Planet Fitness, Inc.

To withdraw your question, press star 1 again. We'll now like to turn the conference over to Stacey Carabella, VP of Investor Relations. You may begin.

Thank you, Operator, and good morning, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer, Colleen Keating, and Chief Financial Officer, Jay Stas. They 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 Colleen, I'd like to remind everyone that the language and forward-looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our investor website 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 Colleen.

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness second quarter earnings call. We're excited to be joining you from the New York Stock Exchange, where we will be ringing the closing bell today in celebration of our 10th anniversary as a public company. Over the past decade, through a steadfast commitment to our mission and purpose, we've added nearly 14 million members. expanded our global footprint by more than 1700 clubs and established a presence in all 50 states and four additional countries today we have 2762 clubs and 20.8 million members around the planet we are proud of our accomplishments and confident in our even greater opportunity ahead As consumers increasingly prioritize their health and well-being, Planet Fitness is uniquely positioned to meet that demand with our judgment-free, high-quality, and affordable fitness experience. Our reach is unparalleled, with a Planet Fitness club within a 12-minute drive of 170 million people in the U.S. At the same time, With population growth and de-urbanization over the past several years, we see increasing opportunities to bring Planet Fitness's high-value offering to an ever-growing community of fitness-minded consumers in more geographies than ever before. Gen Z continues to be the fastest-growing segment of our membership. The ongoing success of initiatives like our high school summer pass now in its fifth year and already outpacing last year's sign-ups and workouts, highlights the continued strength and potential of our model. Gen Z is highly fitness aware, and there are still three years of this population that aren't yet of age to join our clubs. In fact, we have twice the unaided awareness versus our next closest gym peer, and that gap is even greater among Gen Zs. And the next generation, Gen Alpha, is expected to be even more focused on health and well-being. In the second quarter, we delivered strong financial performance and remained confident in our full-year outlook for 2025. We ended the quarter with approximately 20.8 million members and 8.2% system-wide same-club sales growth. We added 23 new clubs, ending the quarter with a global club count of 2762. I'd now like to review the progress we've made on our four strategic imperatives during the second quarter. As a reminder, these four strategic imperatives are redefining our brand promise and communicating it through our marketing, enhancing our member experience, refining our product and optimizing our format, and accelerating new club growth let me start with redefining our brand promise in the second quarter we continued with our we are all strong on this planet marketing campaign that highlights our best-in-class strength equipment our welcoming atmosphere and the supportive community that we offer we continue to see strong black card penetration with 65.8% of our membership at that tier as of the end of the quarter, a 340 basis point increase from the second quarter of last year. Consumers continue to recognize the value of the black card, with the gap between the classic and black card memberships only $10. That said, it's not a question of if, it's a question of when we implement a black card price increase. We wanted to anniversary the classic card price increase and will evaluate the impact of the online cancel functionality before making a timing decision on a black card price change. Now to member experience and format optimization. Our commitment to providing a positive member experience starts with a member's very first interaction with our brand. For many young adults, That initial connection is being forged this summer. As I noted earlier, high school summer pass initial results are outpacing last year's. It's exciting to see so many young people embracing their fitness journeys and even more so that they're choosing Planet Fitness to support them along the way. In line with our members first philosophy, We completed our national rollout of the online cancel functionality in May, despite the federal appeals court ruling that blocked the quits to cancel rule. We are proud to lead by doing the right thing for our members and simplifying their ability to manage their membership with us. As a reminder, this was an option that we offered in more than 35% of our system before the end of Q1, including all of our corporate clubs. where we enabled it more than a year ago. We are seeing a higher attrition rate now that this functionality is live across our system. This is contemplated in our same club sales outlook that Jay will address in his comments. In alignment with our core values and commitment to integrity and excellence, we believe this is the right thing to do, both to support our members and their experience and as the industry leader. In Q2, we once again had a mid-30% rejoin rate and believe that allowing members to more easily manage their membership will only benefit us when they think about rejoining a club in the future. And finally, our efforts to accelerate new club growth. We are steadfastly focused on unit economics and believe that franchisee success fuels franchisor success. we continue to refine our product offering and operational efficiencies to maximize the economic value proposition while delivering the most relevant on-brand experience for our members. Our goal is to drive the top line while enhancing the bottom line to realize the tremendous growth opportunity we have in the US and beyond. Internationally, Jay and I were in Spain in July to celebrate the opening of our ninth club located in Madrid, Chamartin. The milestone came just a week after the one-year anniversary of our first club in Spain. It was incredible to experience firsthand how the brand is being brought to life by the team in both newly built and a couple of conversion clubs. Seeing our brand continue to grow in new markets is extremely rewarding and a testament to our global appeal. Our success in bringing the brand to life in Europe is another proof point to support the long-term club growth opportunities for Planet Fitness. We look forward to providing more insight into our strategy for both domestic and international growth at our Investor Day in November. Earlier this week, we executed an agreement for the sale of our eight corporate clubs in California to a franchisee in the market. This transaction reflects our commitment to recycling capital where appropriate and advancing our asset light model. This sale also allows us to focus our resources on our corporate owned clubs on the East Coast, where we are more densely concentrated and therefore can operate more efficiently. Now I will turn it over to Jay.

