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spk09: Thank you for standing by and welcome to the Planet Fitness Incorporated Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Stacey Caravella. Thank you. Please go ahead now.
spk08: Thank you, Operator, and good morning, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer Chris Rondeau and Chief Financial Officer Tom Fitzgerald. We also have Dorvan Lively, President of Planet Fitness, here who will be available for questions during the Q&A session following the prepared remarks. Today's call is being webcast live and recorded for replay. Before I turn the call over to Chris, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our website, investor.planetfitness.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now, I'll turn the call over to Chris.
spk03: Thank you, Stacey. And thank you everyone for joining us today for Planet Fitness' Q3 earnings call. We are emerging from the COVID-19 pandemic stronger than ever, having achieved the highest sequential net member growth of any third quarter in company history. With membership levels reaching 97% of our all-time peak, we returned to positive system-wide same-store sales growth in Q3 of 7.2% and 100% of our stores are open globally. The past several decades, we have democratized fitness with our differentiated model, breaking down the barriers of intimidation and affordability for the approximately 80% of the population that does not have a gym membership. As we look ahead to our 30th anniversary next year, there are four factors driving both near and long-term growth opportunities, including our expanded leadership position as we emerge from the pandemic, our franchisees' enthusiasm to continue to invest in the brand through new stores and equipment replacements ahead of their obligations, the consolidation from 16 national and local market agencies to one servicing our entire system to leverage our size and scale, and a number of factors driving a renewed appreciation for improving overall health and wellness. Let me address each one. First, we didn't have a single permanent closure as a result of the pandemic, a sign of the power of our brand and our model. This is a remarkable achievement when you consider that HRSA, the fitness club industry group, estimates that 22% of all fitness and health club locations in the U.S. have permanently closed due to the pandemic. Our size and scale advantage combined with the strength of our franchisees put us in a strong financial leadership position entering the pandemic. And we are recovering quickly. We achieved the highest franchise segment revenue in company history in the third quarter. We're now capitalizing on industry consolidation as more people are realizing the broad range of benefits from exercise and looking for an affordable, non-intimidating workout environment. The second reason is franchisee sentiment. We've always had a strong relationship with our franchisees. I was recently invited to join our franchisees at their annual meeting, marking the first time that we've all been together since the pandemic began. It's a testament to the strength of our relationship that I was invited to join them and speak about our strategy and exciting opportunities that lie ahead. I believe that working together as closely as we did during the challenging days last year only strengthened our already powerful partnership, one that I believe is rare in the franchising world. Our franchisees' enthusiasm to continue to grow the brand, make fitness more affordable, and ultimately change people's lives is incredible. They are seeing strong trends in their businesses, which is driving them to look for new sites, build new locations, and actively replenish their development pipelines with prime locations, capitalizing on the favorable real estate environment. Tom will address this in more detail, but as a result, we are raising our 2021 new store guidance to 110 to 120 new locations. Third, we are flexing our marketing muscle in transitioning from 16 marketing agencies to one, Publicis Group. This transition, which is nearly complete, will unlock our full potential as a top tier US marketer by gaining significant efficiencies through the consolidation, enabling us to truly realize this competitive advantage. It will also ensure a consistent advertising strategy on the national and local levels. We already utilize the buying power of our system in other areas of our business, such as equipment and other common items across our clubs, providing a better value to our franchisees. Now we are doing it without marketing. Collectively, we will be able to purchase on a scale unrivaled in the U.S. fitness industry. resulting in lower cost media, which means even more of the 9% advertising contribution will go to acquisition efforts to fuel incremental member growth. And we are doing it at an important time of year. Pre-pandemic, Q1 historically accounted for approximately 60% of net new joins for the full year. With January making up a large part of that growth, the agency will be fully on board for the creative and media placement in advance of our annual New Year's sale. Finally, The pandemic has taken a major mental and physical toll, creating a focus on improving overall health and wellness. The American Psychological Association found that more than half of U.S. adults have been less physically active than they wanted to be since the pandemic started, with the majority experiencing undesired weight changes, averaging between 30 and 40 pounds gained. And now there are a few bricks and mortar options for people who are looking to start their fitness journey. In the eight years preceding the pandemic, we added approximately 11 million members getting people off the couch to join Planet Fitness and growing industry membership by 87%. We also added approximately 1,500 new locations, representing 13% growth. In that same period, the rest of the industry added only 1.7 million members, part nearly 10,000 locations. In Q3, 40% of our joins were first-time gym members, a trend we've seen continue through 2021, which is up slightly from 2019. And there's still tremendous untapped opportunity with 140 million non-gym members who live within 10 miles of a current plan of fitness. We also believe that the continued evolution of our digital offerings will serve as an important gateway to make the initial step to get off the couch easier and less intimidating. And it's not just about getting in better physical shape. It's also about mental health. The Center for Disease Control reports that even one vigorous to moderate workout can reduce one's risk of depression and anxiety while also improving sleep. Prior to Mental Health Day in October, we commissioned a national study which showed that close to three in five Americans say they haven't made their mental wellness a priority in the past year, while feelings of isolation and loneliness have increased. As the world realizes the multiple benefits of exercise, the tailwinds behind physical and mental well-being continued to drive historically unseasonable membership growth in Q3. In 2019, in line with our historical trends, member growth in mature stores declined sequentially from the second quarter to the third quarter. This year, it grew from Q2 to Q3, albeit slightly, and we ended the quarter with more than 15 million members. We believe this reflects that Americans are waking up to the fact that they need to prioritize their health. Members who are visiting our stores are visiting more frequently than in the past. We believe this demonstrates their commitment to overall wellness. Another potential long-term positive is that in 2021, Gen Zs are outpacing other age groups in terms of joins, which is notable as only half of the generation is even old enough to join. In general, we began to see the return to pre-pandemic seasonality of join patterns towards the end of Q3. This is encouraging as we can focus on what we do best, providing our members a community-based, judgment-free environment in which to get active and feel better about their overall health. Tom will address our positive updates to our 2021 outlook in his comments, and we will anticipate providing our performance targets for 2022 when we report our fourth quarter earnings next year. I hope that you can feel the enthusiasm as I truly believe that we are on the verge of a fitness boom. I am more excited than ever to leverage the collective passion and strength of our system to help millions of people in the U.S. and beyond get healthier, live better, and improve their overall physical and mental well-being, as we've been doing so for the last 30 years. And I believe there is no brand in the industry better positioned to do it than Planet Fitness. And I'll turn the call over to Tom.
