67% system-wide and even the 74% for early openings, they don't sound all that different from, let's say, three months ago. Are my numbers wrong, or have you seen pretty steady progress there?

Thanks. Yeah, Joe, this is Chris. The 67% on average, you know, a lot of that is skewed because of the recent openings, three or four hundred or so clubs that just opened, so that's bringing that down. But if you look at the May openings, for example, that are up to 76% today, you know, the system average back then was high 60s, low high 50s or so, and they were, most of those clubs back then were probably high 60s, low 70s. We still have some clubs in that early May openings, there are still even higher than that, right? That's just the average. So some, like I mentioned back then, that are in the 90 or 85, 90%. So it is coming up. It's not, you know, which was a hell of a lot higher, but I'm just more happy that it's going the right direction, not the wrong, especially with the recent trends you see on TV and the resurgence, because that was definitely not the case in July and August. So That's a good part there. As far as 100 left open, like the Panama, they told us November 2nd. They pushed it off, so that's not happening right now. Maybe mid-November in Panama. But as far as the remaining stores, mostly in California at this point. It's really regional in California, and they have a coding system there that they have to, based on hospital check-ins and cases that are reported, that They turn a code, and then the clubs are allowed to open. So there's really no timing. It's just a sit and wait, and each week they look at the numbers that report, and they give us a code that we can open or not. So there's really no timing there in that state. Okay. Great. Thanks, guys.

And thank you. The final question of today's question-and-answer session will come from Alex Moraka of Brandberg. The line is open.

Hi, good evening, guys. Thanks for taking my questions. Among the active member base at franchise gyms, are there members that are frozen and not paying currently but still included in the active base?

Yes, they're still in the active base, but it's really pretty small.

Okay, understood. And then how are re-equipped trends comparing to historical rates given the 15% discount for franchisees?

Darby, you want to take that one?

Yeah, so one of the things that we did, Alex, was, as you recall, we announced that we were pushing out both new development as well as replacement of equipment out 12 months from the date that it was needed to be replaced. So there's certainly been a preservation of capital or cash and liquidity during the time period since we made that announcement. we'll still have some you know as Tom went through some of the results earlier for Q3 and as well as Q4 but and it's not keep in mind it won't be a catch-up then when you get out to the end of that 12 months so in essence all equipment that was out in the field regardless of the year of vintage got an incremental 12 months before it had to be replaced so if you recall our our requirements were cardio and five and strength and seven so that gets moved out a full year but all brand new equipment whether it's a new store or whether it's replacement equipment in a you know in an existing store still has the five and the seven year requirements on it but a lot of franchisees are going to take advantage of it because you know number one is we still have the issues with stores you know some franchisees are not all stores open and then there's just the obviously the concern of you know will stores get re-closed again etc. So most are actually going to take advantage of that but we'll still have some but just not you know where it would have been historically based on the requirements.

Okay that's helpful thanks.

Absolutely.

At this time I'll turn the call back over to the management for any closing remarks you might have.

Thank you everybody for dialing in today. This has been one heck of a year as we all know. I couldn't be more excited with how our marketing is really getting people off the couch and getting them to join the clubs. It's interesting to see with what you see in the news that with our joining trends and with the marketing working that 40% of our members that are joining are still first-time gym members and they're not being persuaded to not choose bricks and mortar as their, you know, place to start their wellness journey. So that's super, super encouraging as well as honestly I couldn't get off the call without, you know, giving kudos to our management team here in the office and all our franchisees in the field that quite honestly have been a And this concludes today's conference call. You may now disconnect.