Thanks, Colleen. We're pleased to deliver another quarter of strong results and we're on track to achieve our full-year growth targets. 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 combined with the proven resilience of our asset-light business model. Demand for our offering is strong as evidenced by our 16 straight quarters of mid-single-digit or higher same-club sales growth. Before I review our second quarter financial performance, I'd like to address three topics. The rollout of online membership management, the agreement to sell our California clubs to a local franchisee in the market, and our latest banking on tariffs. We remain committed to delivering a great member experience, and we want to make the cancellation process as seamless as the joint process. As Colleen noted, we now provide our members the ability to manage their membership conveniently online. As you recall, more than 35% of our system had online cancel functionality before the end of Q1, including all of our corporate clubs where we enabled it more than one year ago. As a reminder, generally the largest impact of the attrition rate occurs in the first couple of months after implementing this functionality and diminishes as time goes on. We're seeing a slightly elevated cancel rate in both the clubs that had online cancel before Q2 and those that rolled out during the quarter. The rate is up less in the legacy cohort of clubs compared to the others. These impacts are included in our outlook in same club sales growth guidance for the year. Now to the agreement to sell our California corporate clubs. We continue to believe in our asset late highly franchise model and reiterate our plans to own approximately 10% of the fleet. To contextualize the impact from the sale of these clubs, we expected these clubs to contribute approximately $7 million to our revenue and approximately $2 million to our adjusted EBITDA for the balance of the year, assuming an end of August close. These impacts are also contemplated in our outlook for the year. Finally, given that we're a fitness brand that sells an experience, we are generally less impacted by tariffs and have implemented mitigation plans such as leveraging our scale to negotiate with manufacturers, exploring alternative markets for producing products, and bringing equipment into the U.S. on an accelerated basis. Now to our second quarter results. All of my comments regarding our second quarter performance will be comparing Q2 2025 to Q2 of last year, unless otherwise noted. We opened 23 new clubs compared to 18. We delivered system-wide same-club sales growth of 8.2% in the second quarter. Franchisee same-club sales increased 8.3%, and corporate same-club sales increased 7.0%. Approximately 70% of our Q2 comp increase was driven by rate growth with the balance driven by net membership growth. Black card penetration was 65.8% at the end of the quarter, an increase of 340 basis points from the prior year, and a sequential increase of approximately 90 basis points from Q1. For the second quarter, total revenue was $340.9 million compared to $300.9 million, an increase of 13.3%. The increase was driven by revenue growth across all three segments. An 11% increase in franchise segment revenue was primarily due to higher royalty revenue from increased same club sales, as well as new clubs, an increase in national ad funds, as well as franchisee fees. For the second quarter, the average royalty rate was 6.7% up from 6.6% in the prior year. The 10.8% increase in revenue in the corporate-owned club segment was primarily driven by increased same-club sales as well as sales from new clubs. Equipment segment revenue increased 21.5%. The increase was primarily driven by higher revenue from replacement equipment sales. For the quarter, replacement equipment accounted for 87% of total equipment revenue compared to 84%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned clubs, amounted to $59.4 million compared to $51.9 million. Club operations expense, which relates to our corporate-owned club segment, increased 10.4% to $77.4 million from $70.2 million. The increase was primarily due to operating expenses from 25 new clubs open since April 1st of 24. SG&A for the quarter was $35.5 million compared to $31.6 million, while adjusted SG&A was $33.9 million compared to $30.1 million, an increase of 12.4%. The primary driver of the increase to adjusted SG&A was higher compensation expense from recent executive hires. National advertising fund expense was $22.8 million compared to $20.1 million, an increase of 6.7%. Net income was $58.3 million, adjusted net income was $72.6 million, and adjusted net income per diluted share was 86 cents. Adjusted EBITDA was $147.6 million, an increase of 15.8% year-over-year, and adjusted EBITDA margin was 43.3%, compared to $127.5 million with adjusted EBITDA margin of 42.4%. By segment, franchise adjusted EBITDA was $86.5 million and adjusted EBITDA margin increased from 71.9% to 72.3%. Corporate club adjusted EBITDA was $56.6 million and adjusted EBITDA margin increased from 39.5% to 40.7%. Equipment adjusted EBITDA was $26.4 million, and adjusted EBITDA market increased from 27.4% to 32.1%. Now, turning to the balance sheet. As of June 30, 2025, we had total cash, cash equivalents, and marketable securities of $582.5 million compared to $529.5 million on September 31, 2024, which included $56.5 million of restricted cash in each period. Moving on to our 2025 outlook, which we provided in our press release this morning. As I noted earlier, our outlook assumes tariffs at the current levels. We continue to expect between 160 and 170 new clubs, which include both franchise and corporate locations. We expect that the quarterly cadence will be weighted towards the fourth quarter of 2025, even more so than last year. We continue to expect between 130 and 140 equipment placements in new franchise clubs, and again, we expect a similar cadence to our openings. Lastly, we are reiterating our growth targets with the exception of same club sales growth, which we are narrowing to approximately 6% growth from the previous 5% to 6% growth range. We continue to expect the following growth over fiscal year 2024 results. Revenue to grow approximately 10%, adjusted EBITDA to grow approximately 10%, adjusted net income to increase in the 8% to 9% range, adjusted net income per diluted share to grow in the 11% to 12% range based on adjusted diluted weighted average shares outstanding of approximately 84.5 million, inclusive of approximately 1 million shares we expect to repurchase in 2025 in line with what we've previously communicated. Let me speak to the drivers for the implied sequence growth in the second half of the year. First, we rolled over the classic card price increase on June 28th, so while we will continue to get rate benefit from it given our subscription model and tenure of our members, the benefit moderates over this time. Second, we forecast an elevated attrition rate in the back half of the year since our national rollout of online cancellation. Lastly, the continuing volatile macroeconomic environment Finally, we continue to expect that re-equipped sales will make up approximately 70% of total equipment segment revenue. 2025 net interest expense of approximately 86 million inclusive of the annualized impact of our 2024 refinancing. The DNA to be flat to 24 and CapEx to be up approximately 20%. I will now turn the call back to the operator to open it up for Q&A.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And we do request for today's session that you please limit yourself to one question and one follow up. Your first question comes from the line of Randy Koenig of Jefferies. Your line is open.