spk02: Thanks, Chris, and good morning, everyone. Over the past 18 months, we've demonstrated the resiliency and durability of our asset life financial model and our store-level unit economics persevering through a devastating period for the health club industry. As Chris referenced, we withstood temporary store closures, some for up to nine months, and not a single Planet Fitness location permanently closed because of the pandemic. We're proud of how our franchisees, headquarters staff, and club staff rallied together to provide a clean and safe fitness experience for our members. We've been confident in our ability to come out of the pandemic even stronger, but the pace of the rebound is even faster than we expected. As a result, we are revising our full year 2021 outlook. First, I will cover our Q3 financial results, and then I will address our updated guidance for the year. All of my comments will be comparing Q3 2021 to Q3 of last year, unless otherwise noted. We returned to positive same-store sales in the third quarter, with system-wide same-store sales increasing 7.2%. Franchisee same-store sales grew 7.4%, and our corporate same-store sales increased 3.1%. Approximately 60% of our Q3 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was driven by a 180 basis point increase in our black card penetration to 62.5%. Q3 total revenue increased 49 million or 46.4% to 154.3 million from 105.4 million. The increase was driven by revenue growth across all three segments. The increase in franchise segment revenue was due in part to temporary store closures last year with growth driven by royalties, web joint fees, and equipment placement fees. The increase in revenue in the corporate-owned store segment was primarily due to COVID-related temporary store closures last year, as well as the impact of seven new corporate-owned stores since July 2020. Equipment segment revenue increases were driven by higher equipment sales to existing franchise e-owned stores. For the quarter, replacement equipment accounted for 54% of total equipment revenue. Our cost of revenue, which primarily relates to the direct cost of equipment sales to franchisee-owned stores, amounted to 27.1 million compared to 15.3 million. Store operation expenses, which relate to our corporate-owned store segment, were 27.8 million compared to 21.4 million. The increase was primarily attributable to lower operating and payroll expenses with the COVID-related temporary closures last year, along with higher expenses with the new stores we opened since last July. SG&A for the quarter was $23.0 million compared to $18.3 million. The increase was primarily driven by higher incentive and stock-based compensation. National advertising fund expense was $15.6 million compared to $20.2 million. And adjusted EBITDA was $62.2 million compared to $32 million. By segment, franchise adjusted EBITDA was $52.1 million, corporate store adjusted EBITDA was $14.7 million, and equipment adjusted EBITDA was $7.9 million. Adjusted net income was $22 million, and adjusted net income per diluted share was $0.25. Now turning to the balance sheet. As of September 30th, 2021, we had total cash, cash equivalents and restricted cash of 585.5 million compared to 515.8 million on December 31st, 2020. This was comprised of cash and cash equivalents of 527.3 million compared to 439.5 million with 58.1 million and 76.3 million of restricted cash respectively, in each period. Total long-term debt, excluding deferred financing costs, was $1.78 billion as of September 30, 2021, consisting of our three tranches of securitized debt and $75 million of variable funding notes. Now, as we've said before, 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, calculated on a trailing 12-month basis, and reported on roughly two-month lag. In our most recent debt covenant reporting period on September 5th, 2021, we had a 53% and a 143% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant, respectively. We believe we have sufficient headroom for our two maintenance covenants, especially with Q2 2020, the quarter in which we had our worst financial performance last year, now out of the trailing 12-month calculation. Now to our guidance for the balance of 2021. Similar to last quarter, our current view of 2021 assumes there is no major resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mandates that result in a significant change in membership trends. As Chris noted, we now expect new store development to be between 110 and 120, up from the high end of 75 to 100. We believe this reflects the continued strengthening of our franchisees' balance sheets. It also reflects their recognition that Planet Fitness is a premier retail investment, even with what we believe is a temporary slight setback in mature store-level EBITDA margins caused by the closures last year. We also continue to expect that replacement equipment will account for approximately 50% of our total equipment revenue this year. We now believe that our full-year revenue will be between $570 and $580 million, up from the previous range of $530 to $540 million, driven largely by higher equipment placement sales associated with our new store opening outlook. We now expect that full-year SG&A will be in the low to mid $90 million range, primarily reflecting increased incentive compensations. Based on the higher revenue, we are raising our adjusted EBITDA guidance range by 10 million to 210 to 220 million for the year with adjusted earnings per share now projected to be between 75 cents and 80 cents versus our prior range of 65 cents to 70 cents. Our investment thesis has only strengthened as we emerged from the pandemic with significant industry consolidation. our franchisees' desire to continue to invest and grow the brand, and the increased focus on the importance of health and wellness. We are well positioned for the long term to further expand our leading market share given the strength of our value proposition and simple operating model that produces strong economics. And with that, I will turn it over to the operator for Q&A.
spk09: At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Again, it's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Randy Connick from Jefferies. Your line is open. Please ask your question.
spk05: Hey, guys. Good morning. Can you hear me?
spk09: Sure can, yes.
spk05: All right, great. Hey, how are you? So I guess the first question is on store guidance. It was revised. It looks like slightly upward for the balance of or for 2021, implying, you know, things are getting back towards normal. How should we just I know you're not getting guidance on 2022, but just want to get some perspective, maybe qualitatively of how we should be thinking about, you know, expansion return towards normalization as we go into 2022 and beyond. Thanks, guys.
