Q4 2019 Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to be planet fitness fourth quarter 2019 earnings conference 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 the session you will need to press star one on your telephone.
We require any further assistance you can press star zero. Thank you.
I would now like to hand, the conference over to Brendon Frey. Please go ahead.
Thank you for joining us today to discuss planet fitness is fourth quarter 2019 earnings results.
Onto these car, Chris Rondeau, Chief Executive Officer, Dorgan widely president.
Fitzgerald, Chief Financial Officer.
Following christened Orbitz prepared remarks, well open the call up for questions.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements.
These forward looking statements reflect planet fitness is judgment and analysis only as of today and actual results may differ materially current expectations based on a number of factors affecting planet fitness is business.
Accordingly, you should not place undue reliance on these forward looking statements.
We're more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast.
We refrain disclaimer regarding forward looking statements included in our fourth quarter 2019 earnings release, which was furnished to the FCC today I'm form 8-K, as well as our filings with the FCC referencing Baptists labor.
We do not undertake any obligation to update or alter any forward looking statements, whether as a result, new information future events or otherwise.
In addition, the company may refer to certain adjusted non-GAAP metrics on this call.
Exploration of these metrics can be found in the earnings release filed earlier today.
With that I'll turn the call to Chris Rondeau, Chief Executive Officer, appoint a fitness Chris.
Thank you, Brian and welcome to plant businesses Q4 earnings call.
We wrapped up another fantastic year frequent fitness in terms of brand growth and financial performance with another strong fourth quarter. Our recent quarterly results were highlighted by 8.6% increase in same store sales for three years stack comp of 30.3%. It's also marked our 52nd consecutive quarter posting positive same store sales incredible.
Which meant for the brand.
For the quarter net member growth contributed to approximately 75% of the increase in same store sales reinforcing that consumers continue to be tracking to our judgment free affordable proofs of fitness.
The full year same store sales increased 8.8% or 29.2% 23 year stack comp basis, we added approximately 1.9 million net new members in 2019 with approximately 14.4 million members system wide.
Fourth quarter adjusted net income per diluted share grew 29.4% to 44 cents compared with 34 cents in the prior year period.
Increased 30.3% to $1.90 cents for the full year.
Thanks to our asset light business model, we generated approximately 204 million, an operating cash flow, which allowed us to invest in India business, including our headquarters 14 in continue technology focused initiatives and along with our financing activities returned over $458 million to shareholders through share repurchases.
2019, we also had a big year in terms of expansion in a well capitalized franchisees continue to drive our strategic aggressive growth to both new and existing markets 2019, We opened 261 location. It company record consisting of 255 franchise locations six corporate stores.
With that really we opened our 2000 location on new year's Eve and ended the year 2001 stores. This milestone is incredible achievement and speaks to the passion and commitment of our entire system franchisees. Their team members of the second line of our stores headquarter support team to furthering our mission to make he said a successful affordable in non antibody regardless of your fitness level.
With that growth in perspective in the last five years, our store count has grown 118% and member growth is growing 137%. We continue to be excited but look long runway for growth ahead of us as we believe we have the ability to reach 4000 locations in the U.S. loan.
Outside the U.S. our opportunity is also substantial.
Today, our international presence is modest consisting of 55 stores, mostly in Canada with a handful in Dominican Republic, Panama, Mexico, and as of late last year, Australia, well domestically expansion remains our near term priority. The pace of intellectual openings is getting speed and we believe we are well position to capitalize on our long term potential current and future international markets.
Helping fuel our growth is our size and scale of a marketing budget as.
Along with our differentiated messaging geared towards first time is a CASM gym users.
I have proven to be important competitive advantages for planet fitness and a further widen the moat around our business 2019 between national and local advertising fund collectively with our franchisees. We spent approximately $220 million marketing up from approximately 175 billion a year ago.
With every new member we acquired 2% of monthly dues goes toward our National advertising fund was 7% ghosts local advertising fund.
Overall marketing machine with each new joint to attract tomorrow you remember.
Prime example, our marketing size and scale densities to be a partnership with time squares Arconic New year's Eve celebration. This was our 50 yard presenting sponsor of the event, we believe that haven't planet fitness brand on a global stage, who consumers on health and wellness top of mind drives brand awareness leading into January they just timing here for our industry.
[noise] findings from our annual brand Health study could from the plant that is not only remains number one in aided and unaided awareness and Jim category. Our awareness level continues to increase post new year's Eve as it relates to our overall marketing strategy. We continue to be pleased with the enhancements we've made to our messaging creative in channel mix to optimize overall effectiveness in result.
Yes.
Now onto an update on our technology initiatives. In addition to attract new members to our brand engage existing members. The our mobile App remains a priority when they focus on driving downloads app usage and enhanced functionality future releases, such as referring incentives in that messaging notifications and enhanced account management tools features.
Such as upgrades from our classic White card membership to a black card remains an opportunity for us to drive rate.
We believe word of mouth marketing driven by our vast membership base through the referral featuring the have extends the reach about marketing machine capitalizing on our size and scale advantage. It helps to further expand brand awareness and consideration through a 14 million members.
Finally in the fourth quarter, we welcomed our new Chief Marketing Officer, Jeremy Tucker in January our New Chief Financial Officer, Tom Fitzgerald came on board as you know Tom succeeds Dorvin, where service our Chief Financial Officer. Since July 2013, and was promoted to Chief Financial Officer, who President in April 2017, Endorphins continuing role as.
