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spk05: Hello everyone and welcome to the Planet Fitness Q1 2022 quarterly earnings call. My name is Seb and I will be the operator for your call today. There will be an opportunity to ask questions on the call and you can do so by pressing star 1 on your telephone keypad or if you change your mind and wish to withdraw your question, please press star 2. I will now hand the floor over to Stacey Caravella to begin. Please go ahead.
spk06: Thank you operator and good morning everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer Chris Rondo 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 would like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the 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 will turn the call over to Chris.
spk03: Thank you, Stacey. And thank you, everyone, for joining us for Planet Fitness' Q1 earnings call. We remain extremely bullish on the long-term growth opportunities for our brand in business for many reasons. led by the tailwinds behind health and wellness and our appeal to millennials and Gen Zs. Despite continuing to operate in a fluid environment, we've set an all-time record high for member count, ending the first quarter with 16.2 million members. We also added 37 new stores, a nearly 30% increase over Q1 2021, bringing our total worldwide club count to 2,291 locations. Like many businesses, we were impacted by the ups and downs of consumer sentiment around COVID-19 during the first quarter. The Omicron variant led to a softness in our January joint trend compared to pre-pandemic levels. This was not surprising given that the U.S. Census Bureau estimated that approximately 14 million Americans were directly or indirectly impacted by the virus at some point during the month. Omicron also impacted usage. In January, it slipped below the 90% index in 2019 that we had most of last year. Higher member usage historically corresponds with higher joint activity. But as the quarter progressed, both joins and usage rebounded. And while our net membership growth in February and March this year outpaced 2019, it wasn't enough to make up for January's softness. However, by the end of the quarter, approximately 30% of our mature stores hit their pre-pandemic membership levels. In the final week of Q1, usage was back above the 90% index 2019. We continue to see that people who are working out are doing so more frequently. The regions that are the hardest hit by COVID restrictions, the Mid-Atlantic, Northeast, and West, all achieved visit frequency highs since the start of the pandemic. Both Gen Zs and Millennials also hit post-pandemic visit frequency highs, and baby boomers, who have been slower than the other generations, had the highest usage in March since COVID. As we mentioned on our fourth quarter call, we experienced some challenges with our national and local marketing and advertising agency consolidation efforts. Our franchisees now have three agencies to choose from, to handle their local advertising. They include publicists in two of our previous top performing local agencies. We believe that the long-term benefits from the consolidation of agencies outweigh some near-term disruption. We now just say that Chief Marketing Officer Jeremy Tucker is no longer with Planet Fitness. We appreciate his contributions to the brand and wish him the best in his future endeavors. We are beginning the search for his replacement. Throughout the past two years of the pandemic, we've learned to be nimble and resilient. This resulted in our single permanent closure of a Planet Fitness store due to the pandemic, which is very different than how the industry fared, where more than 25% of the U.S. gyms are now permanently closed. And hopefully the worst of the pandemic is behind us as the world begins to learn to live with the virus. Looking to the future, I am confident that we will continue to be a differentiated and disruptive force in the health and wellness industry. We offer what people need now, more than ever, for both physical and mental wellness. a high-quality, affordable fitness experience in a welcoming, non-intimidating environment. We are focused on two main growth strategies. First, driving system-wide same-source sales through both membership growth and pricing. And second, continuous store expansion in a broad range of markets. Let me start with driving same-source sales. Gen Z was the fastest-growing demographic group of our membership in 2021, bringing our total share of that generation who are over the age of 15 to nearly 8%, which is exciting as only half of Gen Zs are even old enough to join our gyms. And the research shows that Gen Zs, like millennials, prioritize an active lifestyle more solid than previous generations. We are focused on building lifelong brand loyalty with both generations who capitalize on our appeal to these groups, which is why we are excited about the upcoming launch of the High School Summer Pass. It's a rebranded version of the Teen Summer Challenge program rebranded in 2019, where high school-aged teens could work out for free in all of our stores all summer long. The program resulted in nearly 1 million teen participants, and more than 11% of those teens are members today. And we're bringing it back for after two-year hiatus, making the sign-up process even more seamless. Teens can register online, and if they're under the age of 18, parents and guardians can electronically give their consent. We believe high school summer pass is extremely timely and incredibly important given the alarming teen mental health crisis in the U.S. According to the Journal of American Medical Association, less than 15% of teens met the recommended daily physical activity guidance during the pandemic, while teen screen time doubled for pre-COVID estimates, not including virtual learning. We recently commissioned a national study and found that a majority of teens who exercise also agree that physical fitness makes them feel healthier, stronger, and happier. Almost half of the teens admitted that they struggled with mental health for the first time since the pandemic. To help address this issue, we're offering teens a chance to stay active during the summer for free and perhaps introduce them to a lifelong commitment to their overall health. It's also an opportunity to introduce their parents to our brand and then our already members. We want to be the fitness brand people think of first when they're ready to go into a healthy, active lifestyle. We understand that fitness can be intimidating, and we're focused on breaking down the barriers for all ages. In fact, more than 5% of the parents who joined during Teen Summer Challenge program are still members today. Our price and model is another way that we are a disruptive force in the fitness industry. And it was a key driver of our 53 straight quarters of positive comments prior to the pandemic. For just $10 per month, our standard membership offers access to high-quality cardio and strength equipment in our judgment-free environment. And while we predominantly advertise our standard membership, 6 out of 10 people who join Clamp It has purchased a Blackheart membership. which is more than twice the price. We launched a Black Card pricing test in summer of 2021 in about 100 stores. The test was successful across key metrics such as acquisition rates, retention, average monthly dues per member, and margin. Beginning this month, the new price for the Black Card is $24.99 for all new joins. I've always said that we won't raise price without adding value for our members. Since the last price increase in 2019, a new Black Card membership now includes access to an additional 400 plus stores, with reciprocity being our number one use flat card amenity, access to premium digital content via our PF Plus platform in our app, and an always expanding perks program. We believe there's tremendous untapped opportunity for our brand long term in the U.S. to get people off the couch. Within 10 miles of the current plant business store, there are approximately 140 million people old enough to join a gym, but do not belong to any gym. With fewer competitors due to significant industry consolidation, We believe that perhaps our 4,000 store potential in the US may be the floor and not the ceiling for store growth. We're also laying the groundwork for expansion outside the US, where the majority of the countries have much lower gym membership penetration. To this end, we announced this morning that we signed an agreement to bring the Planet Fitness brand to New Zealand, where 86% of the population doesn't belong to a gym. The agreement is for a minimum of 25 locations over the next several years. We believe we have the right local team in place to replicate the success we're seeing in Australia, where our growing fleet of clubs are performing very well since they reopened last year. We recently opened our first stores in Mexico under the new development agreement we signed last summer for at least 80 new stores over the next five years. Nearly 97% of the Mexican population doesn't have a gym membership in a country where more than 70% of the people consider overweight. Our high-quality, affordable, and welcoming fitness experience appears to be resonating. The first new store's membership count on day one far exceeded that of a typical U.S. store on opening day. It's hard to believe that this year marks the 30th anniversary for the point of business brand. This milestone is very personal for me. I joined the company one year after it was founded, working the first door in Dover, New Hampshire. As our brand has grown, so too is our ability and opportunity to help people be healthier physically, which leads to being healthier mentally. With COVID, we have seen firsthand the repercussions of not prioritizing our mental and physical wellness. It highlighted the importance of access to fitness centers for one's overall health. We believe that fitness is essential and that our industry is a key part to today's healthcare delivery system. I'll now turn the call over to Tom.