spk02: Hey, Randy, it's Gorbin. Good morning.
spk03: As we indicated in early in Chris's comments, we're increasing that up from we had said the high end of our previous range. And I think that what that means is, you know, it's reflecting the franchisee enthusiasm of the business where it is today, you know, how it's built back over the year. When you compare us where we were, you know, kind of this time last year and And the pipeline itself, as I've said in the past, was really stopped. But given what we've seen, what our franchisees have seen throughout, certainly since, say, March, April, May time period, it's caused them to start looking at sites and start putting sites into the pipeline. And some of those have been open this year, hence the increase in our guidance. I think on a you know, kind of a little bit more of a macro basis, we continue to see a lot of availability in real estate out there. You know, we obviously didn't have a single closure during COVID. And a lot of the other, you know, the other fitness companies had some issues with respect to closures, et cetera. And as you guys know, you know, URSA has reported, I think it's like 22% of the gyms have closed. A lot of those are smaller mom and pops, et cetera. But when we sit back and we and the franchisees look at where we're at today, the opportunities that's in front of us to continue to take share, continue to penetrate markets where we may have a lot of stores, but there's still a lot of penetration left. And you've heard us talk about whether it's in California or Texas or some of the other markets where there's a lot of population, but we don't have as high a penetration rate there as maybe we do in the Northeast. And so all of those are kind of the factors, I think, that go into, one, what's happening, and we believe will happen between now and the end of the year, hence the guidance. And to your point, we're not ready to talk about 2022 yet, but we've continued to say that you know, we believe we're going to get back into that 200 plus range, and it was just a matter of when we could get there versus, you know, if. And this now reflects the fact that franchisees are in the market and starting to generate, you know, new sites for the pipeline.
spk05: Super helpful. And then one more last question. You know, can you give some perspective on you announced a recent partnership, I think, with Shell Corporation Gas and so on and so forth? It kind of reminds me of what Costco tried to do with their membership and give their members a lot of other enhancements or value for their membership. So can you give us an update on what you've been doing there around partnerships? Because it seems as if. The number of partnerships has been increasing, and that should potentially lead to some lower churn over time. So just curious on what work you've been doing there and any comments on impact on churn, improving churn, if that at all, as well. Thanks, guys.
spk03: Sure, Randy. Sure. This is Chris. Yeah, you know, we launched the app almost two years ago now, leading into COVID. The idea with the PERC side of things, we really had no central depository that members knew and could get routinely guided to go open up this place that they're off at, right, and to know where to go and to see what the discounts are this week or this month or new partners. So now with the app being built, that allows us not only to have that feature but also capture data from that feature and who's clicking through and how to go to partners and supply them data on the number of eyeballs that they're seeing and getting every day. When you think about weekly we have roughly 8 million or so check-ins into the gym, and we're roughly having today about 6 million of those using the app to check in. So 6 million people open the app every single week to check in, and there's other features there now. They have the badges to check out perks and stuff. So that's a lot of doors that Petco now is in Shell, for example, and Shell is definitely probably the best one we've launched so far as far as take rate. So it provides a lot of data to now go to more partners. So it's more to come on it, but there's no doubt that that offering more value to help people live a better life and offer them to save money on other parts of their world. And it's a great benefit of being part of the Planet Fitness family, you know. And as you know, and as we've talked about forever, you know, 50% of our members won't use the store in a 30-day period. So, you know, their schedules get busy or the Christmas season comes up and they just can't make it in or kids got soccer practice for the spring. And, hey, if you can provide them some value regardless if they use the facility or the content workouts, you know, It can only drive customer satisfaction and ultimately drive retention. Very helpful. Thanks, guys.
spk09: Thank you. Your next question comes from the line of Oliver Chen from Cowen. Your line is open. Please ask your question.
spk16: Hi. The customer trends are very encouraging. What are you seeing in terms of usage and usage across regions as well as churn? Would also love your thoughts on the rationale behind the timing of the agency consolidation, and what synergies you're most encouraged by. That sounds really interesting as well. Thank you.
spk03: Yeah, the usage side of things, we're at about 90% of 2019 workouts, so not quite 100%, but very close at this point, which is great to see. I'm not seeing any huge material changes from regionality right now, so that's not really affecting anything. We have roughly 400 or so clubs that are under some sort of mask or vaccination mandate, peppered throughout the system, but nothing we're not seeing that's really material in that sense. And we're seeing about 30 to 40% of our members using the club in a 30-day period, so not quite that 50-50 that I used to see. But I think that's just made up of the 90% usage rate right now, so I think we'll keeps going in the right direction, which is great, and the boomers, which are the mungs that have lacked the most naturally, they continue to go in the right direction. So I think it's just a matter of time before they kind of get back to normal as well. The agency thing is something that's, you know, I've always wanted to do this for many years, and if you think about all of everything else we do in this business, whether it's the decor and wallpaper we sell, the equipment we purchase, the flooring we use, we buy in bulk and joint, and brand consistency is important, but the value the franchisees get from that is also important. Here we are today, the marketing should have probably done earlier, but here we are doing it today, which... really just streamlines and strengthens our dollar. You know, the efficiencies that we get from that, not unlike the equipment business, for example, is that, you know, before, you know, we get 16 agencies and everybody's paying their own independent agency fees and creative fees and everything else. Now we pay one agency and a lot less. And a much bigger company that's buying media cheaper. You know, it's the same dollars, but working dollars, acquisition dollars are used more as opposed to just, you know, administration fees. So it's almost like a 40, it's almost like a whole other math in a lot of ways with about a 20% savings. So it really should help member acquisition going forward. We're onboarding now. We should be fully onboarded to this one agency. We're already working on our January promotions and first quarter promotions with them. So we're ready to ramp up to our first quarter in the January sale. So So it's exciting. And the other side of it, too, is you think of the insight we have is we have one agency fee that's responsible, so we have all the data that we need from best practices throughout the country on a local level. Because before, it was very hard for us to capture what each independent franchisee was doing in every DMA across the country and then capture data to figure out best practices. So there's a lot of good comes out of this, and I'm looking forward for the future of working this way.