President he remains focused on domestic and international store development, our corporate store portfolio. It providing leadership for the technology. You also continue to work closely with Tom and me to execute our strategic growth initiatives and long term vision for the business.
In closing 2019 was another very successful year planet fitness, we posted strong financial results opened a company record number of the locations and added approximately 1.9 million net new members invested enhancing member experience. It collectively with our franchisees spent approximately 220 million to further increased brand awareness and acquisition.
We also strengthen our foundation to support long term growth by adding people and resources to our franchise support team, bringing on additional leadership to deepen our bench to bolster execution throughout the organization.
Is extremely gratifying when our efforts I recognize outside the company to highlight a few this past year Plymouth is once again received numerous industry accolades, including being named one of the Americas best companies for customer service by Newsweek. It ranking among fortune magazine's 100 fastest growing companies lists as a top performer in revenues profit stock returns over the past three years.
2020 is off to a good start and I'm confident that plant business is poised to deliver increased shareholder value over the long term.
I look forward to exciting things ahead to building upon our strong momentum I'll now turn the call over to door.
Thanks, Chris Good afternoon, everyone I'll begin by reviewing the details of our fourth quarter results highlights from 2019 and discuss our full year 2020 outlook for the fourth quarter 2019, total revenue increased 9.8% to $191.5 million.
From $174.4 million in the prior period total system wide same store sales increased 8.6% and from a segment perspective franchise same store sales increased 8.8% and our corporate store same store sales increased 5.8% approximately 75% of our Q4 comp increase.
Was driven by net member growth.
With a balance being from rate growth direct growth was driven by 120 basis points increase in or black card penetration to 61.3% compared with the prior year period combined with higher black card pricing for new joins.
Right growth was mostly driven by the black card price increases over the past two years the impact from Black card pricing drove approximately 190 basis points of the increase in system wide same store sales.
Our franchise segment revenue was $73.3 million, an increase of 29.6% from $56.5 million in the prior year period, Let me break down the drivers for the quarter.
Royalty revenue was $48.4 million, which consist of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $38.5 million in the same quarter last year, an increase of 25.7%.
This year over year increase had three drivers first we ended the quarter with 237 more franchise stores compared to the same period last year second as I mentioned, our franchise same store sales increased by 8.8% and then third higher overall average royalty rate for the fourth quarter. The average royalty rate was six point.
3% up from 5.8% in the same period last year, driven by more stores at higher royalty rates compared to the same period last year.
Next our franchise and other fees were $4.5 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 of the existing stores and fees received from.
Processing dues through our point of sale system.
Also within franchise segment revenue is our placement revenue, which was $5.6 million in the fourth quarter compared to $3.8 million a year ago. These are fees, we receive for assembly and placement of equipment sales to our franchise owned stores within the U.S.
Finally national advertising fund revenue was $13.2 million compared to $9.2 million last year.
Corporate owned store segment revenue increased 13.7% to $41.2 million from 36.2 million in the prior period. The 5 million dollar increase was due to higher revenue of $3.1 million from corporate owned stores opened or acquired since the end of the third quarter of last year and increase in Corp.
Owned same store sales of 5.8% contributing $1.7 million and increased annual fee revenue of $1.1 million.
Turning to our equipment segment revenue decreased by $4.6 million or 5.6% to $77 million from $81.6 million. The decrease was primarily due to lower replacement equipment sales to existing franchise owned stores replacement equipment sales were 27% of total.
The equipment sales in the quarter compared to 37% during the same time last year for the full year replacement equipment sales were 25% higher than last year and were 46% of total equipment sales compared to 44%.
Previous year.
Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $59.4 million compared to 62.5 million a year ago, a decrease of 5%, which was driven by the decrease in equipment sales during the quarter as discussed above.
Store operation expenses, which are associated with our corporate owned stores increased to $22.7 million compared to $19.9 million a year ago. The increase was primarily driven by cost associated with the non new stores opened and 16 stores acquired since the end of third quarter.
Part of last year.
If DNA for the quarter was $20.9 million compared to $20.4 million a year ago.
For the quarter, we leveraged our SDMA as a percent of revenue by approximately 75 basis points and for the full year by approximately 120 basis points.
National advertising fund expense was $13.1 million offsetting the aforementioned nap revenue, we generate in the quarter.
Our operating income increased 16.7% just $61.6 million for the quarter compared to operating income of $52.7 million in the prior year period, while operating margins increased 190 basis points to 32.2%.
Our GAAP effective tax rate for the quarter was 24% compared to 15.6% in the prior year.
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 26.8% up 20 basis points from what I've discussed on the last call.
On a GAAP basis for the fourth quarter of 2019 net income attributable to the planet fitness Inc. was $29.7 million were 36 cents per diluted share compared to net income attributable to planet fitness sync up $24.8 million or 29 cents per diluted share in the prior year period.
Net income was $34.3 million compared to 28.8 million a year ago.
On an adjusted basis net income was $39.2 million compared to $32.5 million in the prior year period, an increase of 20.6%.
Adjusted net income per diluted share was 44 cents compared with 34 cents per diluted share in the prior year period, an increase of 29.4%.
Adjusted net income has been adjusted to exclude nonrecurring expenses and reflect a normalized tax rate of 26.8% and 26.3% for the fourth quarter 2019, and 2018, respectively. We have provided a reconciliation of adjusted net income.
