Q3 2019 Earnings Call
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session to ask a question during that time, you'll need to press star one on your telephone keypad.
Thank you I would now which I hand, the call over to Brendon Frey. Please go ahead. Thank you for joining us today to discuss planet fitness is third quarter 2019 earnings results.
On today's call or Chris Rondeau, Chief Executive Officer, Endorphin, lightweight President and Chief Financial Officer.
I'll be of today's press release is available on the Investor Relations section of plant up and this is web site at planet fitness Dot com.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements.
These forward looking statements reflect planet fitness is judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting planet fitness business.
Accordingly, you should not place undue reliance on these forward looking statements.
For a more thorough discussion of the risk and uncertainties associated with the forward looking statements to be made in this conference call and webcast.
We refer to you to the disclaimer regarding forward looking statements included in our third quarter 2019 earnings release, which was furnished to the FCC today on form 8-K, as well as our filings with the FCC referencing that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.
In addition, the company may refer to certain adjusted non-GAAP metrics on this call.
Explanation of these metrics can be found in the earnings race filed earlier today.
With that I'll turn the call over to Chris Rondeau, Chief Executive Officer Planet fitness breast.
Thank you Brendan and thank everyone for joining us today, we delivered another quarter solid results highlighted by system wide same store sales growth of 7.9% on top of a 9.7% gain a year ago in adjusted earnings per share of 36 cents versus 28 cents last year, an increase of 29%. The majority of our system wide sales growth in Q3 Approx.
Only 75% was driven by net member growth, it's casuals and first time gym users continue to be attracted to our brand and welcoming not in too many patents concept.
Compared to the industry our growth is remarkable according to Ursa International held racket and Sports Club Association. The U.S. fitness industry open at roughly 1100, new locations and added 1.6 million members in 2018 in that same year benefit. It's opened 211, new stores and added 1.8 million numbers we have.
Good for roughly 20% of the industry unit growth in more than 100% of the point.
Thank you Glenn it didn't really industry. The U.S. industry grew by over 800 stores, but membership declined by about 200000 reinforcing the other because concepts are trading amongst themselves what new store openings. The our share your smaller piece of the same pie.
Our bullish well capitalized franchisees continue to fuel our expansion efforts in both new and existing markets with the opportunity to double our domestic store count overtime, you wish remains our primary growth driver.
That said international markets represent a very attractive opportunity for our brand in dinners and we're excited to she or he development on this front.
Recently, we finalize plans to open our first when it didn't stores in Australia.
Our entry into the Australian market is being led by a partnership between two existing he was franchise groups do enforced forces well they look Australia fitness operator on the trademark went through this name in Australia in operating several occasions in new South Wales.
Initial development agreements secures ownership on the planet fitness trademark in grants the rights to convert remodels several existing locations to our planet fitness bran and built a minimum of 35, new occasions any portion of Australia.
The third quarter, we see opportunity to alter intact, our marketing mix increase in select markets to measure overall effectiveness. We are pleased with the initial results will be incorporating the learnings going forward.
Well, our marketing plans in the media spend for the remainder of this year are largely committed each we should be internet, each where 2020 marketing plan in order to strengthen our messaging with our core consumer, especially during the important post new years signed a period improve our reached wrote the write down some TV digital and other forms of advertising.
In addition, our internal team and advertising easy I worked closely with our franchisee marketing committee to further shared data and insights enhanced national and local marketing synergies collaborate on our 2020 marketing plan.
Further adding to our strength of marketing I'm excited to announce the Jeremy Tucker will be joining planet fitness later this month as our new Chief marketing Officer.
Most recently Jeremy served as Vice President marketing Communications immediate at Nissan North America, where he served as head of U.S. marketing on the executive leadership team.
Jeremy brings nearly 20 years, a broad marketing experience across large scale global industry, including retail automotive entertainment he consumer packaged goods Nanjing robust marketing budgets in teams.
Prior Nissan Jeremy held various marquee roles and Walt Disney Company in Pepsico.
I'm pleased to officially welcome him to plan for this management team I'm confident that has deep experience being asset to our brand in our franchisees and will enable us to continue to elevate and optimize our national and local marketing efforts.
As part of our future plans, we're gearing up for Q1 being the presenting sponsor uptime squares iconic newsy celebration for the fifth year in a row.
Once again benefits would be front and center on a global stage anytime, we fitness and health and wellness is top of mind for consumers on the marketing sponsorship front. We are excited to announce the planet fitness BD exclusive fitness partner of the biggest loser and the Shobi turns in January on the USA network number one really cable network among adults 18 to 49 in 2018.
In fact, one of the trees in the show even if it just member who experienced her own incredible weight loss journey and user experience will be others. We look forward to be part of the shows come back if you want.
Now for a brief update on the launch of our enhanced mobile App in early August we have seen strong growth in both usage in downloads as evidenced by 49% increase in new downwards per day compared to a previous out quite a roll up all club team members across the system are trained on new features and functionality to promote yeah insist members with the transition into.
The increase overall engagement, we have implemented the at the club level in our tours in human orientation.
Since the launch you had been to incremental releases enhancing existing functionality based on user feedback such as improving lagon experience in new features such as we bring a friend to join in upgrade to the plant that is black card. We are evaluating user feedback and we'll continue to enhance our offerings with future releases.
Shifting gears a bit want to briefly recap the teams from a chunk drug in the end it's kinda first.
Final results were incredible with over 900000 teens, taking part in the program and conducting over 5 million workouts, introducing Jens eat a fitness not really sets them up on a path to develop healthy habits infill self esteem. We also see has a great long term opportunity to introduce went up in is generally and their families.
In September we held our Eagle franchise, karmas with more than 1500 attendees, including franchisee their team members and vendors in Britain sports, though the theme of the meeting was focused on the member mission.
That being their overall benefits experienced in all channels, rather entire journey with us.
Our franchisees walked away from the event with energy passion and commitment to continuing to grow the brand building more stores. So we can bring finished what people's backyards. Our team members are inspired to remember the member in everything we do going above and beyond two wild and customer service and support.
Our continued success and growth is the result of the collective passion and commitment of our entire system.
I'm extremely proud that the brand continues to be recognized for both our excellent customer service in for our remarkable growth.