spk16: Thanks. And last question, on the digital experience that the member has in store, what's next? What's on the roadmap that we should focus on, as well as the key opportunities for incurring and continuing enhancement of your mobile app? Thanks, Chris.
spk03: Yeah, sure. Besides the content exercise stuff, which we're continuing to fine-tune and tweak and moving the paywall around to figure out how much free content we offer, how much paid content, is behind the firewall, so we're still working on that part of it. As I said in the past, you know, that also the platform is there now. We haven't yet, but get into more maybe diet and food, nutritional type guidance, meditation type guidance as well. But I think also the app, when you think about friction points, you know, CrowdMeet is a prime example that we launched during COVID, which is something we thought about even pre-COVID, just so we could help customer experience and people wanted to avoid crowds or or of our usage, they could, you know, move the schedule around without having to come to the club and get frustrated. So it's a huge feature that people love. But other friction points, being able to pay their balances before they get to the club if they happen to bounce your check EFT that month, you know, it's being able to bring a friend and invite them through the guest as opposed to walking through and have to sign paper when they come in. And it's just ways to really reduce the friction points, which also helps with not only member office staff, staff satisfaction as well. You know, they're having to deal with it as well. It's all they can kind of help themselves by having that uncomfortable feeling at the front desk when somebody has to be confronted by a balance. So a lot of friction points we get to alleviate through the app.
spk16: That's reverse.
spk14: Thank you.
spk09: Your next question comes from the line of John Ivanko from JP Morgan. Your line is open. Please ask your question.
spk06: Sorry if I missed this. It's a multitasking morning. The total number of members at the end of October, did you say that number? I mean, I know in the press release she said over 15 million. 15 million was, of course, what you reported in July. Just kind of wanted to get your sense just in terms of that underlying demand. I know seasonally third quarter is normally a fairly low demand. you know, ad month, but, you know, any update on the total, the specific update on the total member side that you could repeat if you said it.
spk03: Yeah, yeah, John, no, we did not. Pre-COVID we didn't either, but we kind of tried to do that during COVID when we had a, you know, real-time update. But as we're now returning back to normal and coming out of this, we just announced right through the end of Q3. Okay.
spk06: All right. Yeah, I understand. I think we're all fine getting back to 2019, so that's okay. And then, you know, obviously, I mean, you guys have been kind of pulling up your fiscal 21 unit development basically since you gave it well above – you know, now for the year relative to that initial guidance, or at least the lower end of that initial guidance. How much of that do you think is pulled forward of things that maybe you thought previously could have opened in 22, you know, versus, you know, kind of the start of an accelerating, you know, trend, just as you look at that overall pipeline? And A little bit of an aside, but do put that in the context of all the supply chain challenges that we hear. Are there any significant or major pieces of equipment or anything else, I guess any part of the FF&E package that's missing that could potentially affect that rate of unit openings?
spk02: Hey, John, it's Tom. I'll start and maybe Dorman will add. I think if we step back a second, I think as you look at what we've said over the quarters, I think the headline is, things have bounced back faster than we expected. You know, the old V versus U shape. And I think our franchisees have seen that. Their lenders have seen that. And it's allowed them to get their balance sheets and their covenant calcs back in line faster than they expected. In talking to them, their lenders have released some of the development capital that they might have had a bit of a grip on as they were providing waivers. So I think it's just that's really what's happening. And I think as we've gone through each quarter, we've gotten more and more confident about what we're saying and the numbers are going up. And I think to your point about inflationary pressures, at the moment they're immaterial. They're not changing decisions from franchisees wanting to build a store to not wanting to build a store, categorically not happening. And so when you look at the new store development and the re-equipped investments that they're making, both of which are ahead of their obligations based on the ship's development, sorry, based on the extensions we gave them, that starts to feel a little bit more like where we were pre-COVID when they were ahead of their obligations. So I think that's the headline for me. And the supply chain issues as it relates to equipment, You know, we have a bigger say in that, given our concentration with our primary vendors there, and they frankly, you know, moved mountains to make sure that we can open when we say we want to open and re-equip when franchisees want to re-equip. It's not like it's – there aren't any bumps in there. There are bumps, but we're managing through it, and any – potential drags have been reflected in our outlook, assuming something crazy doesn't happen. So I think the macro view is faster than we thought, and that has caused everything to move at an accelerated pace from what we thought earlier in the year.
spk03: I think the only thing, John, that's really great for everybody on the call, too, when it comes to supply chain that you see all over the news is that with the 2,200 stores that are open, we're not like a retailer QSR that that they're dependent daily on weekly deliveries and inventory coming through in order to stay open and do business. We don't require any of that. The equipment was installed three years ago. It's business as usual. So we're not under any kind of constraints when it comes to that stuff.
spk06: Okay. Yeah, fair enough. And, you know, I guess as I, you know, just kind of think a little bit, you know, longer term, in terms of, you know, your organization, you know, in New Hampshire, I mean, as you kind of think about, you know, just the, you know, the various, you know, the benefits from, you know, adding even more functionality, you know, to your business versus benefiting from the scale that you've already built? I mean, where are you, you know, I guess, where's your current mindset as you think about, you know, the size of your organization today relative to what your store count is going to be three years out, for example?