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 23% to $76.6 million from 62.
$2.3 million in the prior year 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 30.8% to $50.7 million driven by royalties received from additional franchise owned stores not included in the same store sales base and an increase in franchise on same store sales of 8.8% as well as a higher overall.
Bridge royalty rate our franchise segment adjusted EBITDA margins increased approximately 85 basis points to 69.5%.
Corporate owned store segment, EBITDA increased 3.6% to $15.1 million driven by the 5.8% increase in corporate same store sales higher annual fees the nine new stores opened.
In stores acquired since the end of the third quarter of last year.
Our corporate store segment, adjusted EBITDA margins increased by approximately 75 basis points to 43.2%.
Our equipment segment, EBITDA decreased 1.7% to $18.7 million driven by lower replacement equipment sales to existing franchise owned stores versus a year ago.
Our equipment segment adjusted EBITDA margins increased by approximately 100 basis points to 24.3%.
Turning to the full year, let me quickly summarize the highlights for 2019 revenue increased 20.2% system wide same store sales were up 8.8% on top of at 10.2% increase in 2018 for three year stack comp a 29.2%.
Corporate store same store sales increased 6.1%.
Our average royalty rate for the year increased 50 basis points to 6.1%, we placed equipment in a record 263, new stores and replacement equipment sales increased 25%.
Our adjusted EBITDA increased 26.4% to $282.2 million, we bought back and retired 6.1 million shares of class a common stock and our adjusted net income per diluted share was up 30.3% now turning to the balance sheet.
As of December 31, 2019, we had cash and cash equivalents of $436.3 million compared to $289.4 million on December 31, 2018, we announced a few transactions throughout 2019.
That impacted our overall capital structure and December we completed an additional securitized financing transaction, which resulted in the issuance of $550 million of tenure note after expenses related to the transaction of approximately $11 million. The net proceeds from this transaction were approximately.
$539 million.
Total long term debt, excluding deferred financing cost was 1.74 billion at December 31, 2019.
As I previously stated we believe the appropriate capital structure for the company would be a targeted gross leverage ratio in the range of four to six times adjusted EBITDA.
This is based upon the free cash flow generation of the business, our asset light model and our long runway for continued growth.
Our gross debt to adjusted EBITDA leverage ratio as of 12 31 2019 on a trailing 12 month basis was approximately 6.1 times.
Shifting to our share repurchase activity, we closed out the 2018 share repurchase authorization in Q3 2019 as previously announced in November the board approved a new 500 million dollar share repurchase program.
In December we announced that we entered into a 300 million dollar accelerated share repurchase agreement, which we expect to conclude in Q2 2020.
For the year, we utilize $458 million three purchased 6.1 million shares and have $200 million remaining on our 2019 share repurchase authorization.
With respect to cash used in investing activities. Our total net spend in 2019 was $111 million, which included approximately $53 million for the 16 franchise stores, we acquired during the year, including 12 in December.
Additionally, we incurred approximately $17 million for new corporate stores, including six opened in 2019 and $23 million on our existing stores, including $7 million for replacement equipment.
We incurred approximately $17 million on IP infrastructure investments in 2019.
Now to our outlook.
For the year ended December 31, 2020, we currently expect revenue to increase approximately 12% over the 2019 levels driven by same store sales growth of approximately 8% and the placement of equipment and approximately 240 new stores.
In terms of quarterly cadence 2020 will be different than 20 not team in quarter. One we expect to see new equipment placements lower by approximately 10 to 12, new stores with quarter to flat to slightly up.
As our line of sight becomes clearer through 2020, we will update our new equipment placement outlook.
Replacement equipment sales are projected to be slightly less than 50% of total equipment sales compared with 46% in 2019.
Additionally, we expect our average royalty rate to increase approximately 30 basis points over 2019 levels and expect the black card pricing to a drive at approximately 200 basis points increase in same store sales.
With respect to profitability. We currently expect adjusted EBITDA to grow approximately 15% and adjusted earnings per share to increase approximately 16% compared with 2019 levels.
Our adjusted earnings per share guidance includes approximately seven cents of dilution related to the 2019 securitized financing transaction. Excluding this impact we expect adjusted earnings per share to increase approximately 20%.
This guidance is based on a fully diluted share count of 87.7 million shares and assumes no additional share repurchases and includes net interest expense of approximately $70 million consisting of 80 million in interest expense and $10 million in interest income.
For 2020, we anticipate capex to be approximately $65 million, including approximately eight new corporate stores.
Compared to 2019 or 2020 spend includes approximately $13 million of additional expenditures on corporate owned stores with no acquisitions planned and approximately $6 million less on IP infrastructure investments.
I'll now turn the call back to the operator for questions.
Ladies and gentlemen, again in order to ask a question you do need to press Star and then one on your telephone.
Did you ask that you try and limit yourself to one question and one follow up please standby and while we compile the Q1 a roster.
And your first question is from Oliver Chen with Cowen and company. Thank you. Please go ahead.
Hi, This is Alan Jonah on for Oliver today. Thank you for taking my question just curious on your new store guide of 240 to 60.
Nine team just what you're seeing in terms of this year and what's leading to that guide and also in terms there 8% guide how much is a to achieve you develop that price increase and how you're thinking about that new membership growth as you're also making changes to your marketing strategy. Thank you very much.
Yes, thanks, Todd as the Dorvin.
So when when we took a look at.