spk12: Thanks, Chris, and good morning, everyone. During the first quarter, we completed the acquisition of one of our best performing franchisees, Sunshine Fitness, as well as a successful refinancing and upsizing of a portion of our debt. We believe that the acquisition strengthens our powerful business model by enhancing our corporate store team and diversifying the geographic profile of our corporate-owned stores. And with the refinancing, we locked in low fixed rates on a significant portion of our debt before the inflationary environment began in earnest. Now I will cover our Q1 results, and then I'll discuss more details on the Sunshine Fitness acquisition. All of my comments regarding our first quarter performance will be comparing Q1 2022 to Q1 of last year, unless otherwise noted. It's important to note that we completed the Sunshine deal in mid-February. Therefore, our first quarter results only reflect one and a half months of the financial impact from the acquisition. We opened 37 new stores compared to 22 last year. We had positive same store sales growth at 15.9% in the first quarter. Franchisee same store sales grew 15.8% and our corporate same store sales increased 17.0%. Same store sales growth from the Sunshine stores is included in system-wide same store sales and partially affected franchisee same store sales in the quarter. Sunshine stores were only included in franchisee same store sales for January and will not be reflected in corporate owned same store sales until February of 2023 but they will continue to be reflected in system-wide same-store sales. This is consistent with how we have treated prior acquisitions. Approximately 80% of our Q1 comp increase was driven by net member growth, with the balance being rate growth. At the end of the quarter, approximately 30% of our mature stores have fully rebounded to their pre-COVID membership levels, and in aggregate, Membership per mature store is only down 6% from pre-COVID levels. Member growth contributed more to system-wide same-store sales this quarter than it has historically as we were comping over a depressed membership count from COVID. The rate growth was driven by a 180 basis point increase in our black card penetration to 63%. For the first quarter, total revenue was $186.7 million compared to $111.9 million. The increase was driven by revenue growth across all three segments. A 26% increase in franchise segment revenue was due to same-store sales growth, new stores, and stores that were open this year that were temporarily closed last year, partially offsetting the royalty revenue increase with a decrease of approximately $1.6 million as a result of the 114 stores acquired in the Sunshine Fitness transaction, moving from the franchise segment to the corporate-owned segment. For the first quarter, the average royalty rate was 6.4%, up from 6.3%. The 100% increase in revenue in the corporate-owned store segment was driven by the Sunshine Fitness transaction, as well as new store openings, the cycling of temporary store closures in the prior year period, and same-store sales growth. The equipment segment revenue increase of 206% was driven by higher equipment sales to new and existing franchisee-owned stores. For the quarter, replacement equipment accounted for about 40% of total equipment revenue, and we completed 33 new store placements in the quarter versus 18 last year. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $22.4 million compared to $8 million. Store operations expenses, which relate to our corporate-owned store segment, increased to $47.5 million from $25.9 million, primarily due to the additional stores from the Sunshine acquisition. SG&A for the quarter was $30.8 million compared to $22.5 million. About half of the increase in SG&A in the quarter was non-recurrent expenses related directly to the transaction. I will address the ongoing impact to SG&A from the deal later on. National advertising fund expense was $14.5 million compared to $12.8 million. Net income was $18.4 million. Adjusted net income was $29.0 million. And adjusted net income per diluted share was $0.32. Adjusted EBITDA was $77.3 million compared to $43.7 million. A reconciliation of adjusted EBITDA to GAAP net income can be found in the earnings release. Now by segment, franchise adjusted EBITDA was $58.1 million, corporate store adjusted EBITDA was $25.4 million, and equipment adjusted EBITDA was $8.7 million. Now turning to the balance sheet. As of March 31st, 2022, we had total cash and cash equivalents of $536.7 million compared to $603.9 million on December 31st, 2021. This was comprised of cash and cash equivalents of $471.2 million compared to $545.9 million with $65.5 million and $58.0 million of restricted cash respectively in each period. Total long-term debt excluding deferred financing costs was $2.0 billion as of March 31, 2022, consisting of our four tranches of fixed-rate securitized debt, that carries a blended interest rate of 4.0%. And given the increase in interest rates, yesterday we paid off the $75 million variable funding notes. Now to the financial impacts from the Sunshine Fitness acquisition. On April 26, as required by the SEC, we filed an 8K with pro forma financial statements showing our fiscal year 2021 results. as if we acquired the Sunshine Fitness stores as of January 1st, 2021. I'll walk through the changes on our income statement using the pro forma results in the 8K to explain the shifts in our financials as a result of the transaction. Starting with the changes to 2021 revenue. First, there's a decrease of approximately $14.6 million to franchise revenue, the majority of which was driven by the royalties that Sunshine stores generated along with some web joint fees and equipment placement fees. NAF revenue decreased approximately $3 million, and equipment revenue decreased approximately $10 million, inclusive of the margin we make in that segment. Conversely, we benefited from an approximately $172 million increase to corporate-owned store revenue. The end result of all these changes was an approximately $145 million increase to our 2021 net revenue. On the expense side, our cost of revenue decreased without the sunshine equipment purchases. Store operations expense increased approximately $80 million, which is fairly close to what our historical store OpEx was in 2021, given they had a similar number of stores. SG&A increased approximately $12 million, reflecting our assumption of their support center expenses, including the management team, staff to support critical functions like marketing and store development, along with the president of our corporate store, Shane McGinnis. Additionally, there was an increase of approximately $60 million to depreciation and amortization. Half of the increase was due to depreciation, which is primarily related to the doubling of our corporate store fleet, as we're also doubling our historical corporate store cap expense. The other half is amortization expense from Sunshine's intangible assets. DNA increased significantly given the size of this acquisition compared to the ones we've done in the past. And the pro forma DNA expense is in line with our 2022 guidance that it would double. Finally, to our 2022 outlook. We reiterated our