Second consecutive year benefit as has been named Newsweek's list of America's best companies because service.
We're also named in the 2000 Nike franchise times top 200 list ranking number 49 were all up 10 spots from last year's breaking the 59.
The company also ranked number six in both franchise times top 10 fastest growers by units in touch in fast growing by sales.
I'm extremely pleased by our third quarter results.
Our track record for continuing to deliver strong performance in fact, the third quarter marked off 50, onest straight quarter, one more than 12 years, a positive same store sales.
That's pretty remarkable for me well see more exciting when if it is a substantial runway for growth and a bright future ahead from our domestic store expansion opportunities increasing international growth prospects to our group of experience well capitalized franchisees growing national and local advertising budget.
We also believe our focus on enhancing the members experience to our multiyear technology initiatives and exploring new brand sponsorships will further strengthen the attractiveness of the plan if it is Brent and concept.
I believe run the right path to conclude another outstanding year.
With a strong fourth quarter and that the company is on the right path towards achieving our objectives and generating increasing value for shareholders.
During the call odour.
Thanks, Chris and good afternoon, everyone I'll begin by reviewing the details of our third quarter results and then discuss our full year 2019 outlook.
For the third quarter 2019, total revenue increased 22.1% to $166.8 million from $136.7 million in the prior appeared.
Total system wide same store sales increased 7.9% from a segment perspective franchise same store sales increased 8.1% and our corporate store same store sales increased 4.9% approximately 75% upper Q3 comp increase was driven by net member growth for the balance beam.
Right.
Great growth was driven by 100 basis point increase in or by card penetration to 61.5% compared with the prior period combined with higher black card pricing for new Jones.
The rate growth was mostly driven by the two dollar price increase that was put in place its system wide in October of 2017 as the one dollar price increase was put in place in September 2019.
The impact from the increase by card pricing drove approximately 180 basis points of the increase in same store sales.
Our franchise segment revenue was $66.7 million, an increase of 21.7% from $54.8 million in the prior year period, Let me break down the drivers for the quarter.
Royalty revenue was $46 million, which consist of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue $36 million in the same quarter last year, an increase of 27.8%.
This year over year increase had three drivers first we ended the quarter with 244 more franchise stores compared to the same time last year second as I mentioned, our franchise same store sales increased by 8.1% and then third a higher overall average royalty rate.
For the third quarter. The average rate was 6.2% up from 5.7% in the same period last year, driven by more stores at higher royalty rates compared to the same time last year.
Next our franchise and other fees were $3.2 million compared to 3.5 million in the prior year period.
These are fees received from online new member sign ups. The recognition of fees paid to us for new franchise agreements area development agreements and the transfer the existing stores and fees received from processing news through our point of sale system.
Also with them franchise segment revenue is our placement revenue, which was $4.3 million in the third quarter compared with $2.5 million a year ago. These are fees, we received for assembly and placement of equipment sales to our franchise owned stores within the U.S. The increase was due to.
Higher replacement equipment placements combined with placement of equipment in 45, new stores compared with 43 in the year ago period.
Our commission income, which are commissions from third party preferred vendor arrangements and equipment commissions for international New store equipment sales was <unk> point $6 million compared to $1.4 million a year ago, and then finally, our national advertising fund revenue was $12.7 million compared to last.
$1.4 million last year.
Our corporate owned store segment revenue increased 15.1% to $40.7 million from 35.4 million in the prior year period.
The 5.3 million dollar increase was due to higher revenue of $2.7 million from corporate owned stores opened or acquired since the end of the second quarter last year and increase in corporate owned same store sales of 4.9% contributing $1.4 million and increased annual fee revenue.
Of $1.1 million.
Turning to our equipment segment revenue increased by $12.9 million or 27.9% to $59.4 million from $46.4 million. The increase was driven by higher replacement equipment sales to existing franchise owned stores.
Placement equipment sales were 61% of total equipment sales in the quarter compared to 49% during the same time last year.
Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $46.2 million compared to 36.9 million a year ago, an increase of 25.3%, which was driven by the increase in equipment sales during the quarter.
Our store operating expenses, which are associated with our corporate owned stores increased $22.3 million compared to $18.8 million year ago. The increase was driven by cost associated with the 14 stores opened or acquired since the end of the second quarter of last year.
Yes, you an eight for the quarter was $20.9 million compared to $17.2 million a year ago. This increase was related to incremental payroll to support our growing franchise operations and infrastructure higher information technology expense.
Marketing and professional fees and higher expenses related to our franchise E Conference held in September which was not held in the prior quarter.
National advertising fund expense was $12.7 million offsetting the aforementioned nap revenue generated in the quarter.
Our operating income increased 21.8% to $53.1 million for the quarter compared to operating income of $43.6 million in the prior period, while our operating margins were essentially flat with a year ago period at 31.8%.
Our GAAP effective tax rate for the third quarter was 25.8% compared to 26% and the prior year period as we've stated before because of the income attributable to the non controlling interest and not taxed at the planet fitness corporate level and appropriate adjusted income tax rate would be approximately 20.
6.6%.
On a GAAP basis for the third quarter 2019, net income attributable to planet fitness Inc. was $25.8 million or 31 cents per diluted share compared to net income attributable to planet fitness think of $17.5 million or 20 cents per diluted share in the prior period.
Net income was $29.7 million compared to $20.5 million a year ago.
On an adjusted basis net income was $33.1 million were 36 cents per diluted share an increase of 19.5% compared with $27.7 million were 28 cents per diluted share and the prior period adjusting net income has been adjusted to exclude.
Nonrecurring expenses and reflect a normalized tax rate of 26.6% and 26.3% for the third quarter of 2019 in 2018, respectively.
We have provided a reconciliation of adjusted net income to GAAP net income in today's earnings release.
Adjusted EBITDA, which is defined as net income before interest taxes, depreciation and amortization adjusted for the impact of certain noncash and other items that are not considered in the evaluation of ongoing operating performance increased 22.2% to $65.7 million from 53.
Point $8 million in the prior period, a reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.
By segment, our franchise segment EBITDA increased 19.6% to $44.3 million driven by royalties received from additional franchise owned stores not included in the same store sales base and an increase in franchise owned same store sales of 8.1% as well as a higher.