Yeah, thanks and good morning everybody.

I guess, Colleen and Jay, maybe give us some perspectives on where we stand with the proportion of clubs that have been kind of under the new layout with more strength equipment relative to cardio and what trends or items you may see that are different in those clubs versus the older format from an equipment perspective clubs, whether it be Membership, flat card penetration, attrition, et cetera, would be very helpful to understand as you're moving into this new format or from an equipment perspective, what trends are the same or different from the older, more cardio-focused floor layout.

Morning, Randy. Great to talk with you. Thanks for the question. By the end of this year, we will have more than 70% of our clubs on some version of format optimization. So some optimized floor plan and mix of equipment. As you know, at the end of last year, we had 65% of the estate opt in to add plate loaded equipment. So those were at least three new pieces of plate loaded equipment. um in the clubs and then we've got even more in more clubs uh adding that this year so we'll be well over 70 percent uh not just with the plate loaded but with the more balanced mix of cardio and strength and to your question about the specific uh mix of equipment it really is ish about a 50 50 mix of cardio and strength uh so we'll still have a strong car we still do have a strong complement of cardio equipment In our clubs, we find many of our members like mixed modality. However, we've increased the amount of floor space dedicated to strength equipment and augmented that. So really seeing a more balanced mix of cardio and strength. And even within the cardio, adding things like more stair climbers because those are getting a high level of utilization. Treadmills still get a high level of utilization. And dialing back things like arc trainers, and ellipticals, where we'll still have a complement of them, but gearing it more toward what we're seeing from a usage perspective from our members.

Great. And then I know there was some talk in the past about adding new types of amenities to the black card member area, whether it be red light, cold plunge, spray tan, et cetera. Can you update us on where we stand with that? And if any learnings, if any clubs have those amenities at all, if you're seeing anything that's different from a trend perspective versus clubs, obviously don't have those yet.

Yeah. So we've got a number, we have a number of our clubs where we're piloting some of these new black card amenities. So, and you're, you're right. You cited many of the things that are in flight. So testing red light, also red light hybrid is in a number of our clubs, and we're also testing spray tanning as an alternative to UV tanning. So too soon for us to kind of call which ones we're going to move forward, still in pilot phase and evaluating the utilization. However, we continue to see that recovery and renewal are important parts of our members' fitness routine. So we'll continue to test and evaluate things that can enhance our members' experience.