spk03: I'll add some of those, Tom. I think one thing that's where The beauty of our organization is the fact that, you know, we have actually shrunk our number of franchisees in the system, right? There's been a lot of consolidation. So we have, you know, the best of the best. We have the dream team of franchisees now of about 125 that run the entire system. And we don't continue to bring in new franchisees to build out our stores every year. It's built out with the existing franchisees. So it was this. You know, it's not the point where back in the old days I was, you know, I personally was teaching them how to clean a treadmill, you know. Now they run the playbook. They have their own COOs. They have their own chief development officers. So they're very sophisticated groups of franchisees in our system now. So it's not like we're holding hands as closely as we had too many years ago. So there should be definitely some benefits to that in the future.
spk02: The only other thing I'd add, John, and we've talked about this, is that,
spk03: You know, with the concentration that we've had here over the past several quarters in the digital area, and it's just part of our everyday life now. So we've not only enhanced that area, but we'll continue to enhance that area.
spk02: It's just a given that we have to be, you know, where the consumer, where our members are, what they're looking for. You know, Chris talked about the partnerships earlier.
spk03: There's a whole host of things that, quite frankly, have been accelerated because of COVID to be able to reach out and touch our customers and prospective members as well. So that's an area that we've invested in and will continue to invest in. But I think on a more broader kind of macro basis of our kind of franchisor headquarters here, there's no area that we look at and we say, needs a significant amount of attention. The only one would be international, which we've talked about in the past. As we continue to grow that footprint even more, that's an area that we'll also have some investment in. But outside of those, you know, particularly because of the scale that we have and with Chris's comment on the concentration of really you know, smart franchisee groups built out with their teams and the private equity guys that come in and supplement those, it makes our job easier in a lot of ways because these teams are, you know, running some really good businesses with Scala.
spk09: Thank you. Your next question comes from the line of Jonathan Komp from Baird. Your line is open. Please ask your question.
spk11: Yeah, hi, thank you. Good morning. I want to follow up and ask about the member trends, especially since we're past the Delta spike here. Chris, I know you mentioned the new joins towards the end of September reverting back more to a normal trend. So I want to maybe ask what you're seeing there. And then as we think to the fourth quarter. Typically, your members per club decline seasonally in the fourth quarter. So I'm wondering your thoughts on the ability, again, like the third quarter to sort of outperform that typical seasonal pattern.
spk03: Yeah, I mean, I did see towards the end of third quarter, Timberman. and a little bit near the end of August, they decided to come back to normal, which I think is not a bad thing. I think it's a good thing in the sense that it's not, you know, we pulled a bunch of people forward during the second quarter, and it's a cliff that we hit, so it's back to normal, which I think is good, and the usage is staying at that 90% range. So I think the boomers continue to go in the right direction. Meanwhile, the Gen Zs are joining at an accelerated rate, which we haven't seen before, so that's really good news as well. But I believe the fourth quarter will hold true to probably historical trends. I don't see anything wavering right now that's going to make it entirely change either way.
spk11: Okay, great. Makes sense. And then maybe one follow-up, Tom, on the G&A outlook. It looks like the fourth quarter is implied sort of in the mid-$25 million range. Could you maybe just share how much of that is the incentive piece that you called out? And then... As we think forward, should we think more to a baseline in the low $20 million range, which you had the first few quarters, and I know in 2019 you were under $20 million a quarter, or is that mid-$20 million range more the baseline going forward? Just trying to understand how to think about the fourth quarter moving parts and then the baseline.
spk02: Yeah, John, so obviously we're not providing an outlook on 2022 yet. That'll be the next call, but I think, as I said in my remarks earlier, the lion's share of the increase in G&A is really based on incentive comp. That notion of it's more V-shaped than U-shaped and how our business has bounced, you might expect, wasn't fully captured in how we set our targets, so therefore our incentive comp is higher than we thought. There's also some inflationary pressures, as you might imagine, with things like, you know, insurance and different things. But I think if you look at our GNA from 19 and sort of forward to now, and, you know, we always believed we would come out of this stronger, and thankfully it's happening sooner, and maybe our moat might be even wider than we thought at the time, you know, as awful as all of this has been for the country and our team members. But if you grew that G&A at a reasonable rate that we had grown historically and assumed that our revenue would grow sort of as it did historically, you'd see that we would be driving significant G&A leverage. So I think it's really about us looking long-term, making sure we've got the right folks to really take advantage of what we're trying to do, while, to Dorban's point, building out, and Chris's point, building out, digital capability because we want to, as they say, skate to where the puck is going, not where it is. And that's not just the digital team, right? There's a significant IT investment behind that. So we think our scale affords us the ability to do that in a way that will differentiate what we offer and, importantly, get more people off the couch. That's really what we're doing it all for as that sort of gateway to our bricks and mortar. So All of it, I think, is a bit of a long-term view. We did take some short-term pain when everything was shut down, but that was temporary, not really permanent. And we've added back, as I think we've said over the arc of our conversation since the pandemic, that we would invest where we thought we needed to strategically to widen our moat, and that's reflected in what you're seeing.
spk11: Okay, that's a helpful color. Thank you.
spk09: Thank you. Your next question comes from the line of John Heinbacher from Guggenheim. Your line is open. Please ask your question.
spk12: Hey, guys. I want to start with the pricing pilot, right, so Black Card pricing pilot. Where do we stand on that? Because I know you're testing multiple levels. And then long-term, when you think about pricing power of the brand, right, relative to what you're offering, competitors are going to go up, right? So could you see the Black Card ultimately closer to $30 million And is the white card still sacred?