Overall average royalty rate.
Franchise segment, adjusted EBITDA margins decreased approximately 210 basis points to 66.5%. The decrease in margin was due to the higher SGN expenses discussed earlier, including expenses related to our franchisee conference held in September which was not held in the prior quarter.
Corporate owned store segment, EBITDA increased 9.9% to $16.8 million driven primarily by the 4.9% increase in corporate same store sales higher annual fees. The six new stores opened and eight stores acquired since the end of the second quarter of last year our corporate.
Store segment, adjusted EBITDA margins decreased by approximately 125 basis points to 43.5% with about half of the decrease due to foreign exchange rates.
Hi equipment segment, EBITDA increased 42.3% to $13.7 million, driven primarily by higher replacement equipment sales to existing franchise owned stores versus year ago equipment segment, adjusted EBITDA margins increased by approximately 230 basis points to 23.
1% the increase in margin was primarily due to the onetime reduction of margin in the prior year as a result of the transition to the new equipment vendors effective in July of 2018.
Now turning to the balance sheet as of September 32019, we had cash and cash equivalence of $219.8 million compared to $289.4 million on December 31, 2018, the decrease in cash and cash equivalents, primarily reflects our share repurchase activity.
Over the past nine months, including $158 million for the repurchase of an additional 2.3 million shares during the third quarter. This year, which completed the 500 million dollar repurchase program. The board authorized in August 2018.
Total long term debt, excluding deferred financing costs was $1.2 billion at September 30 of 2019, consisting solely of our whole business securitization.
Now to our full year outlook.
For the year ended December 31, 2019, we now expect total revenue to increase approximately 19% over 2018 up from our previous guidance of 18%. This includes total new store equipment sales now expected to be at the higher end our previous range up to 50.
260 stores, including approximately 15 international equipment sales and system wide same store sales of approximately 8.6% up from our prior guidance of approximately 8%.
This guidance assumes fourth quarter system wide same store sales of approximately 8%.
In terms of of profitability, we're raising our projections and now expect adjusted EBITDA to increase approximately 24% adjusted net income to increase approximately 21%.
Adjusted EPS to increase approximately 28% to $1.56 cents per share up from our previous expectation for adjusted EPS to increase approximately 26%.
This guidance assumes a weighted average diluted share count in quarter four of 90.9 million shares and 92.6 million shares for the full year and net interest expense in the fourth quarter up $13.7 million and 52.3 million.
$1 for the full year.
Now, we'll turn the call back to the operator for questions.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key.
Your first question comes from Randy Konik with Jefferies. Your line is open.
Yes, Thanks, a lot hi, Chris and high Dorvin how are you.
Hey, ready.
As Chris.
I guess first question I guess, Chris can you just expand upon you gave us some good insight on.
Straley and thinking through.
A market far away here, so kind of.
What is that.
Into Australia.
What does that kind of how do you thinking about in terms of.
Taking over the rest of the the planet if you will I guess unintended.
Give us some perspective, how you might be thinking about the longer term future and why you might attack a region or not why Australia et cetera, just give us some perspective there.
Sure Good question.
As I've always said you use is still.
Yes main focus with 4000 potential and were barely a halfway there so.
First I would make that statement, but I'd say, we did to some studies on international and.
Sure. It was one of the top five that they recommended English speaking mixes that easier than other places.
So I think with definitely being able to obtain the trademark that was registered by another individual there.
With that you're going to top that we can take that at the same time so.
And it was also good where we had to US franchisees that we know when a very good trusted operators with.
Partnering with debt individual in Austria, Who's also a veteran fitness operator from that country.
Did seem to be a great partnership to have that'd be the next frontier if you will so.
I think as we've mentioned the past you re my all our Chief Development Officer, who came largely from GAAP. He's been here in the of the two years now we are half now I think you'd give him and he led their whole international franchisees, so as you've seen.
The development here in the us.
Really come together, well here and with our plan. This year here I think you give him another year I think the international focus will be quite a bit stronger.
So divert some of his attention that way.
Got it and then I guess.
Back to the United States, the way I kind of.
Hi, conversations with investors, we talk about your company reminding us of Amazon.
With Amazon Amazon has your competitors like Wal Mart.
Target, which are pretty sizable and and so forth.
How do you think about it.
It seems to me.
Your business just as it grows the footprint.
Can you gobble up more and more share.
Because the price points as the amenities and the closeness to wear.
Stores are versus where people working lives so you'll kind of.
When you look at the competitive said there was not someone that kind of coming up you're a re are there in terms of a lot of units in size.
Do you see kind of as you get more these units.
Builds in going more towards 250 to 60 versus 200 back on the day.
It's kind of crowd out the competition and just take more more of those members away can you give us some how do you react that how do you give us some commentary around what I just said.
Yes, it's a good question and I look at you think about size and scale then for women and you look at in every facet of everything we do and have where we'll franchising 70, or so years and we've taken that much time to find the best of the best franchise E groups out there that are sophisticated.
Well seasoned operators, who are building there 20 get 50, there are 100 plus store today, Randy that they are in their own right national competitors ways right computer anywhere else in their interest in our industry. So.
The only thing.
510 years ago Theyre opening one a year now there will be 15 to 20 year. Each so they themselves or a force we reckon with their own Cmos drill Chief development officer in someone's a very very sophisticated.
You put our size and scale advantage with negotiating with recent landlords and retailers and and equipment manufacturers and you just good on the list that.
We are holding in here on 2000 real quickly and the largest really full size operator in this country would be la fitness at about 700.
And then there for quite a few years really haven't really grown.
Total cost would be crunch at about 300.
And we're opening almost that this year, so did acceleration of our growth with the franchisees in there.
I guess their excitement for the brand in the U.S economics of this model.
Just constantly partly that goes back into building stores ability. So it's faster at the end of the day. We continue to see is stores that were proving from approximately two another store five or 10 years ago. We never would have dreamed put them that close and it really does seem the more we opened the more we can open and.
The conference is at 4000 is.
It seems like every quarter is more reassured and I rise that that is very attainable because it just seems more we opened a more can be we market more dollars, we have more reciprocity with the black card and the flywheel is just spending from every from every.