Your next question comes from the line of John Heinbockel of Guggenheim. Your line is open.

Hey, Colleen. I wanted to start with the 170 million person TAM, right, that you're within 12 minutes of. How do you think about... you know, density, and then is the opportunity being, you know, density in some of those existing more urban markets versus maybe less dense, you know, rural markets are, you know, kind of out there. So how do you balance the two? I assume you want to do more densification in urban, but let me know.

Yeah, so, John, good morning. Thanks for the question. So, yes, you know, we... We've seen the de-urbanization and growth in the suburbs give us new market opportunities where we have the population to support our traditional 20,000 square foot club. At the same time, we've been testing some additional smaller footprint in infill locations and also more rural locations. so that we're able to bring a Planet Fitness experience to even more prospective members around Planet.

Okay. And maybe a follow-up. I know you're in the early stages of what you want to do with your marketing structure, but is there any thought, have you given any thought to how you want local, national to kind of be set up? Because I think the idea was maybe do more national, a little less local, and then there is a marketing savings longer term. I don't know if there's been any update on that.

Yeah. So from a marketing standpoint, we launched our new campaign this year. And based on what we've seen from our member join numbers, we're confident that the new marketing messaging is landing. You know, you've seen the campaign around we're all strong on this planet and growing stronger together. That messaging is very much resonating. I will say specifically, you know, we're doing more national marketing, driving the brand and bringing the brand promise to life. And at the local and hyperlocal level, we still believe that's an important complement to the national marketing. So very much in balance. I mentioned that we're seeing increased participation, increased volume, as well as utilization with high school summer pass this summer. And there's an example of where we amped up marketing with influencers to target this particular customer demographic. And it's proven quite successful in the numbers we're seeing with the high school summer pass participation this summer. You know, with our new chief marketing officer who just came aboard in February, you'll start to see us experimenting with a new marketing mix. Again, balance of local and national. And at the national level, we do think there's an opportunity for us to buy more efficiently and aggregate our spend.

Your next question comes from the line of Max Rakalenko of TD Cowen. Your line is open.

Great. Thanks a lot. So first, Jake, can you speak to maintaining the comps guide? I know you provided some color, but just any additional comments? Because should it churn normalize in 3Q given your prior comments on click to cancel? And then you should still see a benefit from the classic hard price increase given how churn works. And then I do think that the headwind from 1Q is a black card promo.

should i believe continue to uh reverse so just any more color on the conservatism for the qh guy yeah max thanks for the question and yeah i mean i mean to your point uh obviously the classic card price increase uh will continue to get that benefit we will continue to get that but it diminishes over time over the the tenure of the membership uh to your point i'm quick to cancel as we said that what we're seeing is slightly elevated than what we had initially modeled. Now we've recast that and it is baked into our full year outlook and the comp guidance. And as far as it moderating, we would expect that. I mean, it is still early. We're still within the first three months of the full rollout. So we're still in the early phases of that. But we've updated our forecast and we've contemplated that. So we think what we've got in there is appropriate. And then the last pillar, just given the macroeconomic environment, we do think it makes sense to maintain some level of conservatism. in the guide going forward. So all that culminated in what we spoke about today.

Got it. That's helpful. And then, Colleen, I saw that you recently announced that you're looking to add a director of franchise sales. So your franchise base has been shrinking, and I believe you've been close to new entrants for many years now as the white space has been divvied up, and there has been M&A inside the system. So what's the mechanism to add new franchisees into the fold besides new ones entering through M&As such as the Flint Group and others? And is it more for U.S. or international franchisees? And just how should we think about the acceleration and openings from this?

Yeah, Max, one of the things, you know, we've said is that to, you know, over the longer term, to achieve our full growth ambition, we believe we'll need more franchisees in the system. We also know that there are several of our Can you still hear me?

Yes, you can be heard.

Okay, perfect. So I'll start again in case it was disrupted. So to achieve our longer-term growth ambition, we believe we need more franchisees in the system. And we also know that there are several of our larger franchisees that are approaching the end of their fund horizon and maybe looking to transact And in support of those franchisees as well, you know, we want to be cultivating prospective new franchisee relationships who might want to, you know, might want to come into the system and grow with Planet Fitness.

Your next question comes from the line of Raul Crathapalli of JP Morgan. Your line is open.