guidance for 2022 in our press release this morning. As a reminder, our view for 2022 assumes there is no material resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mandates that result in a significant change in membership behaviors. Now, two things to note on our outlook. First, our system-wide same-store sales growth will likely be higher in Q1 with the depressed membership levels in Q1 last year, combined with the unseasonable membership join trends last year, where Q2 had more net member growth than Q1 for the first time in our history. This will make the compares for same-store sales more difficult in the coming quarters. Second, regarding expenses, as I outlined in the 2021 pro forma results, the addition of Shane McGinnis and his team added approximately $12 million to SG&A last year. For 2022, Sunshine Support Center costs impacted our SG&A in Q1 for only six of the 12 weeks, and therefore will have an increased impact in the subsequent quarters. The near term continues to be fluid with the pandemic's ongoing impact on consumer sentiment. However, we believe we are well positioned for the long term to further expand our leading market share given the strength of our value proposition in the fitness industry as well as the resilience of our asset-light business model. I'll now turn the call back to the operator to open it up for Q&A.
spk05: Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. Or if you change your mind and wish to withdraw your question, please press star 2. The first question today comes from Randy Koenig from Jefferies. Please go ahead. Hey, good morning.
spk14: I guess this question is more for Chris to start here. Chris, I just wanted to, you know, a lot of the data we track around traffic trends, web traffic searches, etc., continue to point towards in-person fitness coming back. Peloton results are out this morning. They look kind of subpar. So I just want to get your thoughts on where we continue to see things or what you expect to head for at home versus in person, and then get an update from you on what you're seeing around the mom and pop competitors. Are those store closures in the gym side continuing or are they stabilizing? I just want to get your thoughts on you know, the competitive environment and the moat that you guys have and continue to build going forward.
spk03: Sure, Randy. Thanks. Good morning. Yeah, I think, you know, what we're seeing happen here today, Randy, you probably remember, you know, last year and a half, unfortunately, going through this pandemic is, and I haven't wavered from it, is that, you know, in-person fitness has, you know, always been, always been, you know, the key driver of health and wellness and home fitness has always really played second fiddle to it, maybe third fiddle in a lot of ways we're seeing today. And honestly, we even saw that in our own content consumption. We were all closed down in our gyms. Our content consumption in our app was used as an all-time high, and we're seeing it today, not back to pre-COVID, but it certainly isn't anything close to where the consumption was when we were closed. And what we are seeing, though, I'd say the Gen Z population is joining at quite a bit higher than we've ever seen pre-COVID. They're joining just at an astronomical rate, which is great to see. that they're active and studies show that they're equally as active as millennials have. And as you know, millennials have always been a big part of our member base, which is great. So I think, you know, in-home fitness is, you know, will continue to be the second fiddle and people are driving back to gyms. And, you know, the beauty of that is now with 25% of our, you know, the industry is permanently closed and we didn't lose a single store. It's just, you know, less competitors, less opportunities except for us. And I think with with recession here, um, and, and, and that in, in the, in, in, in, in light here. And we saw this a little bit, oh nine, two, and even back as far as the.com bomb in 2000, we only had four stores, but you know, I think as a whole, maybe there's less people looking to join gyms, but the issue is that the ones that are only looking at planet fitness, cause they can afford it, right. Or, or they're, they're being more smart with their money. So we, we evidently went in those, in those, in those times. And some of our highest themes for sales in history were during the oh nine Oh 10 area. So, you know, I think it's people aren't going to, you know, not be healthier. I think they're going to continue to choose it. They're going to be more cost conscious, I think, at the end of the day.
spk14: Super helpful. And I guess one more question is I want to kind of explore what you're doing around the perk side of the business. You added the Crocs perk in the quarter or just thereafter. And I just want to understand kind of what's the strategy around there. You're adding more and more perks. They're more compelling things. it would seem as if the member at some point realizes that the perks kind of pay for the membership themselves. I just want to understand kind of what the strategy is around the perk side of what you're doing there. Thanks.
spk03: Yeah, as you know, even through the IPO, about half our members won't use the store in a 30-day period, right? And I think any way we can add value for members, even if they're not using the store, is a good thing because they are paying us every month, and I think we should offer them value in and out of the store. So the content is one part of that. The other part of it is can we offer benefits for being a member that is even outside of fitness in some ways that can help them live a better life? Discounts on gas, which in today's world is real meaningful, naturally. Crocs, they're back. I didn't realize they were back this much, but they've been a great launch, and Gen Zs are all over it. So it's great to see that one now in place. We did Gooder Sunglasses and Noon recently as well. So I think now with the app built in with the perks button and the platform that's been built, it's able for us to track a lot of click-throughs and redemption rates, which previous to the app launch, which was in the summer of 2019, we really didn't have a depository with all our perks in it and a way to track it. So now it allows us to go to all the companies out there that we want to do a partnership with and show them true data, which is hugely impressive. When you think about Us right now, we have about 70% of all our members are on the app. All new members, about 90% of our new members are downloading the app. And we're doing about roughly 8 million check-ins a week. And about 6 million of those members are opening the app and opening that app to check into the gym because that's their barcode and they see these perks. So the amount of eyeballs that they get in front of is quite large. So now that we have that data, it's opening the doors to a lot of vendors and I think there will be a lot more to come here. And I think back to your question, again, you know, we can give value when people haven't used the club in two or three months or their life's busy, but they're getting discounts on gas and Crocs or what have you. It pays for the $10 membership in some ways.