Every way.
That's what to ask one last thing here because it around churn. The one thing that people we've asked about as churn in the industry in years is much lower.
As you are getting more black card members as you're doing more of those partnerships with Reebok and other types of 100 flowers or other companies that want to kind of get access to your members and you're getting more to your members.
Are you seeing more customer satisfaction lower churn just give us some perspective, there and that's all app. Thanks, Yeah, I mean I.
I had mentioned the last couple of quarters.
Tension is very slightly better all the better but very slightly.
If we can really Neil it back down to one or two of the things that we've done over the time, but I think is unlikely to then add more value to being a member of planet. It has to help the overall.
Product in new value that the customers getting that drives drives them experience I think with the customer service that we continue to be.
Rankings of of the last couple of years JD power last year and I think it just we seem to do the right thing and give more value and not necessarily charge more forward. I think you you always when keep the customers best interests at heart.
Thanks for answering my questions. Thanks, guys.
Thanks.
Your next question comes from Jonathan Komp Baird. Your line is open.
Yes, hi, Thank you I just wanted to maybe ask about the same store sales trends and maybe a broader question as you look throughout.
2019, any kind of reflection on the commentary from last quarter about new joins being a little bit light and then.
In conjunction with me pretty solid.
Update to the full year comps outlook, just curious how you're viewing.
The trends within the system and any color looking forward.
Sure I'll comment more on the kind of the marketing front that we.
Spoke to less earnings and probably talking to speak to the same facilities.
As you recall you a lot of what I've looked at with data over the years in what has changed.
As a lot more of the allocation of the National ADVATE AD Fund, where I'd mentioned, we kind of over allocated money to digital.
Wasn't growing the traditional cable TV advertising at the same slip a unit growth for NAFTA row.
And as I mentioned in my remarks, some of the fine tuning we were able to do a little tweaks. This.
Third quarter, and even real time today.
More around that is we own again this year is pretty much baked, but we'll do some small changes in smelter is we had done were did do is more around that taking some money digital throwing it more into cable and networking we're seeing promising results.
That leads me to believe that we're going to on the right Road here of what we thought the data with telling us so more to come but really 2020 is being based off that plan in that and we have the marketing ice CE, marking things independent franchise concepts that we involved heavily second data from them in the local level to really streamline both know how we spend napping.
Also how we recommend the differentials you spend their local advertising from the laugh and and I look forward to 2020.
Yes, I think what John what I'd add to it is that couple of things keep in mind.
We stated on the call.
Q2 that.
That did not anticipate the.
The rolling out nationwide of the one dollar price increase so that was not embedded into our guidance at that time and I think we commented on the call that.
The results were very somewhere to what we'd seen previously with the $2 price increase in that.
We would expect the impact to be very similar in terms of the cadence and the impact to the due to the two dollar price increase when we rolled it out we expect that it had very minimal impact as I said in my remarks, a few months ago and in Q3.
On a on a full year basis, it's going to be about 10 basis points. So it's it's not huge in Q4, we expected to be and kind of the mid thirtys in that range basis points of an increase in.
And same store sales for Q4, so when we set back in and.
Back in August when we're looking at.
The balance of the year I'm looking at our business in some of the comments, we made back then and adjusted our guidance.
To approximately 8%.
Based on what we knew at that time, and then we saw some favorability in Q3 and and as Chris commented earlier in his remarks. Some some additional favorability that we're seeing now so all of that is baked into how we get to the guide that we gave now for the full year, but we feel good about where the trends of the business are now.
Some of the changes that Chris talked about on the marketing front, but that's how we got to work we guided to.
Yeah, that's really encouraging to hear how maybe a follow up that on the unit development.
Have you have accelerated the pace of development I'm curious you there what data you have or what feedback you hear from franchisees about the new unit performance given the accelerated pace of openings and then is there anything unique about the pace of openings and this year or should we think about this kind of a base going forward and.
Terms of that the pace of annual openings.
Yes, I think it you know we've got some.
Really great franchisees across the system always from our larger guys even down to the smaller guys that.
Continued to build out their territories and.
Yes, new store performance is really not much different than what it has been last year year before et cetera.
We're going into some.
Newer markets that has less penetration and some others, but frankly some of the results even in a this is Chris has comment earlier about sometimes it seems the more we opened the more we can that.
Even stores that we are open up in a more highly penetrated markets still seem to reform very somewhere as well. So we feel good about that and that's why.
Chris made the comment about we still think that.
Long term target seems to make sense.
In terms of.
The franchisees willingness to invest obviously the returns are there that they they want to get into these markets as fast as they can but but at the same time, we end they want to be at main and main and so in some cases.
No, there's either something not available quite yet and it makes sense delayed or doing ground ups and we're doing more ground up this year than we had had historically.
Let's say two or three years ago, so that takes a bit longer to get those done but as we said here right. Now you know in terms of the guidance we gave for the year.
And you know this as well as anybody John there's a lot of clubs that still left to.
You know to get opened and get equipment in.
Here in the last say three weeks in November and and then all of December because there's so much activity that happens at that time of the year.
But that gave us confidence to kind of say, we think we'd be at the upper end of that range.
The I guess the the the the governor on that so to speak is yeah. We've we've been we've had weather in our favorite though last few years and we didnt have any major snowstorms that kept trucks from getting to a.
To put a gym site.
And you know it generally our franchisees and their real estate folks.
Working in parallel with with our teams here on the construction side.
To make sure that we can get these stores opened by the end the year or certainly get the equipment and so they can open shortly after.
The year closes.
Gives us confidence in that.
Kind of the higher end to that to 50 to 60 range that we've talked about earlier.
Okay. That's all really helpful color. Thank you.
Thanks, John Thanks, John .
Your next question comes from Oliver Chen with Cowen and company. Your line is open.
Hi, Thanks for taking my question. This is John on for Oliver just looking at the corporate stores are you seeing anything different compared to franchisee stores in terms of member growth trends and.
Obviously, you won't see the same benefit from the new stores on that side. So how do you think about the comp trend over time. Thank you very much.
Thanks, John .
Our per store.