The way we've got it in the past and we look at kind of whats in the pipeline what's in line of sight.
And.
Based on.
Where our franchisees are with respect to.
Deals are working on and kind of the history of the franchisees.
We decided to to get to the 240, so a couple of things that.
Comment on one is we sort of over 1000 in the pipeline and about half of those are in the next three years, So that's pretty consistent with with the past.
In terms of.
Factors that would affect development such as real estate.
Any these other kind of factors we've talked about in the past, we don't see any deterioration of any of those things that necessarily would would slow that down.
Timing is such a huge element when it comes to.
Real estate and really pipeline.
Deals.
We did guide slightly lower in Q4 Q1, rather this year Q1.
2019 was the highest number of placements the company has ever had.
And the implied guide that we have now would still be higher than it was back in 27 in 2018, and then I think the last point I'd make is that.
[music].
The guide we have as of right now is even higher than it was this time last year. So as we did last year quarter by quarter as we get more insight into kind of that line aside which is generally about a threed.
Six month kind of time period.
Then we'll update our guidance as we go throughout the year, but we we feel very good about the economics of the model of franchisees continue to have to deploy capital in building out their markets.
But we think to 40 is kind of an appropriate number four for right now in terms of your same store sales question the the 8%.
Guide includes approximately 200 basis points.
Related to the bike part pricing, which is a combination of both the.
The two dollar pricing increase back in 17 as well as the dollar price that we took back in early September of last year.
Thank you.
Your next question is from John Heinbockel with Guggenheim Securities. Your line is open.
Hey, guys can we start with.
Your your take on member growth this year.
Obviously.
Opening a few less.
Clubs, but do you think the member growth.
Tracks close to what you had this past year, a little bit less and then from a seasonality perspective, right, it's becoming gradually a little less first quarter centric and.
And more in two three and four do you think that continues in 20 that but gradual shift away from the first quarter.
Yes, Dennis Chris.
Yes, we do see the seasonality.
Doesn't affect the quite the could use in that we mentioned last year, where the summer is aren't quite in the fall off as we once you see years ago.
But I think what we've learned back in the marketing front from third quarter as we've talked about.
And last year from the marketing mix in driving acquisition.
We feel really good on the changes we had made in the reallocation from NAF dollars and those learnings into into this year.
So we're really pleased with the momentum to carry.
Okay, and then maybe secondly.
Talk about your thoughts on teen Summer challenge.
Kind of year to year.
In terms of how you get started what you do differently on the marketing budget.
And then.
I mean, I would think that it would be more impactful this year I, but 900000 would go up in the 60000 member.
Lift would go up as well, but maybe talk about how you're going to attack that.
Yes, I would definitely Relaunching again this year for sure.
Continues to get.
Many alkylate accolades and awards, even just is really is last week from a dual Halo Award we granted ward.
Great Great initiative that will do this year.
Beauty of now as you now have.
Hundreds of thousands of kids the genes to now redirected go after in parents as we mentioned before emails that we're launching it. So we have a base already baked in that we can go after in Relaunching Combi. The first of the teams in the us to activate your second second free Summer you know.
So we get a lot of initiatives around that to get momentum. So hopefully we blow that 900000 teen number out of the water on top of that we're going to use our new app actually two on the onboarding process for the teens so.
They will actually check in almost feels like a real true member with their barcode on their key on there on their app and some team content. So on so we're looking forward to.
Little bit more structure around how we capture interact with the teams. This go around.
Okay. Thank you.
Thanks, John.
Your next question is from Randy Konik with Jefferies. Your line is open.
Yes, Thanks, guys I'm, just curious Dorvin I was there.
I think you said that black card penetration was up about 120 basis points year over year is that correct.
Yes.
The ended the year Bicarb percentages.
Yes, I think thats kind of gone up.
I think more than being more flattish is there anything kind of.
You are seeing in the way that you're going about kind of approaching conversion of white black.
Any.
Amenities being added more than in the past locations on as you think about the future.
Are there other.
Areas or amenities that your customers or your.
Your members are asking for that are little bit outside the box that you're kind of thinking through that could be.
More impactful for them as you can see distinct through of innovative ways to kind of continue to grow.
More things for those numbers keep them happy and talk about those those.
Those benefits to other potential.
Versus in the future give me give us some thoughts there please.
Sure Randy.
We've talked a lot of in the past about the.
Kind of the the biggest values out of the bike heard membership clearly reciprocity is the number one benefit and you know as we just continue to add more and more clubs and now over 2000.
The availability and the more likelihood of using that whether it's you yourself you wanting to use a club closer to home closer to work.
Or just the fact that you have friends or or someone that you want to take that might be at another location. So the big value of reciprocity can guess privileges just continues to increase in and you've heard US talk about that's really why we took the first price increase and then basically two years later, we tested again and took the dollar increase and then.
Both cases, we continued to see the Vicor percentage increase.
Quite frankly, even even more so than what we've done the pilot. So I think it it speaks to the value of.
The actual benefit you get from that just with the scale that we continue to have was it will open more stores second thing is is that we continue to sign up more.
Members online a year after year through through our web join process and there's a higher propensity of those members to join as a black card member when you join online on a percentage basis versus when you join in club you kind of got a little bit of built in momentum there and then I think the last.
One thing I'd say is that clearly over the last four or five years or so and continue to do so today, we keep continuing building really nicer black card spy areas than where we had been if you go back years ago when that by percentage was was less.