spk14: Yeah, super helpful. Thanks, guys.
spk05: Thank you. Our next question comes from Brian Harbor at Morgan Stanley.
spk10: Please go ahead. Yeah, good morning, guys. Thank you. In the second quarter, you know, understand kind of your comment on same-store sales. But in the second quarter, do you think there will still be somewhat atypical seasonality in terms of membership joins? Are you still seeing kind of pent-up demand given that the first part of one queue was a little bit slower just from a membership sign-up perspective?
spk03: Sure, Brian. This is Chris, and then I'll have Tom jump in as well. Yeah, what we're seeing now is more typical of historical years where the seasonality, I think, is more on trend as opposed to What we saw last year where all of a sudden second quarter was bigger than first quarter. So I don't think we'll see that necessarily this year. But Tom, do you want to talk about this? Yeah, Brian.
spk12: I think in terms of same-store sales, and we kind of hinted at this on the last call, that given what we're anniversarying in terms of membership levels 2021 and then as you're pointing out last year, we really had very atypical growth across the quarters where growth – where we had more member growth in Q2 than we did in Q1 for the first time in our history. So the comps compare will get tougher. And so despite the 15-9, we're still sticking with our outlook of low double-digit comps for the year. Still very strong, it just gets a little tougher as the compare to last year gets more difficult across the rest of this year.
spk10: Okay, great, thanks. Maybe just a more detailed margin question. I noticed that equipment segment EBITDA margins were kind of above history in the first quarter. Just curious if there are any kind of one-time drivers of that. Do you think they'll kind of remain at that level, or will they come back down to a more normal level?
spk12: You know, I think they're fairly in line with the history. We've passed along our margin, the price increase that we've gotten from vendors, so we're maintaining our margins. Some of that is a little bit of mix between the vendors that moves it around a little bit, but it's fairly in line.
spk05: Okay, thank you. Our next question comes from Max Roklenko from Cowan & Company. Please go ahead.
spk15: Great, thanks a lot. So first, with the increase in black card pricing, what is your outlook of what the lift to comps will be? Do you think it's going to look similar to the previous time that you raised the pricing by $2?
spk12: Yeah, so I think what's happened historically, as you know, Max, we raised the price back in 2017 by $2 and then $1 in 2019. And in those times, what we've seen is and what we saw in the test by the way, is initially the black card acquisition will be relatively flat sequentially, but the black card member penetration or the black card mix of membership still grows year on, still grew year on year. And that's what we expect will happen this year. And we talked about this past quarter we had 180 basis point improvement in black card penetration to 63. So we expect the same kind of result now It is a little different in terms of the impact of same-store sales because, as you know, it's only on the new joins. And given the rest of the year, you know, and the size of our membership base, that impact will be muted but certainly will be accretive in the subsequent years in a more significant way.
spk15: Great. That's helpful. And then just a quick follow-up question. What is your sense of when we could see the members per gym return to 2019 levels? I think you said 30% of your mature gyms have already come back. So just curious your thoughts on the rest of the fleet. Thanks.
spk12: Yeah.
spk15: Okay.
spk12: Yeah, I'll start maybe. I think if you look at – when we look at mature stores, really the best barometer as we think about it is if we take the calendar year 2018 and prior stores – And those stores in the aggregate are, you know, that's the group that has 30% of their membership is back to pre-COVID levels. And they're down about 6% overall. So I think as we think about the same store sales growth, member growth, you know, it's just a matter of time for each and every quarter, each subsequent quarter for more and more stores to get back to that pre-COVID membership level. And again, it's a one question, not an if question in our minds.
spk00: Our next question comes from Sharon Zacfia from William Blair.
spk05: Sharon, please go ahead.
spk07: Hi, good morning. I guess a question on the marketing. So I know out of the fourth quarter call, you kind of thought Omicron and the marketing shift both contributed to January. I mean, as you have gone throughout the last three months subsequent to January, I mean, how big of a factor was the marketing shift shift that you did. I know you kind of re-expanded to the three agencies that you mentioned, but trying to get some color there. And then on attrition, are you seeing any difference in attrition at this point relative to pre-pandemic? I'm wondering if maybe it's even a bit better because you've got kind of, I guess, a Darwinian element where the folks who maybe weren't using the clubs that much have dropped out. over the past few years?
spk03: Yeah, right now we're still about, we're typically pre-COVID, about 50% of our members would use a store in a 30-day period. Today, that number is around about 40%. So that's still about the same as it was most of last year. Of the ones using it, though, they are using it more than previous, pre-COVID. So the ones that are using it are using it more. And our attrition, you're right, our attrition is slightly better, just slightly, but it's slightly better to pre-COVID right now, which is a great sign. As far as the marketing question, I think most of it was Omicron related because even, you know, we look at the February and March numbers, that net member growth was even better than February and March of 2019. And we had the same agency going on at that point too, right? So I think it was more, you know, probably more Omicron related, although probably some marketing impact as well. But Omicron really, the first two weeks of January, really was impacted those two weeks. Even by the end of January, it changed pretty drastically, believe it or not.
spk07: that's really helpful. And then I guess, you know, the market's very concerned, obviously, about a recession. Can you talk about your franchisee enthusiasm and whether any of this macro talk is starting to kind of concern franchisees and, you know, potentially dampen their appetite to accelerate expansion?
spk03: No, I think, you know, many of them luckily have been with us for, you know, since the beginning here, we started franchising in 2003. So they've been through the 09-10 areas as well, which probably doesn't look like as severe as this might be. And they saw their same sort of sales even in that period. So I think they're, you know, watching it naturally as we all are. I think they realize that the business is fine. It's probably more the, you know, increase in build-out costs and so on. But even with some of the build-out costs we're seeing today, the MUNA is still quite, you know, so profitable that it's, you know, at the end of the day, it still can, you know, weather that storm and continue to make it exciting to build stores even under a bad environment. I don't know if Tom want to add.