Really performs pretty similar to a franchisee store you know and Submarkets. So if you're in a.
No more urban areas to let's say more suburban markets to maybe smaller a smaller cities or on the outskirts of a have a more major metropolitan area.
They performed very somewhere in fact, we have a cities, where we have corporate stores and franchisee stores that you are in the same market and if you went in the stores. One you wouldn't know the differences between its a corporate store franchise store and quite frankly, if they opened in the same year, let's just say there.
Three year old store or five year old store.
Their growth rate, you're gonna be almost virtually identical so I mean, that's the beauty of our brand is that you know it's the Chris always says he likes to the Big Mac you want that you expect the big Mac in one place to look feel taste like you know it isn't another store, we want that same experienced from our members to be exactly this.
Same and.
Jim and his team that runs our corporate store portfolio and then a great franchisees that run there's.
And market you know collectively together in co ops. So we've got co ops, where we have corporate stores are participating in the marketing co op along side by side with franchisees on and they're all you're making group decisions on how to spend their money etcetera, and so I think thats why from a performance perspective clients.
It's virtually identical.
Got it and just one follow up you're still expecting play some mix for the year to be slightly under 50%.
Yes, I think it's going to be probably around 40, 546% kind of in that mid to slightly upper upper fortys.
All right. Thank you very much.
Thank you. Thank you John .
Next question comes from Sharon Zackfia with William Blair. Your line is open.
Hi, Good afternoon, I guess store then if you're really helpful. Hi, It would be really helpful to talk about the price benefit impact as we enter 2020, so you've got that residual to dollar price benefit this kind of continuing to roll off and then you've got the one dollar that just started I mean does that kind of leave all in kind of 20 twentys aggregate price benefit.
But similar to 20 910.
You know I.
Say a couple of things Sharia, we're not prepared obviously to kind of nailed down comp guidance yet for next year I think the way to think about it though is that the.
And I made the comment a minute ago on the dollar I would expect based on everything we know right now that the dollar impact a young we rolled that out on October one of 17. So yeah, we got a full quarters worth so we rolled it out September early September here.
Of 19, so I would expect Q4.
You know this year and then four quarters next year to be pretty comparable you know at 50% of the rate as the $2 price increase what.
We will continue to see you know a decrease on the two dollar impact now that we're you know nine quarters or will be nine quarters, I guess passed at once we once we in Q4 this year they'll still be some some residual impact to it because it's it's you know it's not all going away and we still have.
Its members at the at the 1919 on price point, and you know as as overtime as they turn and we continue to add more at the 20 299, but we'll have a lesson them, a lessening impact and 20 or 20 on the $2 price.
The increase.
That's helpful. And then could you talk about on Australia, if there any tweaks to the model you plan on making in that market and then I just want to make sure I kind of inferred company owned development correct in the quarter. It looks like you might have opened a handful of clubs. If that was accurate could you kind of talk about what's going out on the corp.
Downside.
Corporate and other Westphalia, the us failure of FFO instantly enough bagel mornings there doesn't work so we're going have muffins [laughter].
Pete and I still work and that's what drove the kind of we have Mendoza. So those are three changes as far as the that part of it the only thing really changes the model. There is tanning is not allowed.
The model in pricing wise in Australia.
Dollars was a little bit $13 the month of the wildcard.
Which is which is an ken in Australia, a bit different where they build bi weekly so as $10 biweekly. So $20 a total in the month was turned out to be little over $13 us.
Sure on your question on corporate stores.
We opened two.
New corporate stores in Q3 and we.
We anticipate opening for more corporate stores in Q4.
Thank you.
Thank you Sir.
Your next question comes from John Heinbockel with Guggenheim Securities. Your line is open.
So let me start with.
I think it looks like membership.
Actually went up 100000 or so in the quarter.
Is that is that fair and then Im curious what what impact you saw from team Summer challenge It was that a nice.
Membership driver this quarter or is that is that likely to happen more overtime.
I would seem to see some challenges overtime I think to date were about 65000 total joints of which about 45000 to parents.
So I think what I think it's more of a longer term play bouncy, John but we did have a little bit of joined traffic after that and just kind of learn best practices from a nationwide standpoint, so as we look to rollout next year, how do we have a year over year performance of driving hopefully incremental joined from best practices going forward.
And then as you think about what do you do differently.
I don't think you did a ton of marketing last year round. This what do you do differently and try to drive that 900 came up and then longer term when you think about the mix between national and local.
I do I do think you want to move the mix a little more national.
When does that start to move and what's the right. What's the right mix is the right mix five national for local something like that.
As far as the National marketing plan.
Yes, yes, we have.
Our net.
Yes, yes.
Oh, yes. So you have about four national programs now plus we have some flash sales that are also mixed in there.
Yeah, I think you know with the new IC marketing committee and the new CMO coming onboard with Jeremy coming on board I think a year. So from now more credibility more data or more.
Performance here based on some of the mix I talked about with switching our digital gets more cable advertising I think that makes a very good point to think about synergies and I guess.
Cost effectiveness and blending some of that seven intuitive that big question as it is a three and six is the five in four we don't know that yet but.
There is some savings there because we consolidate some of that spend especially from buying purposes nationwide. So I think that will probably happen in time and I hope it does.
First came from a challenge we didn't actually multi is all three PR.
Which is an incredibly have 2 billion impressions.
Locally here in New Hampshire was our second you're doing it we piloted here to answer the first year in New Hampshire, we used some TV to push it and new Hampshire, we did more than double the team this summer compared to last summer so.
Not sure we could replicate that nationwide, but I think maybe some TV backup in advertising the sale for the the sponsor India.
The efforts I guess to get get people aware that we're doing it for free on TV could be a push next year for the team member challenge.
And then just lastly, you talked about maybe.
Going back to more.
Broadcast.
In the first quarter, Yeah, we've talked about in the past the business, maybe becoming a little less seasonal.
You would think thats true or with a little marketing elbow grease.
You can still has the seasonality we've seen historically.
In the first quarter still applies.
Yes, I mean seasonality is still a big driver for us I mean between between daylight savings as we roll seeing right now can pitch black already it for an hour you know and getting cold and user issues that changes for sure, but there's definitely been the third quarter forces in the 10 years ago was always.