Good morning, guys. Thanks for taking the question. Colleen, as we think about the TAM and going into the analyst day, how do you think about the local and regional HVLP competition? I mean, we are seeing some of the incumbent brands with very well-capitalized operators and backers coming into the market. Curious to hear your thoughts, and I have a follow-up.

So, Hyrule, nice to hear from you. Gosh, when I think about the TAM, I think about the growth of Gen Z and how fitness-minded they are and that they are the fastest-growing segment of our membership and the fact that several years of Gen Z haven't even aged into our membership opportunity yet. So I think the TAM is going to continue to grow, and with Gen Alpha coming up behind by all accounts today, going to be at least as if not more focused on health and wellness and well-being. And when I think about the landscape, and I tend to say peers in the space, you're right that there are a lot of local and regional players. When you think about the 31,000 gyms and clubs that are in the U.S. today, If you take us and our next largest peer in the space combined, we're together only about slightly more than 10% of that. So it's a big landscape. And at the same time, I think our biggest competitor is fear of walking in the front door. And that's what makes Planet Fitness so uniquely positioned, coming into any market and uniquely positioned is our welcoming environment, no gym intimidation, and that we're uniquely positioned to meet members wherever they're at on their fitness journey, whether they're a beginner or whether they're an advanced gym goer who's training for a marathon.

Appreciate the color. I want to pick up a little more on the Spain side. Appreciate the update. How are the unit economics shaping up relative to the U.S., given you have a GMO2 with almost a year in? And then also, if you can share any colors on an update on the franchise, on re-franchising situation there. Thank you.

So from a Spain perspective, we are thrilled with the way the clubs are ramping in Spain. And in particular, you mentioned the first club that has just been open a year. It was a year in July. When we look at that club's ramp and we compare it to a domestic ramp, the Spain clubs, inclusive of that first one that opened, are ramping like our domestic clubs, which is quite remarkable considering we only brought the brand to Spain just a year ago. So we're feeling really good about our entree into Europe, really good about the Spain performance. And we're in the very, very, very early days of having some conversation about transacting Spain. But it is our intention to recycle that capital, to bring a franchise partner into Spain. We built it on our balance sheet as a proof of concept. And it's proving really well.

Your next question comes from the line of Jonathan Komp of Baird. Your line is open.

Yeah, hi, good morning. I just want to follow up. I know you mentioned, Jay, in the back half now, assuming higher churn continues, could you maybe just talk about some plans you're embedding to help offset that, whether there are some demand-centric initiatives that can help near-term and then longer-term? Just what are the key initiatives you're looking at to help drive unit economics still higher here?

Yeah, so I think that's a broad question. You know, when we think about it, I think this is a bit of a moment in time if we step back and think about click to cancel or the ability to manage your membership online. Look, we're about putting the members first. We think it's the right thing to do. Taking this step, even though it wasn't mandated, is the right thing, and then align with our core values. So from that standpoint, it makes all the sense in the world, and we think it makes sense to be the leader since we're the leader in the industry in this space. As we think about opportunity. We've talked about it before. It's too early to comment on it further, but the ability to market this further in the join flow, we've done some testing and we've seen lifts. Colleen touched on the high school summer pass, which has been a nice program that we think will continue to be successful and meaningful going forward. And I think, as is evidenced by our comps and our results for the second quarter, the marketing is landing and the shift in our clubs with the equipment is landing to the full spectrum of Jim Kohler. So we're pleased with all that. Click to cancel. We're managing it. And again, it's, you know, we're talking tens of basis points compared to what we originally thought. It is baked in our outlook and our comp guide, so we feel good about where we're at.

Okay, thank you. Then just two follow-ups as we think about the next few months here. Any opportunity to better monetize and convert the high school summer pass? And then, Colleen, just on pricing, I think we're within a window of a few months where you'd probably make the decision for this year or not. What else do you need to see, or what are you looking at specifically as you collectively make that decision? Thanks again.

Absolutely. So I think from a conversion standpoint on high school summer pass, We saw last year that we had a higher conversion percentage than we did the year prior. And what we're seeing this year, too soon to get into real specifics, we'll see the conversion in the fall. But all indicators are that both the utilization and the participation are both up markedly. this year versus last. So, you know, so that will be very, you know, should be favorable, I guess I should say, you know, if we assume even a flat conversion percentage, much less, you know, potentially an increase in conversion like we saw last year. So, remains to be seen in the fall, but the indicators there are, you know, I think are really strong. Oh, and blackout pricing. So, We said last quarter that it wasn't a matter of if, it was a matter of when, but we wanted to get on the other side of anniversarying the classic card price increase, which we did at the end of Q2. And we also wanted to get through the rollout of online membership management, what we're now calling Click to Cancel, because it really is about empowering our members to manage their memberships. Given that we've seen, you know, as Jay said, a slight elevation, and I don't want to overplay that, you know, we're talking in the tens of basis points. This is not in the hundreds of basis points. Slight elevation in churn since that rollout. You know, we'd like to give that a minute to moderate. As we've seen in test environments in other markets in the past, there is a moderation after that rollout. So we want to, you know, we want to take a minute