spk12: Yeah, hey, Sharon. I'll just maybe build on Chris's answer. I think the other piece that's happening in our business is there's a fair amount of franchise, you know, larger franchisees who are, you know, taking some chips off the table and either the old, the prior private equity firm is rolling out and the new one's rolling in. But there's a lot of appetite from outside the system to come in and there's a fair amount of activity. So, When those businesses change hands, as we've talked about, the owners and operators stay and roll. And there's new money coming in who's looking to develop pretty aggressively, and typically more so than the prior group would. So that bodes well. But I think, to Chris's point, there's been, I think, no hesitation. And if anything, maybe more money coming in looking to put it to work.
spk07: OK, great. Thank you.
spk05: Thanks, Chair. Our next question is from Simeon Siegel from BMO Capital Markets. Please go ahead.
spk04: Thanks. Hey, guys. How are you all doing well? I think you grew franchise EBITDA dollars more than you grew the franchise sales this quarter. So just any change to how you're thinking about underlying franchise segment EBITDA rates? Just basically, I guess, speaking to what the right margin level should be as we normalize from the pandemic costs and then Could you elaborate a little bit more on that? Congrats on New Zealand. Can you just elaborate a little bit more on how we should think about your broader international growth opportunity and focus as we look further up? And then if there's any differences in expected international economics. Thanks a lot.
spk12: Yeah, it's Tom. On the margin question for franchise, last year we had a fair amount of marketing we were doing to help certain franchisees in certain states get reopened or upon reopening to put a little bit more money in their marketing activity. So we didn't repeat that this year. So it's a cost last year that depressed margins that this year we didn't repeat. So this is, you know, I would say more typical of where we see franchise margins going forward.
spk03: I think on the international front, as you know, we had Australia we launched just before COVID-19 hit us. But now they're all reopened and that market performs very well and that group's off and running. New Zealand next door, so they're going to actually help them a little bit with some support for us as well, get them off the ground. And I think going forward, Asia is definitely something that's on our radar. There's not any large low-cost competitor to speak of for that much over there compared to Europe, as many of them. Where in Europe, I think going there might be more of an acquisition strategy if and when we went there just because you've got many chains over there that have north of 500 locations each. and one or more of a thousand. So I'm not sure if you go there and open one at a time to compete with that or not. But, yeah, we're excited about New Zealand. Mexico, that new ADA we signed last summer, that group is off and running very strong. They've opened their first couple stores here with opening numbers well exceeding a U.S. opening, acting much like the original clubs in Monterey that we opened and also the Panama stores, which have always opened ahead of what U.S. stores opened. South America is very different in the sense that there just is like two or three percent of the population in those countries have a gym membership, so it's a huge untapped potential in South America. Banking is a little bit different when it comes to the EFT standpoint and how to build members. That's a little bit tricky down there because we do the EFTs, we do it in the U.S., although we do take credit cards down there. But all these markets seem to act very similar to the U.S. as far as the model, as far as the judgment-free zone came to casual first-timers, purples and yellows and all that.
spk04: Great. Thanks a lot. Best of luck for the rest of the year.
spk05: Thanks, Stephen. Thanks. Our next question is from John Ivanko from JP Morgan. Please go ahead.
spk00: Hi, John. Could you please check your line is not muted? I don't know what happened there. We'll try it on the speaker.
spk16: Just looking back on the Black Card, I understand and thank you for reminding us that customers that were Black Card members 2017 and prior are still paying $19.99. You've obviously added a lot of functionality to Black Card, a lot more of the network of gyms, which I think is the number one reason why they join and the benefit that they use the most of. What is the thought and why haven't you basically normalized the pricing across the system? Do you think there would be any resistance to that customer that's obviously gotten a great price for a long time? If it's possible for me to ask, what percentage of your Black Card members still reside at that $19.99 price point?
spk03: Yeah, I don't have that number, John, off the top of my head as to how many are still at the $19.99, but we've always looked at it as though Yeah, if they're a long-time paying loyal member, I have a hard time justifying that I should raise their rates. The more I'd probably reward their rate, if anything. And hopefully longer term it continues to drive some retention. We have some members, and actually we've been around for 30 years this year, we have members that have no annual fees even on their memberships. They've been around for 20-something years. So in some ways looking at the loyal member, I wouldn't want to, I guess, penalize them in that way. I'd rather reward them by letting them have it and keep it for as long as they want to be with us. But normal attrition over time gets people in that average rate to continue to grow with people adopting the newer rate and opening more stores at the newer rate as well. So yeah, in any agreement, we don't have the right to raise them either. So that's the legal part of that side. But I guess that's kind of how we look at it, John, when it comes to the longstanding members. Thank you. And a separate topic.
spk16: Obviously, the marketing function at Plant has undergone probably more change than what you would have thought in the last six months when we seem to be making some really good progress on the management of local. So a couple of questions. Does it still make sense for the brand to consider a shift from local to national? Do you think that the local-national mix? I understand there's a contract there, clearly, but do you think that is being optimized is point one. And point two, the next CMO that you have, what types of functionality or what types of execution or process, what have you, do you think the next CMO in this marketing department can do better as we look for obviously a high profile replacement?
spk03: I think on the marketing side of things, This first quarter with Publicis, now we've gone to three, but this was the first time that we began to see data, true marketing mix that the local money was being spent on. Before that, we knew what dollars were being spent, but we really didn't know the tactics. We didn't know how much cable, how much network, what channels they were on, how much FM radio, how much satellite radio, how much Hulu. We didn't have all that data, which the first quarter was the first time we ever saw it. So as we get best practices nailed down and as we learn more, even in the upcoming months and years here, from even having three nailed down and supplying that data, that now then gets us to figure out what is the true right mix to your question. Is it seven and two? Is it three and six? Or does it get to the point now that it's five and one, right? I mean, we really don't know where it goes, but that's what this data is going to help us determine longer term to then get the franchisees on board to maybe look at that very differently. So this is the beginning of that conversation, hopefully, as we get smarter at how our marketing mix goes. As far as the CMO is concerned, you know, we're 2,200 clubs strong here, you know, a unit potential here domestically for 4,000, which I think is on the light side of that thing. And now, as you've seen, we've gone, you know, much more international here in the last couple of years, even through Omicron. So I think we'd have to look further down the road here on what we need of a CMO and his background around those 4,000 units and five more countries down the road. In franchising, I think it's hugely important as well for me as a franchise background and working with franchisees.