And we always are looking for other options to add kind of in the club that would cause you. If you you come into a tour and you want to join we want to be able to present that value proposition.
That would hopefully drive you to take the Black card membership I think down the road you know into your point of kind of maybe the wish list or what people not what we've talked in the past, Chris and I about digital content and you walk into our club today, you will see people that are.
They are consuming data off of their cell phone leaning up against a wall or on the treadmill. There there were looking at various types of content, whether it's you know exercise and fitness or entertainment whatever it takes may be.
And as we continue to enhance what we can offer through our mobile app, we want to be able to offer content that can be has consumed you'll not only in the club that most likely would would require blackcard membership to get full access to that and then maybe content that's kind of on the go as well.
Well that could be consumed outside the club. So those are the things that as we think about our overall strategy and then particularly you know to drive more black card members. Those are the pieces to the puzzle I guess, the only thing I'd add to that new.
Im sorry, I think duly I'd add to entering as with the half now the only way you could upgrade your members to black card would be to physically walk into facility and go to the front desk and have the staff member upgrade you with the App today is a one click upgrade option so as more people adopt the app the convenience of being able to upgrade on the fly.
He has already proven to be really been efficiently I was going to get more people upgrade and adopt the app for one click option to be able to get it is.
And easy easy to upgrade.
Great and now it's one last question on.
Thank you said in the past boxed into what have you to help with the help with.
Hi.
Through the long term opportunity on on real estate.
Have you contemplated doing any.
Updated work there, perhaps in a more on a more micro level basis kind of looked at.
This is dick different densities in different parts of the country. For example, Lucky say your highest entities hamstrung Thomas I'm not sure.
How that.
Thank you work May look where you could have added kind of unit opportunity.
Than previously contemplated when the work was done I don't know for five years ago, what's the update there in terms of.
Density work for you or that you're either doing or potentially doing.
Through long term real estate opportunity for the business.
Sure Randy you're right, we use to actually used Buxton then today, we use a company called Tango.
Which really incorporates a lot more.
Data inputs. So we can put in about site location.
A lot of other factors, including population density drive times.
Income levels et cetera, so it's a it's a more powerful tool for us and for our franchisees to use as we do our market planning, but I think what I would say is is that if you go back you know at the time of the Apio.
We said that we had over 1000 stores in the pipeline and look at the number of stores. We've opened in the last four years or so now and we still have over 1000 stores in the pipeline. So what we do you know in concert with our franchisees is either voluntarily they come in and they say you know I bought a.
15 store area development agreement and have built 10, I think I can do 10, more and so we amended our agreements and add more locations and today, we can do that in a much more sophisticated way with these tools. So it's all the way from things like having access to third party data.
With that track cell phone usage, how many people werent, how many cellphone devices are in parking lots, where they're coming from where they are going.
We've done some some studies with with consumer intercept and in our centers, where we have stores, we know where they shop within the center, we know if they.
If this is the first time that they really ever shopped in this location because they join planet fitness or vice versa that they yeah. This is a kind of their home shopping center. So to speak and then all the sudden we opened in the center. So they they they join planet. So we we have a lot of data that we can then take back to the these landlords and reach.
And prove to them that the old fallacy of the parking lot hogs of back in the day is no longer reality and quite frankly, they they're trying to find retailers that are out not only wanting to take space that but are driving traffic and we have even been able to get a number of our.
[music].
Landlords in return centers, where we wanted to go into two to give up the exclusion for.
Fitness centers, which you back in the day was was kind of a given that they wanted to protect a parking.
So I think the net net of it Randy is is that.
One is we have obviously all the data to know.
The population density and then our penetration within the market and what percent of that penetration to the population do we have within a 12 to 15 minute drive time, which is kind of the sweet spot and then we can see where we're not and that's how we do the market planning to maximize.
The number of stores that we think we can put in that market.
And as you know a number of the the franchisees have monetized over the last two or three years with bringing in private equity. We've re size all those markets that were those area development agreements got sold and re sized them based upon in essence much better data that we have today not only.
It was more stores more members, but with more sophisticated tools as well.
Very helpful. Thanks, guys.
Thank you David.
Your next question is from Jonathan Komp with Baird. Your line is open.
Jonathan comfort with him.
Hello.
Hey, John.
Sorry about that I wanted to first ask on the comps.
I look at the last two quarters, it looks like things have stabilized.
Accelerated a little bit in the fourth quarter and now obviously pretty front approach to the marketing so far in 2020. So just maybe wanted to hear your thoughts on what you're seeing and how you're planning comps for the year here.
Well as an approximately 8% over.
Forecast into this year and I think you're right in the towards the fourth quarter, we saw some momentum and beyond the findings of back we re looked at our.
Data that supported our spend on digital in moving some of that into more TV and specifically cable advertising, which is where the bigger ships we did.
In any given the January sale use I think you putting I couldn't be waiting to TV commercials kind of put on TV. So I think you saw quite a bit of change here from the previous years. So I think the momentum is good we're happy with how the year started in Q.
Quarter for sure.
I think the only thing I'd add to that.
John is that.
Implied in that guide of.
Approximately 8% we anticipate.
About 200 basis points are so related to pricing.
For 2020.
And I think that when you kind of back that out you're really not all that far off for the last couple of years or so of on at least on an annual basis of kind of.
The non pricing related comp.
I think probably about 75% of our growth will be you'll member growth is kind of where it's been fairly recently.