spk03: Yeah, I think the white card is still sacred. I think that is, as I've always said, kind of our get you off the couch price. You know, back to my earlier comments, the fact that there's 140 million people within 10 miles of our current planet that aren't members, you know, we still have to get them off the couch before we need to touch that. So I think that's something that we're sacred to. And I think the fact that we're 62.5% black card means Even though we only almost always advertise a $10 membership, it's amazing when a customer comes in and pays more than double what they thought they were going to pay based on the benefits of it, you know? You know, I think getting it to 30, you know, I'd never really move it without adding more value, so without more perks, you know, whether it's more, you know, Shell gas type perks that are only Black Card incentives or more content perks, you know, more exercises or diet. You know, the one thing we do have, which we've always talked about, is the reciprocity. That is still the number one used function of the Black Card. You know, when we have 3,000 stores, that's a better value than it is today. So that's something, you know, whether or not it goes to 30, it's hard to get there. But I think the black card is probably really the pricing power that we'll utilize to change the average ticket. That doesn't mean we could come up with a third tier if we find some great benefit that we decide is a third tier option. But I think the white card, black card, it's an easy join scenario, right? It's A or B, essentially. It's not very confusing for a customer to come and make a decision. And a lot of our industry is not like that. It's like a menu of 20 you can pick from. So we make it very simple, you know, in that sense. But I think that's kind of how we look at it now. The pricing test right now is still in those 100-plus clubs or so. That's $24.99. That includes the PF+. So fine-tuning the kind of the, I guess, how we present the offering, how we present the rate sheets and so on, how we sell it online. But we'll continue to test at the end of the year and into first quarter and hopefully have some better data here for first quarter to make a decision.
spk12: And secondly, given what you've done with the ad agencies, right, so does this now accelerate the process of, right, restructuring the marketing spend, you know, more national, less local, and is that, you know, is the seven to nine still right if you're getting a 20% reduction in cost on the national side?
spk03: Yeah, I think almost both, right, John? I think as we learn more from the data and understand more of how the LAP is spent locally and the NAP is spent nationally and how they work together and they both, I guess, roll in the right direction, there could be efficiencies there which could change the 9%. And then on top of that is the efficiencies of just having one agency that's buying it in bulk and and not only administration fees that you're paying the 16. So both of those could be working towards what you're asking. You know, whether or not it's a 2 and 7 or it's a 2 and 6 or it's a 3 and 5, I mean, we'll have to see when you get there. But I think this is the beginning of all that long term.
spk12: Okay. Thank you, guys. Thank you, John.
spk09: Your next question comes from the line of James Hardiman. Your line is open. Please ask your question.
spk15: Good morning. So you touched on this. I just wanted to clarify the visitation trends. I think you said in aggregate you're at 90% of 2019 sort of visitation levels or workout levels. In the repair remarks, I think you mentioned that members who are visiting a store are visiting more frequently. I just want to make sure I understand that. Is it that, you know, the people that are there are actually working out more than they were in 19, and then there's some people that just aren't there, or should I think about that in a different way?
spk03: That's exactly right. The ones that are using are using slightly more than they had in the past, but we're not quite at the same percentage of members using this facility.
spk15: Okay. I appreciate that. And then as I think about where you're sourcing new customers from, uh the people you know basically sourcing from the couch or sourcing from from other chains maybe chains that have closed do you have any updated numbers on on sort of the mix of of new customers uh and how should i think about the difference or i don't even know if you have enough data at this point to understand that the difference in behavior there the difference in in turn ultimately trying to think about sort of lifetime value of a customer that you get from the couch versus a customer that you get from another gym chain that's closed down.
spk03: Thanks. Yeah, we haven't seen the retention side of an abandoned member coming to us from a closed club. So we haven't really seen any impact there or change there. But we do have the data that shows that today at Q3 about 2% of our gyms are closed competition. The same trend holds true with the rejoins, which is a great one, that 30% of our joins are rejoins, so there are former members that have come back, and that runs usually historically and almost forever 20%, so it's up quite a bit. So people are coming back faster than they have ever in the past by quite a bit. And the Gen Zs are joining way above what we've ever seen in the past, which is exciting. There's almost 80 million Gen Zs, and there's only about 40 million that are even of age to join. So there's a huge trend there that's a tailwind that's going to come each year as another bucket of Gen Ds fall into the age of joining. So some great data there. And also 40% of our joins are still first-timers. So that's also a great point. That's kind of historically been there for forever. So, um, again, people are coming back to bricks and mortar faster if they were following numbers and they're joining bricks and mortar as they were pre COVID. So it's not, not a deterrent. It's actually probably a benefit now to stay in shape. I think it's been proven. I think everybody's seen this as well. Everybody should have been working out going into COVID.
spk15: Got it. And so just to clarify, if I think about people coming that previously were plans to fitness members, people that have never been gym members, and people that are coming from other gyms, the biggest opportunity is still the couch people. Is that fair? Yes. Yeah, absolutely. Absolutely. Got it. Excellent. Thanks, guys.
spk14: You're welcome, Chris.
spk09: Your next question comes from the line of Chris Ako from Stifel. Your line is open. Please ask your question.
spk13: Thanks. Good morning, guys. Tom, the revenue guidance looks like it implies roughly $166, $176 million in the fourth quarter, well above this quarter's level, but adjusted EBITDA well below what you generated this third quarter. Can you help us understand what's built into that expectation and whether you're seeing anything in the business that suggests margin pressure during the fourth quarter?
spk02: Thanks, Chris. It's really just a mix. The equipment segment really has its strongest quarter in the fourth quarter. And so that, you know, given its margin differential compared to the franchise and the corporate segment, that's probably what you're seeing there. But there's nothing by segment, if you will, that across the three that there's any individual margin pressure quarter to quarter. It's just more the mix of the businesses.
spk13: Okay, that's helpful. And then, you know, it's great to see the acceleration in new store openings. Can you provide a bit more color around how units open this year are trending in terms of store maturation and new member acquisition relative to what you've seen historically? Sure.