spk16: Understood.
spk05: Thank you.
spk03: Thanks, John.
spk05: Our next question is from Jonathan Comp at Baird. Please go ahead.
spk01: Yeah, hi, thank you. I want to follow up on the member trends you're seeing. I know you mentioned February and March above 2019 join levels. Do you think there was any sort of pent-up or delayed demand effect from Omicron? And, you know, trying to think through, you know, whether or not looking back to 2019 join trends would be the right way to think about membership trends going forward. And maybe within that, are you seeing any signs that older populations are starting to pick up the activity in terms of the joins? I know you mentioned usage, but what do you see and expect on joins for the older population?
spk03: Yeah, even the boomers, even the boomer population, we started to see them start to turn the right direction here, even Q4, and we continue to see that even though, you know, the first part of the first quarter was definitely lower with Omicron, and the boomers through the entire COVID thing have definitely been the ones that have been more skittish along the way. So, But what I've seen, like I said, in my opening remarks, so again, the marks, they had their highest usage since COVID started. So when usage is definitely a, definitely is a preceding indicator of joins down the road. So hopefully the more people are getting to work out here as we saw in first quarter towards the tail end of it, getting all-time highs since COVID that, you know, the joins begin to follow us here. I don't think, you know, I think last year, you know, it wasn't even just the January, it was really almost all the first quarter was suppressed. So There's a lot of pent-up, I think, demand that we saw in second quarter where I think in this scenario was really probably the first two weeks was suppressed. So I don't think we'll have quite the pent-up demand that we saw last year just because it wasn't as long, I guess. But I still think the trends are all in the right direction. I think for bricks and mortar, I think for health and wellness, the Gen Z population hasn't let off once since COVID has started and they're coming in droves and I think they're going to continue to do that. Even with schools open, they're still doing the same thing. And I think this teen, I think the high school summer past, we were getting ready to launch this coming Monday. We'll just get more brand awareness around even the younger Gen Zs for more of that tailwind as well, which I think it's hard to say exactly how much of the Gen Z that we see today or how much of that is teen summer challenge related for 2019. But it certainly has helped, I think, brand awareness for the younger population.
spk01: Yeah, that's really helpful. And then maybe just one follow up on the franchisee economics with the pricing that you recently took. Any comment on your thoughts about sort of franchisee economics and cash flow relative to pre-pandemic once that pricing's in place and maybe related to that? Are there any impediments you see today to getting back to that normal sort of pre-pandemic opening rate still at some point in 2022?
spk12: Yeah. Hey, John. It's Tom. I'll start that. And I think in terms of franchisee economics, you know, given the, as I was saying to the earlier question, the new black card price will feather in as new members join. So it won't have a huge impact in the near term, you know, certainly help in the longer term. And the reason for the price increase was not necessarily to help franchisee economics. It was really because we're providing so much more value that, you know, that's really the driver of our, pricing changes, not looking to necessarily go the other way as we think about it. So I think the economics will definitely improve, but the economics are pretty strong. As I said before, on average, any store opened in 2018 and prior, the average membership in those stores is, in aggregate, only down about 6%. And you know the economics of our business. membership in those stores continues to rebound, the flow through is pretty terrific. It's essentially $0.84 on the dollar. So we don't see anything standing in the way of our franchisees or frankly our own corporate stores that have still not yet recouped their pre-COVID membership levels and pre-COVID economic margins or financial margins to get there. It's just a matter of time. And in terms of the outlook, you know, if We've said we've moved away from the practice during the pandemic of talking about new store openings for the year, and we're really back to what we used to do before, which is the franchisee placement. And our outlook on that, as you know, is 170 for the year. And as you know, that's only franchisee placements where new stores is the whole system, including corporate-owned stores. And if you take... the 170 and you add what we would typically open up in our corporate stores pre the Sunshine acquisition. And Sunshine added about 14 stores in 2021. So combined, you know, the two, now the broader, larger corporate store group, add that to the 170, you kind of get to where the new store outlook is, if you were doing that math, would get you pretty close to the 200 level. We're not saying that's the number, but if you do the math, you can kind of get in that ballpark. And we've said all along that we think at some time during 2022, we'll be on a run rate where we'll be at that 200 plus new store units for the year, for the subsequent 12 months. It's just a matter of when we get on that pace. And all signs seem to be pointing to that continuing to strengthen. As it did across the year last year, we think it'll strengthen across the year this year.
spk01: That's really encouraging. Thanks again. Best of luck.
spk05: Thank you. Thanks, John. Our next question comes from John Heinbockel from Guggenheim. Please go ahead.
spk11: So, guys, I want to start with the corporate segment. When you look at the pipeline that Sunshine has, right, so I guess they may have grown units 13% or 14% last year. Do you think that segment can grow faster than the franchise segment over the next several years One, because of Sunshine's growth, but also two, I assume you think Sunshine can get legacy margins up to where they are. So do you agree with that? And can that segment grow faster for a while?