um and uh and get on the other side of that rollout as well uh before we make an absolute decision on the timing of the black card price increase your next question comes from line of joe altabello of raymond james your line is open thanks good morning guys um just want to follow up colleen on that last answer you gave about click to cancel i i it's still early obviously but do you have data on how quickly cancel rates actually, you know, go back to normal after the implementation of click to cancel, or do they stay slightly elevated permanently?

Generally speaking, generally speaking, after ish about 12 weeks, they moderate. Now, there have been a couple of, you know, couple of exceptions. We talked about Tennessee. A couple of exceptions where it's remained a bit elevated for a longer period of time, but generally speaking, we see a moderation about 12 weeks after rollout. The difference here is that this is a nationwide rollout as opposed to, you know, in smaller cohorts as we've done in the past. So, you know, remains to be seen if this behaves like the prior test and, you know, prior rollout environments. But we're still in that window because it was mid-May, so we're still within that 12-week window of rollout, and we'll monitor it.

Okay. And then just to follow up on the comp, the 8.2%, I know you've talked about kind of getting back to more of a 50-50 split between member and rate growth. How quickly do you think you can get there?

Yeah, Joe, this is Jay. And as we said on the call, it's 70-30. We're not guiding beyond 25. And I think especially right now as we think about the back half of the year, we're going to be – more consistent with the 70-30 versus getting back to an even split. And as we think about Q3, it's historically not a large increase in membership type of quarter. So I would expect in Q3 for that 70-30 to even be more skewed. And we'll give longer-term guidance at our Investor Day in November.

Your next question comes from the line of Chris Okull of Stiefel Financial Corp. Your line is open.

Thanks. Good morning, guys. Colleen, I was hoping you could provide an update on the progress in reducing investment costs for new units.

Me too. So, as you know, the more balanced cardio and strength package, for starters, reduced the build cost for our franchisees. We've also done things like shrinking the lobby, where we're today seeing well over 80% of our joins come either online or through the app. We determined that we don't need as large a lobby because we're not doing the signups in the lobby. So dedicating more of that space to the gym floor and shrinking the lobby reduces the build cost because obviously tile is expensive. We're looking at locker room sizes and shrinking the locker room sizes a bit to dedicate more space to the gym floor That, too, reduces build costs. Building a smaller front desk, which we think actually creates a more welcoming environment for our members. So things structurally that we're able to do from a construction cost standpoint are helping the unit economics. At the end of the day, the biggest thing is this business is a top line play. And when we drive the top line for our franchisees, that's the thing we do that's most accretive to their unit economics. So, you know, we're really encouraged by the joint volume that we've seen this year. We're really encouraged that our marketing is landing and that our product offering is really resonating with consumers, you know, particularly businesses. Gen Z, a younger consumer, as we think about kind of longer-term lifetime value.

Makes sense. And then, do you believe adding some of these high-value services like great painting could unlock the potential for an additional pricing tier?

We're not talking about additional pricing tiers, you know, right now. What we are talking about is potentially, you know, and the timing of which is not potentially, when we will take an increase to the black card pricing. And we're always going to be thoughtful about making sure that, you know, you've heard me say leaning into, when we think about HVLP, making sure that we're thinking about the HV in capital letters and the LP in lowercase, that we're delivering, you know, an incredibly high value for our members. So always thinking about the offering, wanting to stay most relevant, and then, you know, pricing in a way that, you know, enhances the economics of our franchisees, while at the same time, delivers an incredibly high value for our members.

Your next question comes from Yanshu of BNP. Your line is open.

Hi, guys. Thanks for the question. I wanted to follow up maybe on Gen Z in terms of the differences of how they behave versus other demographics. Are you seeing them tend to join at more white card versus black card, any differences in utilization or churn? Just kind of curious on how they look.

Yeah, so, you know, while we haven't really dissected or we don't dissect or deconstruct the utilization by generational cohort, you know, we have shared that we're seeing utilization increase. So where we used to see our active members or members that utilize our club in a given month, you know, use the club six times a month or 6.1 times a month, you know, we're seeing that in the high sixes, mid to high sixes today. So, you know, that is an indication. You can glean from that as Gen Zs are becoming, you know, are the fastest growing segment of our membership, you know, compound that with the increased utilization. And then I talked about high school summer pass this morning, and that's all Gen Z. And, you know, I shared with you that not only is the participation up, the utilization is also up as well. So, you know, those are indications you can draw from.