As you go backwards essentially right now, we're getting a little bit of ground, where before you'd actually go backwards you'd be you'd be a higher than January but you'd be still backwards. So the world I think has changed some there for sure. Yes, just thing I'd add to that John is I mean, clearly think about how many stores. We've added in the let's say five years, we didnt have near the number of stores in some of the southern.
States, like Texas, and Florida, and California, some of the areas, where you know the the climate frankly is different than the also can dictate kind of when you might want to join and then obviously in the summertime of Florida, you really don't want to be working out outside you know so there is there some pieces of that but as Chris is still Q.
One.
Early Q2 still important I think that pointed again in the northeast Northern Northern part of the States you have news resolutions plus weather, where the southern today to have news resolutions, but in the summertime, it's kind of their winter begins to hit it right. So there's isn't quite as big of a spike in January .
Okay. Thank you.
Thank you.
Next question comes from Peter Keith with Piper Jaffray. Your line is open.
Hi, Thanks, good afternoon, and nice results guys.
Just two questions on the the franchisee event for our model could you just give us what the cost during the quarter was to run that event and then secondly.
Maybe just dig a little bit deeper for us where there any kind of key interesting learnings broadly for that the franchisees or or even Chris for for you regarding your your your key franchisees I know in the past you've talked about increased sophistication, adding more executive talent.
Curious if you could just give us a little more color on maybe some of the learnings overall from that event.
Sure sure. This is critical to the learning private so it's always best practices, we actually even inclusive of the franchisees and some of the teachings antigens.
We had 5000 people most of at this point not only the senior management, there, but it's a lot of director of regional managers throughout the country that are running 10 or 20 stores themselves with a lot of hands on.
This whole this whole, we really have a customer service.
And how to integrate the App and technology onboard people.
I think is a lot of low hanging fruit there, what's the right way to onboard a member from the day, they join and get them acclimated to the club and I think with the technology in the App.
Piece of it how do we teach them how to utilize technology will its equipment to the app in the different equipment. We have so they get a better experience in the clubs. So this is all about the number and it was about the team members, but people run our stores and how do we how do we streamline their jobs. So that they can spend more time and attention to me.
Members and not the day to day to day tedious things.
Operating just the front desk for example, so what degree submit a state every year, but the the enthusiasm within the system is is second to none I mean, it's some of the happiest most culture driven people in the system and and as I said in the past I mean, even given the.
So private equity groups that have entered the system, where the franchisees than here and you know open one store with me 10, 15 years ago that now have 30 or 40 stores that taken.
Tens of millions of dollars off the table they still.
Roll some equity in the still work every single day building more stores. So they really believed the direction of the company and what growth to do as a brand so.
There's more to it than just at all as they really really as regard to serve the purpose.
Peter the the franchisee conference cost us in the quarter about $700000 net expense.
Okay. Thanks Torben.
Then just follow up question again on the I guess the comp raise for the year. So.
Perhaps there's a little extra scrutiny on the back half the comp guide or coming off of Q2. So.
And our Matthew or you were previously guiding for about a six and a half the seven now you're saying you're implying it for about an 8% for Q4. So it's a nice step up did a hearing you correctly that it's really all attributed at one dollar blackcard price increase or is there anything on the member front, that's that's perhaps coming a little bit stronger.
No. It's sub I'm I've mentioned that the dollar impact would be about 35 bips.
Of the impact in in Q4, so yes.
Whatever whatever math you know you kinda back into that that's the impact of that so the balance of it is what we're seeing from a membership trends and member growth not only what we saw in Q3.
Kind of back half Q3, and then.
What we've seen a into in terms of current trends as we project over the balance of the year. So majority of it is really member member growth disrupt driving the comp.
Okay. Thanks for that color and clarification and good luck guys.
Thank you.
Your next question comes from John I've been Cohen JP Morgan Your line is open.
Hi, Thank you I apologize if I missed this it's a pretty basic when I think yes. As you guys have obviously ramped up development and fiscal 19, how is that giving you visibility for fiscal 20, I mean is it I mean are you kind of comfortable at the at the nominal levels do you think we should be expecting another step up obviously, there's still lots to be done here.
On a placement side between now and the ended the year, but how are we at how we setting up for 20, what should we be putting in her models at this point another couple of follow ups as well.
Sure John .
I think you'll recall.
Probably over the last certainly the last couple of quarters.
Talked about.
Two big I guess, a particular points to that things kind of got us to where we're at right. Now one is that we clearly have more sophisticated larger groups that kind of for that have.
Their own real estate departments, and and people that's focused on just kind of real estate development.
And construction you ought to get stores open, whereas three four or five years ago franchisee was doing that in marketing and ops and everything else. Besides one. The second point is is that we've added to our SGN a both our own internal folks in the field, a real estate directors et cetera.
As well as hiring our own commercial real estate brokers in the field.
And then Weve added some technology to get more sophisticated with market planning and looks location siding et cetera et cetera. So all of that I think is you know and all of that working in concert has allowed us to what I think is kind of I guess I'd call. It kinda filling the pipeline because.
Yes.
In the real estate World you don't just you know work on one store and get it opened their work on another one and you got to keep it going which I think is your point is to so what do you know now you know today setting here and kind of middle of Q4 that maybe you didn't know a year ago and and how do you kind of play that out and think about it for for next.
Here.
And as you know, we haven't given guidance and we'll do that for next year or when we report beer and results, but yeah I'd say the pipeline is it continues to be very strong.
Yeah, we still have over a thousand than the pipeline that are committed we add that back same time last year and Weve opened a bunch of stores in the last 12 months. So we continue to add incremental sites two of our area development agreements and a lot of that comes about you know from that.
The efforts of not only the franchisees team, but our real estate brokers kind of recycling some of those markets and we can do that either voluntarily by the franchisees wanting to amend their franchise or amend the radios rather for when you know when a transaction takes place on a a franchisee cells to private equity or the franchisee.
He then we that's an opportunity that we can recycle those 80 days at that point in time.
Chris mentioned that.
Kind of the favorability in terms of you know with our size and scale. So yeah. I think we get first dibs lots of times on properties that are coming available you I've said in the past that.