spk12: Yeah, John, it's Tom. I'll start that one. So I think on a pretty solid, robust list of what made the Sunshine franchise, Sunshine Fitness franchise, purchase so attractive was their economics and the economics of their new units. Does it need to grow faster than the broader franchise segment growth? Don't know. I think we'll – we don't want to sort of put the proverbial gun to our head on how many units we want to open a year. We want to open great sites that have great returns. But we think that sort of 10% growth is probably in line. And maintaining the 10% penetration in our system is kind of the goal. If that in any given year is up a little bit or down a little bit from 10%, I think we're fine with that. But the pipeline is very robust across all of the states they operate in. The margins that they've produced historically have been very consistent across those states. And to your point, if you look at pre-COVID, the mature stores that Sunshine operated versus the mature stores that were prior in our corporate portfolio, there was about a 700 basis point gap between what Sunshine stores produced and our corporate clubs. So we think some of that management talent, some of the practices they have will certainly benefit the 100 plus prior corporate stores that were operated mostly in the Northeast. We think that's another reason why it was such an attractive acquisition opportunity for us is to spread some of those practices. Will they completely close the gap? You know, time will tell. But there are some structural differences between cost of labor, cost of occupancy in the northeast versus the southeast, as you know. So it may not close it all the way, but certainly we'll move it in the right direction.
spk11: Great. And maybe, Chris, philosophically on royalty rates, What do you think the franchisee appetite would be for higher rates? Is there a ceiling in your mind? And what does it take to get there? Is it a restructuring of the marketing spend that gets you there?
spk03: I'd say, as I said in the past, I think until our mature store base, which Thomas says 30% of them are at or above pre-COVID, you know, I think until we get back to pre-COVID membership and profitability, you know, I probably wouldn't look to have that conversation just yet. You know, I think I want to make sure that they're all back to where they're accustomed to being and then at that point, you know, as you know, same sort of sales are back and, you know, they should be continuing like we were pre-COVID with 53 straight quarters of positive comps and, you know, it's most of its member growth and it's 84 cents to the bottom line of every, you know, new member above that. So, to drive margin, which then I think gives the ability to raise royalties, right? You know, longer term too, I think the advertising piece could be the extra bonus that makes it even more palatable, right? Because if we begin to get more efficient with the marketing dollars, you know, does the next 2,000 stores need to spend as much money as the first 2,000 stores marketing wise, right? Does it get to a point where there's just, you know, The coffer is just too full and you can't spend the dollars when you have 4,000 stores. But I think as that changes, if we can get more efficient, if we can lower the overall marketing spend from 9% and close at 8% and we share a little bit and that savings back into royalty, that's another bonus for both of us. So those two levers are something that I think we will watch pretty closely before we make any determination.
spk11: Thank you.
spk05: Thanks, Hans. Our next question is from Warren Chang from Evercore. Please go ahead.
spk13: Hey, good morning, guys. It sounds like some of the age cohorts in regions that underperformed the last few quarters are catching up to company averages, especially the boomers. Is there still a significant gap for pre-pandemic membership levels for some of these underperforming age groups? Because it just seems like Gen Z has outperformed, but members... Her location are still down. I'm just curious the breadth and depth of how depressed we are for those other age groups.
spk03: Well, I think first of all, I think boomers, you know, first off, although they are still not back to pre-COVID, you know, and as I mentioned in my opening remarks, have now hit, you know, all-time usage highs since COVID. So they're not back to pre-COVID, but they're actually starting to hit highs now, which should drive more boomers in to join. But there's still a pretty small part of our member base overall. You know, if you think about the millennials in Gen Z, for example, they make about 60% plus of our membership base as a whole. So the boomers are a small piece, then Gen X is number 30. So the boomers, although they have it back, they're only about roughly 13% of our member base. So although we want to have them back, they're not a huge driver of our growth. It's really the younger generations.
spk13: Gotcha. Okay. Okay. And I also wanted to ask a follow-up to your answer to John's question on the black card pricing. So it sounds like you're pretty committed to maintaining that $19.99 for the pre-COVID black card cohorts. And I think you've said in the past, you know, the $19.99 entry price point is pretty much off limits. So does that mean you're likely to just maintain this pricing architecture kind of regardless of what's going on externally other than, of course, the new black card joints?
spk03: Yeah, I think it's a pretty amazing business model when, as you've seen, we almost always advertise $10 a month. And when people walk in the door or go online to see the benefits of the Black Card, 60% of them end up choosing a Black Card membership, which is more than twice the price or 150% more the price. So if we can get the people off the couch, as we've talked about, 40% of our joins have belonged to a gym in their entire life. And to get more of those people off the couch... seems counterintuitive to raise the price, right? They're already thinking about, how am I going to do this? How do I cancel a membership they're already asking before they join? So I think lowering the barrier of entry to keep it $10 gives everybody the opportunity to give fitness a try at no commitment, right? And, you know, really drive the value into the black card by perks and more stores and reciprocity. And you might have heard my last call, we're now testing or putting in meditation pods in our Blackheart Spire area so we add more value to the Blackheart Spire area in the clubs and use that really as the lever to drive overall average ticket. It's worked for many, many years and I think it continues to allow us to drive member growth like we've done over the past years.
spk13: Thanks. Very helpful. Good luck.
spk03: Thanks, Warren.
spk05: Our next question comes from Chris O'Call from Stiefel. Please go ahead.
spk09: Great. Thanks, guys. Good morning. This is Patrick on for Chris. I had a quick clarification and a question. Tom, can you just remind us if the program you put into place during the pandemic that allowed franchisees to defer equipment replacement, has that fully expired? And then are you guys seeing any new supply chain issues on the horizon that might affect the ability to re-equip or have franchisees open new locations?
spk12: Yeah, hey, Patrick. Thanks. So, yeah, so I think what you're referring to is during the pandemic, we granted ultimately 18 months on the re-equip obligation, and that's all passed. So it's all, you know, all dates were shifted. There's no catch-up year. Just whatever date somebody's obligation was in the system moved out accordingly. And all new stores are back on the five-year and seven-year re-equipped cycles for cardio and strength, respectively. And we currently do not see any issues with equipment availability. We're in constant contact with our primary suppliers. We don't see anything that would be any cause of concern for equipment availability to support the re-equips for the rest of the year or the new store growth for the rest of the year. Like everybody, probably the primary issue that folks are dealing with opening new stores is HVAC availability. We are not immune to that, but are certainly working with the primary suppliers there to see if there are ways that we can position ourselves to make sure that our needs are secured. We don't yet have any concerns to cause us to alter our outlook, but that's the only potential issue, and so far it looks like our team's been able to navigate to position ourselves where there's no risk.