With still some pricing embedded into the.
Some lingering on the $2 and then the one dollar that we've talked about at the end of Q3 last year, but.
The other factor as as we've also talked about we just have another 250, some odd stores that are in that base of stores on the comp waterfall that comps in that low to mid single digit brand.
Okay, Great and then maybe a separate question on the unit growth outlook I guess, one question I had it maybe bigger picture I know.
The annual unit growth has been a part of the the annual incentives at the at the executive level I just wanted to ask maybe if.
If that still is the case and if it is how.
How those targets align with.
The targets that you've put out for further guidance here for the year.
Yes, we have different incentive factors that that depending on the pyramid that that you work in functionally but clearly.
Store openings in placements is a critical factor.
Same store sales is also.
On an element of that as well as EBITDA.
You know to drive dropped province to the bottom line. So it's still is a factor in our overall compensation plan.
Okay got it alright, thank you.
Hey, John.
Your next question is from Sharon vaccine with William Blair. Your line is open.
Hi, good afternoon.
Teacher different sets of questions I guess first on equipment I didn't hear you mentioned anything about supply chain challenges with China. So if you could just talk to us about supply and whether or not you feel good about the equipment you have to facilitate.
It opens a replacement demand and then.
Should we expect as well equipment revenue to be down and the first quarter of placements are down and then secondarily on marketing.
You have a huge algebra AD budget and I'm, just wondering as you delve into optimization, there kind of where the next legs could be on.
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Our optimization for the money you're spending.
Yes, sharing that I'll take the first part and Chris can talk about the marketing.
I mean, we're having.
Fairly regularly contact with our suppliers as you can imagine as a lot of companies are.
Right now.
We've been assured by all three of our manufacturers that they have plenty of supply.
In the in the distribution centers or or.
And transit.
To get us all the way through the into Q2. So we have plenty of supply for Q1 in Q2 at this point and we we continue to monitor to that on on a regular basis.
In terms of revenue for Q for Q1 revenue will be down I mentioned, we'll have say 10 to 12 placements less this year than than the highest we've ever had which was in Q1 last year.
We do expect that our replacement equipment sales.
On a on a full year basis, we'll continue to grow this year. It was about four this past year 2019 is about 46% or we think it will be a bit higher in 20 and 2020.
That is a little bit lumpy quarter by quarter, but we do expect a.
A slight decrease in sales on Q1.
Yes.
Can I ask a follow up just on that before the marketing question what is all of the equipment.
Assembled are made in China, and if you had to prioritize would you prioritize new unit openings relative to placement of replacement equipment. If you.
You are kind of limited and supply at some point.
Yes, so we are franchisees have the.
They have the election to choose any of the three manufacturers.
For for new equipment.
They can pick any of the three.
And a lot of the equipment is actually manufactured in the us some in Taiwan, and a little bit in Europe.
But a lot of it is in the U.S.
So they can do that and then when it comes to re equipping their clubs. They also can do that but we don't let them kind of pick and choose you can't you will replace some pieces with one brand and then some pieces with another Brian because we like the consistency of of the branding from a member facing experience perspective.
But.
We're not at a point, where we think we'll ever have to prioritize that.
But.
As I said earlier, what we've been in contact with these guys. You know if not daily weekly just to make sure that that we've got enough supply on hand, and they've assured us that we don't have any issues to get through Q1 in Q2 and a quite frankly we're.
Probably the most important customers. Some of these guys have in terms of volume on an annual basis. So we get some prioritization with respect to our manufacturers.
On the marketing front sharing the.
I'd say, we did the new years Eve, we renewed that contract two more years. We also do the biggest leisure this year, which they brought that back that started into January another integration there.
I think the bigger.
Lever. We have is we started to collected and towards the tail end of last years, although we get the spends with the franchisees were doing locally it was more than means and methods that we weren't capturing.
As as diligently so learning best practices around the system. So that we can figure out in guide.
Franchisees in their local spend for the 7% what tactics to be easy. So they were all aligned in all growing in the same direction that I think it is a bigger lever for us to be pulling this year and the future.
Thank you.
Thanks.
Your next question is from Peter Keith with Piper Sandler Your line is open.
Hey, good afternoon, everyone.
Nice quarter here.
Just asking a question more on the the revenue growth outlook hopefully it's not.
Yeah answered identical good luck, but why is the revenue growth guided that a 12% this year versus.
Versus 15% the start of last year when.
What looks like a fairly in line.
Outlook to last year.
Yeah, I mean that.
The equipment, the total equipment or the total revenue number obviously is is impacted on a big way by the equipment sales. That's the reason I made the comment to Sharon's question, while ago that we expect overall the replacement as a percent of the revenue to be up on a year over year basis, but this year where.
In 2019, when we report.
Placed around to 60 in total so it's down call. It 20.
New stores on a year over year basis.
Thats that is really the only factor thats driving down revenue I mean, it's offset by growth in or other segments, but the biggest decreases coming from the.
The guide of approximately 240 new stores.
Okay that.
Carry forward to the.
EBITDA and net income guide and then also this year a little bit lower than the nice started last year or there other expense should be aware of.
No, it's really up pretty straight forward flow through call it.
23% to 24% kind of margin business theres not a lot of SG in a in that in that segment.
So when you when you take that in.
And flowing through your model really on a year over year basis. The only other change is is the cap that structure.