Today versus three or four years ago, the rights and lot of these major developers will you know there will be more than willing to come see us as opposed to us trying to.
Get our way into a meeting with them wherever their offices are at so that's great. Yeah. The brand is bigger and better known Allen in virtually ever community because we have so many stores now so with all of that said you know I I don't see this is being a you know I hate to 30 to 50.
The five to 85 350, you know kind of fraud I kinda like the pace of where we're at a I think that you've heard us talk about the flywheel on the marketing side and I think that's one of the key reasons why you know we've had you know.
Virtually no underperforming stores I mean, there's you know there's always some on the bell curve, but.
When you open up a market and you know you put your first one on your second one on your third one then all of a sudden you start building the momentum and marketing dollars. The the next three or four you know benefit from the first and so to go into a market you know, California is a great example, and say L.A.
You know the greater Ela area, where we don't have a ton of stores, yet and still opening some but to go in there and try to double what we have all the sudden and the next six eight months just doesn't make sense.
Because you wouldn't have enough marketing dollars to support the amount of stores and then to drive the amount of members that yeah. We've been we've been able to prove that we can do through the maturity curve of a new store and you've heard us talk about that in the past. So yeah, we'll see but but I guess the comment I'd say is the pipeline is strong we feel.
Good about it and we think we got the right assets in place and divide and devoting the right attention to this and our franchisees frankly, you know they they stepped up their game to do that as well and I think Thats why you see where we're at this year versus where we were say 12 months ago.
Thank you for that for that answered or vets, it's great to kind of here such a comprehensive view.
I I guess, a couple that which maybe a little bit more boring and more short from your perspective.
As as we think about.
On a new unit volumes relative to average unit volumes. However, you think about it. It's there you know kind of a good percent that we should be thinking about going forward I mean, it's not yeah. The math that we do a new unit volumes isn't perfect. It is volatility quarter to quarter, but we're still just kind of trying to capture a trend you know in terms of new unit volumes as a percentage of ads.
It's unit volumes is the first point and then secondly, you know as we're kind of in the fourth quarter of 19 could you give us an update on the waterfall.
How these stores comp kind of after there you know in their 13th month, 25th month, what you know what have you just in terms of what the current math on that as.
So on your first question when you are saying New unit volume are you talking about how about how our stores performing on a now you the basis, yes. So it's like say for example, I give the volume of an average store in year, one relative to the average store. It may not it's I don't know exactly what vernacular you use them in a restaurant Sina, we can say something like it if it says.
To your 70 or 80% of the average unit volume in some cases, it's 100% of the average unit volume that wouldn't be the case sagna for Jim like yours, but however, you want to kind of communicate your one vessel to the aggregate volumes.
So let me let me do it the way I've always done it and I am a because I I don't want to start kind of something new here and I don't have that data point in front of me either what we say is that a typical store so kind of average and frankly you know there. The bell curve is you know it's pretty tight on this.
As is that a typical store will reach cash flow breakeven in about month six months of unkind in that range and by month 16.
Kind of reaches an eight you the of about 1.5 to 1.7.
And yeah, it's a big you know if it's a a club beyond a high urban area. It may have more members and have more you the but it's going to have more cost more rent a you know more rent occupancy et cetera, et cetera, but on the averages that's kind of where it gets to buy but about months 16 and that that kind of second.
Your run rate, then and that's that's what I would consider a pretty good run rate that then starts the comp and that you know kind of call. It mid single digits on after that or or mid to high single digits. Yeah, 'cause, it's still ramping in the back end the year, two and even then into your three.
<unk> as an example versus say a five year old store, but that's the way we think about it we set targets. We're all stores and we say, here's where you ought to be on about months 16, and yeah, we'll talk with franchisees on what they need to do out of the gate, we like to get stores opened with a thousand plus members.
Or so out of the gate on day, one and and the normal curve there are going to get to that 1.5 1.7 million call and then month 16.
So that's that's how it performed and it's been very very similar you know last for four years.
Okay go ahead.
Oh I was going to go the waterfall. So go ahead, Oh, yeah excellent. Thank you perfect. Okay. So from from the way a store performs on on and we look at this one on an individual store because you think about it you got a franchisee that's looking of territory or frankly with corporate yes, do we opened the store at this location and so we're looking at that.
How that individual stores going to perform and back to my comment those are the kind of those expectations. So as you know we put stores in comp in month 13.
So in that month 13 and back to my previous comment. It you know I I use the point of month 16, and it's still ramping but that you're in that kind of 1517 zone.
Store in its first first year comp that month 13 is gonna be 40 plus percent comp.
And then next door and it's kind of second year is gonna be.
What kind of the call it mid single digits or thereabouts.
And then think about John it's now a it's now a a four year old store or older now caused a bit first year is not in comp I talked about the second and third or its first year comp set of your comp. So a store. That's you know 456 year old store is going to comp Nirvana.
<unk> very similar to two the other cohorts there what we do see at times is one stores get into a month and to years like 678.
Time period, sometimes we'll see a bit of a increase in comp and we think thats because ER, we know that in a lot of situations is because that's one of the franchisees are you know they're doing a number of things there.
Replacing the equipment they may be doing some your modest renovations. They don't have to do a complete renovation so they get to the under their tenure franchise agreement, but sometimes in a market where they already have 10, 12, 15 stores and there they may be changing some of the things in one of their cloud. They may just wouldn't do it another club even though it's in.
Your eight or nine or something so oftentimes, we'll see those stores then maybe a store in year, seven or eight might be doing a bit better of stores. It's in call it five or six or something but in general.
And I've said this you know for for several years now that stores that are kind of four years older generally comp in the low to mid single digits.
And that's been already can I.
I just wanted to just to clarify something especially since run it but a lot call to transcript. So after here one is 40% and then you mentioned go into mid single digits did we skipped a year in the middle to go from that 40 to mid single digits or you know exactly how we should be thinking about it so thats all from elsewhere.
It's the way we've always talked about.
Okay, alright, okay. That's perfect. So I've kind of yet the 13th month for a 12 month, 40% then after that kind of mid single digits and then low to mid after that okay I've got it.
Alright, perfect. Thank you so much.
Thanks, John .