spk02: Yes, sure thing. So back in 2020, Chris, as we were talking about, sorry, stores that opened in 2020, you know, they weren't on the normal ramp curve for all the reasons you'd expect given what was happening, you know, across the country and within our business. Now, since then, as things have, you know, through the earlier part of the year, particularly into the second and third quarters, things have improved across our business significantly. their performance has improved as well. So they're sort of tracking about 80% of where we would expect them to be on a pre-COVID new store ramp. And the stores that have opened more latter part of Q4 and into this year are 90 plus percent of that normal new store ramp. So, you know, kind of tracking where our business is, if you will, in terms of visits and things. But Very encouraged to see those store ramps returning more closer to normal pre-COVID levels. And I think that's another, you know, confident sign for our system to accelerate their development efforts, as Dorbin was alluding to earlier. Great. Thanks, guys. Thank you.
spk09: Your next question comes from the line of Brian Harbor from Morgan Stanley. Your line is open. Please ask your question.
spk14: Yeah, hi. Good morning, guys. Just maybe another question on new member sign-ups. You mentioned a number of clubs that have, you know, still have masking or maybe some vaccine requirements. I'm curious about how sign-ups trend when some of those restrictions end or, you know, how does the confidence or do you think that's somewhat of a limit to kind of recovery memberships?
spk03: Yeah, the mask thing we don't see being much of an issue. The vaccine mandates, which luckily is only a very few number of clubs, 50 clubs, I think, roughly that have vaccine mandates. So that's not a huge amount, which that definitely is a little bit more of a hurdle to get through.
spk10: But the mask mandate, we haven't seen that effect.
spk03: Even during COVID, the ones that had it and didn't have it, we didn't see it really affect people. member joins us on that.
spk14: Okay, great. And then maybe another question is on the digital, on digital content, too. I'm curious how usage of that is kind of trended. Is it decreased, perhaps, as people come more in person, or do you see it kind of continuing to grow? I guess I'm just curious about kind of how you think about that as more of a revenue generator in the future.
spk03: Sure, yeah. We actually, you know, even since, once the store started to reopen, so last, even the even a year ago this past summer when we started to have the stores open, we began to see just even the usage of the free stuff. We haven't even launched the paid stuff. Even the free stuff started to decline some. But I think the trends around the paid subscriptions, which is probably the most interesting, where we look at the paid subscriptions who have subscribed, visited the club. So even though they're subscribing, they're actually using the club too. So it's not like they're using it as a replacement, I guess, if you will. They use it as a supplement to their bricks and mortar.
spk10: which is great to see because a lot of people, you know, come from the industry and think they're going to, you know, people are going to work out at home, not gyms.
spk03: So they're actually using it as a supplement as opposed to a substitute. And 40% of the PF subscribers, PF Plus subscribers, so they started off with a digital membership to begin with. And 40% have gone on to buy a bricks-and-mortar after. So that kind of goes to that kind of gateway, if you will, where they kind of get a taste of planet digitally, and then we get them to convert to a bricks-and-mortar down the road. So I think a lot of it is an acquisition tool, whether it's on a planet close by or they want to – You know, maybe they want to get a little bit more in shape before they join the gym and be, you know, around other people. But I think it's a good gateway. And I think as we continue to streamline and learn how the members are using different content, different trainers, and different likes and dislikes, we can only get better with it. And then down the road, like I mentioned, is getting into maybe diet, nutrition, meditation, and so on, so we can hit different segments of our member base. But I'm getting that today.
spk14: Sounds good.
spk03: Thank you. Thank you.
spk09: Your next question comes from the line of Alex Perry from Bank of America. Your line is open. Please ask your question.
spk01: Hi. Thanks for taking my question, and congrats on the strong quarter here. Nice to see the recovery trends. I just wanted to ask, does this change the outlook at all for the equipment margins, and how would you sort of treat that? Would you pass that through to the franchisees? I just wanted to get more clarity there.
spk02: Yes, sure thing. It's Tom. So I think, as I said, we're very important to our two primary vendors, Matrix and Life. And, you know, they have passed along after a period of months of not passing it along. They did pass along a slight increase. to our system. It's viewed as temporary until steel prices pull back. It varies a little bit based on type of equipment and vendor, but it's sort of low to mid-single digit price increases. It's not anything significant. And, you know, it doesn't really affect our margin.
spk10: It doesn't really affect, as I said earlier, which is really the most important thing,
spk02: franchisees' willingness to move forward. I mean, that impact on their overall ROI and store-level economics is right at the decimal. So it's not a gating factor at all. And I think back to what I was saying earlier, the fact that they're not only driving that new store activity that allowed us to take up our outlook, they're also investing in re-equipping their stores, which I think is really a testament to how they feel about the brand the customer and member experience that they want to have and making those investments ahead of when they need to, you know, I think is testament that those slight inflationary pressures are not affecting how they think about the business and how they're investing in it.
spk01: Great. That's really helpful. And then just to follow up, I wanted to ask about the higher black card pricing in the pilot that you're doing there, and maybe touched on this a bit earlier, but has there been any decision in terms of maybe rolling that out to the rest of the chain or just sort of how you're thinking about the cadence of the black card pricing from here? Thank you.
spk03: Yeah, this person makes a question. Yeah, we'll continue to test it, as I mentioned, through the end of the year and probably the first quarter before making a longer-term decision or a broader rollout decision. Still watching all of the clubs. There's a little over 100 clubs roughly that are in that test, fine-tuning the rate sheet, the sell process, to be sure we get the right black card conversion. We don't want to diminish the black card conversions when the price increases, so that's really, really easy. have to watch the date of how that falls, and make sure that we're not driving a higher attrition because it's a little higher price point and no one's using the club. So it just takes time to share and to make a decision that we can move with.
spk10: Perfect. Best of luck going forward. Great. Thank you. Appreciate it.
spk09: Your next question comes from the line of Simeon. Siegel from BMO Capital Mortgage. Your line is open. Please ask your question.
spk10: The black card member penetration. Can you distinguish between new members and the existing?
spk04: So is there any differential between the new members you're seeing in terms of that black on the ultimate company level black card? penetration opportunity. And then earlier you brought up the bring a friend perk that we have seen be pretty powerful. Any update on that or some form of data capture on? Thanks.