Okay, that's helpful. And then maybe you might have unit economics a couple times, and to your point, with the pricing and the formatting of the stores and the marketing, it seems like unit economics are getting better. I'm just curious, like if you're hearing feedback from franchisees, maybe looking to, they're seeing the better unit economics and maybe wanting to accelerate opening into the next year.

One of the beautiful things about a franchise business is the opportunity to partner with our franchisees. And our new chief development officer has been out on the road a lot, meeting with our franchisees and talking with them about the changes in format, the structural changes that we can be making to enhance the build cost or improve the build cost. And then, of course, our new chief marketing officer really driving the top line. The other thing I'll say that we're seeing, and I'm sure you're seeing as well, is improvements in the availability of retail real estate, particularly shopping center real estate. So we've had strong positive absorption over the last several years, and in the first two quarters of this year, Q1 and Q2, negative absorptions. also a moderation in rent escalation. So rent growth has been below inflation in 2025. So those are also good indicators for improved unit economics for our franchisees. So we're looking at crop line, which is most important. We're looking at build cost in partnership with our franchisees and then trying to also lean in and help them with the availability of real estate.

Yeah, and I agree. Just to add on specifically, we do look at the new cohorts of clubs that we've uh, open both the franchisees and are since the new growth model and, uh, you know, some of the evolution in the marketing and the floor plan. And from a top line standpoint, we're very pleased with the way those are trending, uh, in terms of a, a unit economics.

Your next question comes from the line of Alex Perry of bank of America. Your line is open.

Hi, thanks for taking my questions here and congrats on a strong quarter. I just wanted to follow up sort of on the guidance. So you narrowed the same source sales range toward the high end. You sort of mentioned that click to cancel attrition is, I think, is a little bit higher than expected. So I guess what is the offset? Are you seeing better black card penetration than you were expecting? Or, you know, what else is sort of going on that's maybe offsetting some of this higher click to cancel attrition? Thanks.

Yeah, so as we said, we had a wider range, five to six. We've narrowed that range. We obviously came off a good quarter, so part of it is just actualizing Q2. And then as we think about the guide, the click to cancel, right, we had some of that embedded, and we've moderated that slightly. And then otherwise, it's just the things that we've talked about, right, continuing Q2, the benefit on the classic card price increase right we'll still get that although not to the extent that we have that was modeled in before and then just some level of conservatism with the macroeconomic environment perfect and then I guess just my follow-up um as we think about memberships in the back half anything to call out there I think seasonally on a per club basis you normally see declines in the third and fourth quarter is that you know how we should be thinking about it as as we look at this year is there you know anything else we should be considering giving all the moving parts thanks yeah we don't really guide uh to membership but to your point when we think about the third quarter historically that's not been a large uh net member ad uh quarter um you know but we're going to continue to do our best and then if you look at the trends that we've had

Your next question comes from the line of Sharon of William Blair. Your line is open.

Hi, good morning. I wanted to kind of go back to the increase in strength training at a lot of the clubs at this point. Is there any way to compare and contrast kind of member engagement or visitation patterns at those clubs with the added strength versus kind of where they were before or kind of a base cohort?

So, as I shared a little bit, we're seeing utilization up and the number of visits per club increasing as well, which is an indication that the format and format optimization is landing, is resonating with our members. We do have some clubs that have some monitoring data that gives us some granular line of sight, but probably too soon for us to talk about that as a trend. So we are measuring utilization, but again, you're really just rolling out the plate-loaded equipment just went in right before the first quarter. Probably too soon for us to really talk about it as a trend yet.

Is it a big enough trend, though, where you might need to go back and add even more equipment on the strength side?

Sharon, that's one of the things that we're evaluating, and it may not be broadly all strengths. It may be certain specific pieces of equipment that we're hearing member feedback that may indicate we want to add more of it. I'll give you one example in particular. we have significantly increased the complement of stair climbers in our clubs. That was based on data that we showed from a member utilization standpoint. And the same will hold true with strength equipment. As we hear from our members, the pieces of equipment they receive, that they're using more, could help inform our equipment packages going forward. And the other thing that we've noticed is the utilization of floor space for functional training. So we've been intentional in our clubs about opening up floor space so that our members have space to do functional training. That's another trend that we've been responding to.