Your next question comes from Dave King with Roth Capital Partners. Your line is open.
Hi, This is a andrew stepping onto Dave Thanks for taking my questions. So I guess, just first started off what percentage of your current members have at one point cancelled their memberships and then have since come back to become him to become members again.
Yeah, I know the a 14 million, but 20% had been members at least one time in their best.
Great. That's helpful. Thank you and then I guess just second just quickly follow up I know you guys have said that it's fairly similar but about how big was a differential between black card and white card churn.
It's virtually the same no no difference.
Great. That's helpful. That's it for questions. Thank you.
Yes. Thank you. Thank you.
Your next question comes from roughly Curtis from Bank of America Merrill Lynch. Your line is open.
Okay.
Hi.
Thanks for taking my question three say writing.
Chris I just wanted to follow up on your comments.
The adjustments you need to marketing third quarter did you see improvement in the new member growth during the quarter and then how much more opportunity to do you have them on the marketing side to continue.
Yeah. It was it was number growth. It was it was definitely a tweak I believe on the mix.
We spent lesson digital push more of that cable. We also use we might talk of the past the market segmentation study as we said that they do studies on we learned a lot from that to is also networks and once they will use and fine tuning on with network channels and cable we were advertising on.
From past performance of uses was what we learned what they channels. They watch so we kind of the.
Best of one sided best of the other side to pick the right networks to go on so I think that also had a play in it but let digital spend and better performance and only just certainly some once we can do this year has already committed for most of the spend but some more fine tuning for the remainder of this year, but since 2020 is when will we have already pretty much completely overhauled our our future here with a with the.
HIV is and how we.
And next year. Thanks.
And then I just wanted to.
Paul again, sorry, sorry do too.
But the follow up on John's question rather.
I think in the past the second year of your waterfall, you've spoken about I guess.
15 to 20 before you into mid single digits like has that changed or do I have they're wrong in the past those gone 40 to mid single digit.
No I said, it's kind of mid teen Joe mid to high teens and it's.
And its second year of Cop first years 40, plus percent CECA your comps in the middle mid to high teens and then.
Third and on our in a kind of low to mid single digits you know on average.
Thank you for the for the clarification and then the just for one.
One more for me.
As you look at your older clubs or some of the more mature clubs that are you seeing any change in the comp trends. There in terms of retention or are you still see positive comps and some of your was mature clubs things.
Yes.
All the old sport all cohorts of positive using thing that we've seen I think is.
The ones in that you know the re equip is a year five bacardi a year seven for strength.
And we'll see more trends around to see that other than your seven plus seems actually pay more than a subs. The mid range. So we look at like the law. The low positive is still in the year, five six which which is a testament to the commitment to the friend of the franchisees and this is a brand which the in this industry never really seen people dedicated.
And committed to re equipping and remodeling stores and keep in fresh and new when you go. This industry. You go to 10 20 year old stores is 10 20 years old so.
It was most most brands other industries do remodeled do spend capex keep their stores, new I think thats what.
We're seeing even our old cohorts stores continue to perform and even the oldest markets. Even here in new Hampshire would've been 27 years in the state that does not grow within 1.3 million people forever, It's still member growth.
Thank you that that's that's really helpful.
[noise]. Your last question comes from Joe Altobello with Raymond James Your line is open.
Thank you good afternoon everybody.
Yes.
Two quick questions on Black card membership.
I understand how we should think about that pricing lever going forward since the increase two years ago with $2.
This year with a dollar the delta between that and the classic car.
$10 I'm on.
The 13, so I'm thinking about how wide that gap Oh go between Black card and classic card and maybe secondly, what the runway is in terms of the penetration rate.
61 of the half percent I guess blackboard membership today is there a number that you guys got topped out at call. It 70%, 75% for example.
Sure so.
Yes, we are before the first price increase in 2017 did that 20 199, we were 1999 essentially forever.
What made as originally decide to do some price testing in change. It was the reciprocity function. So you can use any store in the country a world for medicines for no charge at your Black card member and that's one way you can do that if you are black card member.
It happens to be the most used perk up the black card.
So if they did question back then we had no 16 hundreds of stores and there's a time to do it which we did it moved it by two bucks.
Little to no pushback on acquisition and moved it.
Yeah. We are this year, we're already at another 400 plus stores. Since then so beg the question again.
Should we tested again, so I think outside of other services. We are from the Black card reciprocity is probably something we always having our back pocket I mean, so am I think every two or three years. We have another 456 hundred stores that makes sense that we tested again.
This price increase in a buck has been really well received and probably little bit unless one quite frankly, I mean, right were 61.5% Black Carty a year ago now we were 60 and a half so were up 100 basis points.
So I think we'll always constantly look at universal prosody as one of those drivers and on top of that we're always looking at other other things, whether it's the technology and capturing data from the cardio. So that members have it on their on their app and if you're black I remember you receive that.
Content in the App, we unlock certain features and there whether its weight loss or died nutrition or certain contact the workout at home, which can't making the sub today is that a black card benefit. So what are other ways or other services that we can use. So I think is your question the bucket pricing.
I'll always looked to see if there's ways that we can raise it but only if the members receiving value for that raise I'd never just do it cause. So you know before 500 more stores in a couple of years and then add that begs the question, where we offer more nutritional content or other service would look to see if there's a lever there to pool.
And in terms of penetration as there is there enough or bad.
Yeah.
Sure. We have you know we have some stores that are in the seventies.
Penetration there so I.
I think discontinue linzess to slowly move that up.
Certain features tanning example, or our use more in some regions and others. So.
So certain the many of these certain parts of use more than others and reciprocity is another them. Some areas that are well built out with the rig network. The club resin prices much higher so in that area. So.
Some do get higher so I think there's room to continue to slowly.
Ed that up overtime. So that's the perfect storm is to be able to offer value to get price as well as more acquisition.
Got it okay. Thank you guys.
Thank you.
I'd now like to turn the call back over to Chris can do for closing remarks.
Well. Thank you everybody. Thanks for joining the call today really excited for our momentum here in Q3, and a continued as we mentioned the close out. This this year here and caring to 2020, so look forward to our next call. Thank you.
This concludes today's conference call you may now disconnect.
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