spk09: Great. That's really helpful. And then lastly, I just wanted to ask on the effectiveness of the Super Bowl campaign, did you guys get any other insights there other than maybe what you shared last quarter? And then just more broadly, I mean, what has that taught you about the potential to have more premium ad placements and the ability to go after a bigger audience? How much of an impact can you drive to new member sign-up trends with sort of those bigger stages that you're now able to access?
spk03: Yeah, I think, you know, we're so much larger than any of our competitors. I think doing big brand moments, you know, like the New Year's Eve and, again, like the Super Bowl is something that sets us apart from, from our peers for sure and definitely puts us in a different world with other companies that typically, I'm sorry, gym and a Super Bowl commercial was never, you know, so I think they definitely, with 112 million viewers, it was definitely a good spot to be in with good company for sure. About 40% of people surveyed said they would like to join PF in the next 12 months, so it's, I think that's a good tailwind from it. And we're doing a brand health study too, hopefully it'll come out off of that, which is off of the New Year's Eve as well, which, It can only help us from that. And people like the commercials. It was 69% positive what they liked about the commercials. So I think they're memorable. I think because we had celebrities in them, I think it made better recall, which we continue to use here through the first half of the year. So I think that as well as setting us apart from even our peers is having celebrities in our commercials that definitely caused a lot of recall. So it's something we'll probably look to do in the future as well.
spk05: Great. Thanks, guys. Thank you. Our last question today comes from Joe Altebello from Raymond James. Please go ahead.
spk02: Good morning. This is Martin Metello for Joe Altebello. Just wondering if we can get an update on unit economics, especially when it comes to labor and equipment costs and commercial real estate as well.
spk12: Yeah, I'll start that one. So I think in terms of The wage inflation, the good news is, as you've probably heard us talk about, we really have a pretty low labor model. Typically, there's a dozen to 15 people on the roster for any given store, and on the floor at any time, there's two, three-ish people on the floor. So wage inflation isn't great for anybody. It certainly affects our franchisees as well. I would say, compared to other places where people... like our store associates can work, it's a pretty good place to work. You know, you're not going home smelling like a French fry or slipping on grease. You're working in a very cool place, music. And, you know, clearly there's a membership servicing involved and cleanliness and standards that we have. But other than that, it's a pretty good gig. And so I think we fare better than most on some of the surveys about where would you like to work. And I think in terms of the financial impact, the good news is it's, as we've modeled it and talked about it with our franchisees, it's pretty temporary because once you, you know, assuming wages don't continue to climb at a rate that we've never seen, but if there is a bit of a one-time reset and then, you know, gradual wage inflation after that, our same-store sales growth that we've had historically, you know, pre-COVID, 53 straight quarters of positive same-store sales that averaged across those quarters 12%, most of that being member growth, and as we've talked about, there's not really any cost that gets added if your store increases its membership from 6,500 to 7,500 members. You don't really add any more cost, so it all flows through the bottom line, which in a pretty short order would offset the margin impact, certainly dollars faster than margin percentage, but both would be offset in a relatively short period of time. Equipment costs are higher for sure. They're up about low double digit depending on the supplier and whether it's strength or cardio versus pre-COVID. And we've talked about typically the cost of putting in new equipment in a club would be around $600,000 pre-COVID. So, you know, bump that up 10 plus percent. It doesn't take a decision to build a store from a yes to a no. It may take the pretty strong returns down a couple hundred basis points, but it's not a meaningful change to cause somebody to decide not to build a store that they wanted to build. And again, as we've said, our franchisees are typically on or ahead of their development schedules, which is a real testament to the returns that they get from building new stores. And lastly, in terms of occupancy rates, we haven't heard that those are changing dramatically. You know, they're pretty sticky. I think even through COVID, they didn't really go down much. Maybe landlords got a little bit more aggressive with tenant allowances to ease the initial cost of opening a new location. And we continue to hear that and see that in our own corporate clubs, but haven't really seen or heard any dramatic change in occupancy rates on a per-foot basis across the markets.
spk02: Great. Thank you. That's super helpful. Just one last follow-up question. You mentioned about 25% of gyms all across the US are permanently closed. Are you seeing a significant number of those members migrate to Planet? And also, are you seeing sort of the workers there migrate over to Planet as well, and you're getting a little bit more experienced workers there?
spk03: I haven't seen any of this, Chris. I haven't seen any of the employee side of things. In the first quarter, about 1% of our joins were coming from closed competition. Typically with the closed competition, just to put a little bit into context, is that about 25% of gyms are permanently closed. It's made up of about 30% of boutiques, which is yoga studios and spinning studios, which typically have about 200 members a store. So it's not like we have a 5,000-member store across the street closing, right? And then of the gym population, about 14% of gyms have closed. And a typical gym in the U.S. outside of Planet, for example, is about 1,200 and 1,400 members. And if they're closing, they probably have less than that because they're not successful. So it's not like we have a bunch of these 5,000-member gyms around the country closing. So yes, there is a market share to grab for sure, but not quite as large as you would probably see when you think about 25%. I really look at it, though, as the longer-term benefit of month over month over month of people looking to join a club for the first time or join a club, period, that there's just less places to shop, there's less advertising from competitors, there's less everything except for planning. So it's more, I think, longer-term benefits gain than a one-time shot in the arm that you would think of. Oda, thank you very much.
spk00: Great. Thank you, Mark. As this is the last scheduled question, I will hand the floor back to the team to conclude.
spk03: Great. Thank you. Everyone, thank you for joining us today. It was an exciting quarter for us. I'm happy to see that People are, you know, driving back to bricks and mortar, as we expected, and really proud of our million net member growth for the first quarter. I'm actually on my way to Boca for tomorrow to speak at our independent franchise council. I was invited to speak to the franchisees. They're excited to all get together and talk about our future together. And next Monday, launching High School from the Past, giving all our teams throughout the U.S. and Canada a place to work out for free, blow off some steam, and hopefully introduce them to fitness for the first time. So, Good stuff to come and have a good summer. Thank you. This concludes today's conference call.
spk05: Thank you very much for joining. You may now disconnect your lines.
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