spk03: Yeah. Yeah, sure. Thanks for the question. Yeah, blackout penetration, I mean, it's been great because it ekes up a little bit each year, right, as you've seen it the last few years, and we've increased the rate of price slightly over the last four or five years. So I don't see any reason why it shouldn't be able to continue year after year, slightly tweak up as we, as I mentioned earlier, open more stores. Reciprocity is number one. You know, when we have 3,000 stores, it's a better value than it is today. So that's always in our back pocket as we build out our system. Um, and any other new pilots or tests that we do that, that are out there that, um, that we find as a new perk for the black card area or more discounts in our perks button, that's maybe a black card only perk. Right. So I think more of that stuff, anything we add value, I think can drive black card percentage. And that's kind of how we, how we're looking at that. But, um, I think even without that, I think it's still slowly, slowly tweak up year over year on that side of things. Um, bring a friend conversion. You're right now we have it in the apps with capturing data on who those friends are. Um, We have about 60% of our member base has the app, so out of 50 million, about 60% do. So we are capturing some of those guests today, but people that are using the app. But again, it's not our entire member base that has the app, so we still capture more of that. But that is definitely going to hang fruit for us that we didn't have that ability to really market to them. We've done some small tests here and there with those guests. The other one, too, is we have the Refer a Friend button that's on the app, which, you know, if you think about it, we didn't even have a way to formally have a member invite a friend to join. And that's been working extremely well. We just started doing a little bit of gamification with it where if a member refers up to three friends, they can get up to three members free if they get their friends to join. So a little bit of a way to reward members for referring. So that's all new to us. We didn't even really have a formal way to do that. And, again, once we get 80%, 90% of our members with the app, it's even better for us. So when you think about cost per acquisition there, You know, we already paid for the first member to join. The cost per acquisition for those members is almost nothing except for the free month we give to current members. So it's extremely lucrative.
spk04: Sounds great. Thanks, guys. Best of luck with your head. Thank you very much.
spk09: Your next question comes from the lineup, Karen Sarsia from William Blair. Your line is open. Please ask your question.
spk07: Hi, yeah, I think the queue went in alphabetical order today, but thanks for taking the question. So I guess I was really intrigued by the 140 million people that you mentioned are within 10 miles, and it made me wonder kind of where your brand awareness is at this point. I mean, is that the number one opportunity? Or if it's not, I mean, what is the main – a reason that your research would indicate that you haven't captured, I guess, a greater share of that $140 million?
spk03: Yeah, I think it's the brain awareness did retract. I mentioned that in the first quarter. It did retract some when we weren't marketing all last year. We're still number one by far in the industry, but we did retract some. So I guess now we're definitely getting back on track and probably after this New Year's we'll be hopefully back where we were. um yeah i mean that is the low-hanging fruit and i look at it was interesting we talked about like unit growth and we've talked about this a lot over the last couple years where you know we look at these area development agreements that we sold you know eight nine years ago that we thought we could fit 10 clubs and we find we look back at it now and you could probably fit 15 clubs in that same area but just because we're getting more people off the couch and the bigger our marketing flywheel gets the more people we get in front of and And whether it's brand awareness or it's the right offer or it's just another club built closer to the population, less drive time and more on their way they drive to work. That's where it's all hanging through. And the more we penetrate that 140 million people that are just not good numbers, maybe it's messaging. Maybe it's more getting into talking about it. A lot of people don't realize that working out can make you sleep better. They don't realize working out can relieve stress or anxiety. They think They think it's all vanity. So there might be other ways to, you know, what haven't we said already? We're spending $250 million a year, let's say, in the current year in marketing. You know, there's more messaging we can get in front of them that maybe gets another group of people to give it a shot. Sharon, we've said this in the past. I think you've heard Chris talk about it. But even in, say, New Hampshire where, you know, we have the highest kind of penetration rates and one out of every two health club members or members of Planet Fitness, but even a lot of our oldest clubs are here in New Hampshire. And if you go back over the last three, four, five years, they still cop. So the thing about our brand is that because of those people that are on the couch, even with the kind of penetration rates we have here, we can still get more and more off the couch and grow our comps in those older stores in those markets, which then what that tells us, and we've said this, is that when you go in then to some of the markets where we have not had as many stores and that much penetration, we're still able to grow the comps in those markets, which gives us then that that expansion opportunity, and then that confidence level that you were talking about to get to that 4,000 or even more.
spk07: That's really helpful. I guess one other question. There are obviously a lot of wearables out there, right? And I feel like every day I hear of a new fitness tracker of some sort. Have you explored any kind of partnerships there as a means for, you know, building awareness or, you know, new member acquisitions?
spk03: Yeah, there's definitely, you know, between the wearables connecting to our app, the Apples, the Garmins, and Fitbits and stuff like that, we're working to make sure all those are piped through our app as well, heart rate collection, all that. But also, partnership wouldn't be out of the question. I mean, there's always something here that's, you know, you better partner or come up with your own is probably the bigger question. Probably partnering might be the better option because it's more brand awareness with other companies that are already in that space. But it would be great data capture, right? I mean, the app is already great data capture, but That one more component would just be probably top it off. Great. Thank you.
spk09: Thanks, Aaron. There are no further questions at this time. You may continue.
spk03: Okay. Well, thank you, everybody. Have a great morning. As you've heard, the business is performing extremely well. I couldn't be more pleased. We all couldn't be more pleased. We never wavered in confidence that we would come out of this, that we would come back and come back stronger than we were before, and I strongly believe that our future is going to be brighter. And I look forward to our fourth quarter release and then going into our first quarter for New Year's, which will be pretty spectacular. So thank you. Have a great day.
spk09: This concludes today's conference call. Thank you for participating. You may now disconnect.
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