Yeah, and as we've talked about before, we have NPS now fully rolled out across our system. So that's a great area for us to get feedback across the entirety.

Your next question comes from the line of Marnie Lysat of Macquarie Capital. Your line is open.

Hi, guys. Thanks for taking my questions. I've just got some questions maybe pertaining to more just some cash flow nuances. Just noticed that your accounts receivable balance is quite elevated compared to more recent history as of June end. And it's kind of ratcheting up to what it was in December. on the back of some of those re-equipped dynamics. Is there anything you can kind of unpack there? Is there potentially any inflation coming through on equipment?

No, I think there's nothing unusual there. It's just standard timing differences.

Okay, okay. And just kind of moving on, you've obviously spoken to the deal in California. Are you seeing any changes in the appetite of franchisor groups for these kind of deals in the current climate? Or is it still kind of like business as usual?

Yeah, I think it was mentioned on one of the questions earlier about how frequently when assets transact, when clubs transact in our system, it's an incumbent franchisee who's looking to purchase. And in the sale of the California clubs, we had multiple bids on that portfolio of clubs and, you know, once again, strong interest from inside the system to purchase the additional clubs. So, you know, no diminution in appetite for sure.

Your next question comes from the line of Logan Reich of RBC Capital Markets. Your line is open.

Hey, good morning. Thanks for taking my question. I had a question on the black card pricing test. You've been doing it for a little while now. I was just wondering if you can share any observations or differences you guys are seeing in the test relative to broader store portfolio and maybe in relation to black card mix, retention, net ads, anything you would be able to share on the black card test. Thanks.

Logan, I'll start. So when we went in and I probably, you know, I wouldn't call it a test at this point. I think we've evaluated it now. It's about, you know, we've made a decision. It's just about the right timing. But at any rate, when we were in the test, we wanted to see two things. You know, was there headroom on price and was that headroom at $27.99 or $29.99? The second was, you know, did we see elevated churn? And then the third was, did we, you know, was it more accretive? to enjoy, did we see an increased black card penetration? And net-net on price, there was not a material difference between the $27.99 and the $29.99 price test, which is why, you know, we've anchored to the $29.99 from a churn perspective. We did not see a material difference in churn at the different price point. And from a black card penetration, we've been talking about that. Gosh, we're, you know, we're up 340 basis points in black card penetration quarter, you know, quarter to prior year. And that's been a trend that we've been seeing. So with the gap between classic and black, you know, we've had significant, you know, being the narrowest that it's been since the inception of the black card at a $10 price delta. We've definitely enjoyed increased black card penetration that has been, you know, has been accretive.

Got it. Super helpful. And just a quick follow-up. How many stores have the $30 or how many gyms have the $30 black card price today?

We have it in two geographies today. It's in our New York market and our Charlotte market today. Okay.

Your last question comes from the line of Brian McNamara of Canaccord Genuity. Your line is open.

Hi, this is Madison County on for Brian. Thanks for taking our question. We were just curious why net new unit guidance hasn't been adjusted as we would have figured visibility would be much higher today on that front compared to May. Also, is there like an internal timeline when you expect to surpass the 200 plus net new unit growth number that the company did pre-pandemic? Thanks.

Yeah, so I can start on that. As far as the 200 number and what we've talked about, I mean, Colleen is a fan of a big number, and so we appreciate that. You know, we want to continue to do the right things, and what that will allow for is, you know, continued steady growth in the units, right? We don't want to hear the bumper crop, but we think doing the work that we're doing on all fronts will eventually lead us back to that, and that includes both domestic and international growth. And then from a net growth standpoint, to your point, right, we have had a couple of closures. Some of that was related to lease terms, and some of that was just natural lease ending. So, you know, it's just part of the normal course of the business, nothing unusual, and we can, you know, refine that going forward.

I think, too, we also know that we've got, you know, because of the nature of the business, there's seasonal favorability to a Q4 opening. It's a very profitable quarter to open because you're right in front of the strong Q1, you know, joint volume. The flip side of that is that it's, you know, it's a race to the finish when you've got a lot of the openings back and loaded in the last quarter of the year. So we felt confident in the range that we guided, and we feel confident that we have a great line of sight to those openings. However, at the same time, there are a lot in Q4.

Thank you very much.

That concludes our Q&A session. I'll now turn the conference back over to CEO Colleen Keating for closing remarks.

Thank you. In closing, I am encouraged by our performance during the first half of 2025. We continue to be a highly attractive franchise system that generates strong and stable free cash flow for long-term sustainable growth and increased shareholder value. Thank you.

This concludes today's conference call. You may now disconnect.