And we are in my prepared remarks earlier I address kind of what the total gross and net interest expense. We expect in 2020, but those are really the only other factors affecting the model.
Okay. That's it that's helpful.
I did want to pivot then to some of the comments you made around the the app.
Seems like Theres some interesting.
Benefits that are helping your business I was wondering if you were able to assess what the penetration of App usage is.
Today, maybe versus where it started a Tony 19, and where do you like where you can see anywhere he would like to get into over the next year or so.
Yeah, I mean, it's still a small we leased rolled out the tail into last year. So it's a couple of million active users those really.
Just starting up here, but we're really focused on new joint how do we get them onboard it correctly.
Our main focus and the at the current members or one thing, but the newer members of their joining.
And just to start using it right off the bat. So they can capitalize on a you're right whether it's the upgrades referral function to I mean do you think we never really had a formal way for amendment to refer another member.
When you have a huge volume of joint how do they tell their friends and family that they join in hopefully offer them and incentive through them to join so.
Just some really neat tactics, there's now just matter get them everybody onboarding. So that we can capitalize on them and we have any rolled out messaging or in our messaging and notifications and once we roll that out being able to.
Speak to our members about promos, we run so they can refer people.
You can't underestimate what was 14 plus million members here with somewhat larger than even our competition that.
It's such a huge member base than if you can talk to them and offer them incentives that in itself and word of mouth marketing is just a powerful tool that none of the industry has.
Right.
Your next question comes from John I can go with Jpmorgan. Your line is open.
Sorry about that guys.
The cost of incremental debt I would suggest that any acquisition of already established franchise clubs would actually be accretive to earnings something just by this straight math of it so.
As there are number that you guys think about in terms of the number of company clubs that you would want to operate in the United States or maybe there is a percentage of the total jumped out at Cessna United States that that that you would potentially going to operate and would you consider actually owning any company stores internationally given what your overall cost of incremental debt is.
Yes, it's a good question John and we get this a lot obviously from.
No.
Both sides of the equation I mean, there there are some.
Some investors all question why we have any and that's a good answers to good answers to that one is it really is a great kinda R&D.
Lab for us so to speak because not only can we test things, but we've got a lot of people to work in our corporate office or now work out in the field with our franchisees that kind of grew up on the corporate shore side. So they understand the business and can be great.
Greg business coaches to our franchisees so.
It's good to have that secondly, we've we've gone down a strategy of saying we would like to operate some stores in most geographies. So that we understand the different.
Aspects of those geography has all the way from you know we have a store in downtown Boston as you know so we have an urban store, we have us a couple of stores and really.
Fairly high crime area out in Oakland that you know quite well.
We have a stores in rural Pennsylvania, and and stores in New York and lot of stores in New Hampshire words, very rural and so we it gives us a good read on the good kind of pulse on how the business operates in different geographies.
In terms of this strategy, we have a role for on every single location and you know we take a look at not only is does it make sense, if a franchisee decides to sell.
And where nearby that that's kind of a no brainer to take a look at and sometimes we've done that and we did a couple of acquisitions last year.
But we're also looking at some of the better operators and some of the locations where there's some pipeline that could be built out incremental stores and maybe it's a market, where if we could dominate that market and kind of build the moat around us.
By building out stores and kind of getting their first you know even in a b take a a.
Kind of a decent sized city you got a lot of storage you could build there we'd rather be first to market within that that kind of shopping hubs. So to speak. So we will continue to do that we don't have a set number of stores that we would target in any year and in fact, our guidance for the year does not assume that we would buy any corporate stores.
But when those opportunities come up because.
Quite frankly, the that EBITDA that they generate is pretty significant we know everything about the store we know the members.
The operating cost are pretty easy because it's pretty much the same from store to store, but it's something we're going to continue to focus on and you know I don't think we have to be the largest but I do believe.
Chris and I've talked about this a lot that we we have historically been one of the larger groups.
We'd like to stay kinda up in some of the larger groups and be a key player of our brands in some of those markets, where we have stores.
And we've seen restaurants go from what used to be keno kind of 20% need to own in terms of understanding markets the well under 5% I mean is there.
Kind of a percent just in terms of of at philosophy that you would like to commit to you and then secondly for the record my sister does say that the high crime area in Oakland, it's much less high crime than they used to be as that area.
Significantly changed so thank you for that comment.
Thats good that I appreciate that.
Keep telling us elliot's going I think the way we look at it John is that we are in asset light model, we generate a lot of cash. We've said, we want to return cash to shareholders, but yet we are and have deployed.
Capital in buying some of the stores, there's a lot of strategies of.
Markets, where you have some onesies and twosies, so to speak and it it makes a lot of sense, whether it's also a franchisee to control that market. We're looking at that as well as working with franchisees to kind of dominate the market with one or two.
Operators I think when you get up into probably the 20, 25% range in that starts to get maybe a little bit high but I think you would say just because you know the the QSR business, so well that there's not many franchise businesses out there that generate high thirtys.
Were 40% EBITDA margin. So you know you could make an argument that that in terms of kind of the way investors tend to look at it maybe you'd look at our business a little bit different.
But were under 5% today, and I would say overtime, we probably would increase that percentage a little bit.
Perfect. Thank you.
Thanks, John.
Your next question is from refi pitch from Bank of America Merrill Lynch. Your line is okay.
Hi, good afternoon, Thanks for taking my question Doug.
Okay right, it's going to follow on the question.
Cost of capital allocation.
How do you think about.
The buyback longer term in terms of whether it's accretive to you on the near term basis or not.
Does that matter to you and your.
Deciding whether to.
By a club dollar.
Or buyback stock.
Yeah, I think three the way we think about it is.
The acquisitions that we've done historically, you know have all been end the call. It five to seven times EBITDA and obviously, we're trading at a much larger multiple that than that and that kind of goes to John's question that I just answered in that.
You could make an argument to buy a business all day long at 567 times EBITDA, when you're getting the kind of multiple valuation that we're getting and and rightly. So because we've been able to take stores and in essence generate with the kind of cops are generating.
Just become more accretive so on the one hand, we we haven't deployed a significant amount of cash in that area, but thats something that albeit not embedded into our guidance or our budget for 2020, we will always look at all the ropers that come along in terms of the way, we think about the broader stress.
Atg of capital allocation.
Yeah. We've stated this now since last couple of years or so that we will return cash to shareholder and in fact, we've done so well north of $400 million last year and over 6 million shares.
It is that loaded to 2020 and I mentioned that in my remarks.
You know, we believe that overtime, it's the right thing to do and if we can keep growing comps we have confidence in our business, where the confidence in our pipeline. This business will generate so much cash flow that we believe that sort of the right thing to do we have had conversations with our board about the rock priorities of.
Of capital allocation and those discussions have always been around you know stock buybacks dividends and then deploying.
Capital and the term in terms of a lot corporate stores, both organic as well as acquisitive.
So far obviously, the the bigger piece has been cash return the.
Shareholder purchases or stock repurchases.
And but we'll continue to look at all of those options. You know of every time, we meet with our board and have a capital allocation conversation.
Thank you.
Well.
Chris You mentioned.
International growth accelerating this year and kind of going forward.
Can you talk about.
Within the guy, but how many of the openings will be international versus domestic and then.
Sort of go through some of the key markets between Mexico, Canada, and Australia and talked about.
We see there.
Long term potential.
Compared to.
Yeah, I'll I'll take a step out and Chris can add to it so.
Last year, we opened 261 stores out of that 16 were or international so it's still small percentage.
We ended the year with 55 stores, mostly in Canada as as we've talked about.
So thats, where we have 44 stores in Canada last year, we opened we opened 12.
And then we just most recently it ended the year as we talked about Australia. So we have two stores open there.
In terms of the opportunities and the way we currently see international clearly.
Canada, we've sized it at about 300, so it's really.
Really important contributor up for US and you know now with a base of 44 stores in growing I'm starting to get more scale and there's things that you can do with scale that you can't do when you only have just a.
Small number of stores will be it in this case lets say, Mexico or or even Australia, but Mexico. We also believe is really important market for us.
Yeah, we do extremely well and a lot of Hispanic markets from southern Florida to Southern Texas and California.
And the stores, we have down there at the moment, we think.
They do very well and we think our brand will resonate in that as well. So we're we're opening some more stores in the moderate area testing kind of some different income levels to try to determine exactly where our brand Ken Ken can really XL and different economic structure.
It was down there.
But those are really probably the two markets at the moment that have kind of the biggest opportunity within most recently as I mentioned just going into Australia.
Your next question is from Joe Altobello with Raymond James Your line is open.
Great. Thanks, guys good afternoon.
First question Orbitz would go back to the comments you made earlier about marketing and the fine tuning of of the marketing that we got to 2020.
You guys have done a very good job reorienting, the marketing effort back toward traditional.
For example, weve digital but beyond that sort of high level.
One other point you guys see happening at point 20 on the marketing side.
In more of them. This is Chris actually the you may recall last year, we did a big market segmentation study in our member base in categorize our members into five different buckets and learned a lot about.
TV channels retailers that they shop at and so and so forth. So not only have we directed more towards cable and from digital but also fine tune, what particular channel networks, we're actually going to be on.
Besides network television being a b C or NBC presumed but food network history Channel 80 goes on the bid list of them.
Insights that we really didn't have before so we fine tune a lot of that part of it.
And use that for while ended last year as well as the 2020.
Got it Okay couple more productivity.
It goes back to the commentary about opening 240 stores. This year versus 60 last year. If you look at the productivity of.
New store openings compared to some of the older core older cool cohorts, how do they stack up is the productivity improving on the newer stores.
Yeah, I'd say, if you look over the last.
Call It three years four years or so.
No.
And you look at kind of the comps of of older stores versus how stores kind of get out of the gate.
There hasn't been any significant differences you only get this question a lot in terms of.
If you are in a higher market penetration kind of area of the country, where we have more stores and therefore more a higher percentage of the.
The the Tam yes, it we don't see really any significant difference from that than we do in a market where.
You have a lower percentage, which comes back to why we keep saying that we continue to have confidence in kind of that 4000 potential in the U.S. and you know even we haven't looked at our hundred older stores in the system and our hundred older stores, which goes way back actually last.
Year outperformed even the the more mature stores older older than say three or four years old. So not only are we seeing kind of those newer stores and then the kind of year 2345 year ramp even the hundred oldest stores continue to pot comped positive and.
In fact higher than some of the mature stores. So I think it speaks to a number of things. It's you know more and more marketing dollars is Chris has talked about going into a market. Obviously in those stores in those markets, where some of the older stores are we have a lot more stores. Today. So you have the availability of reciprocity so you've got the black card.
Maturations can contribute to the up to the the total revenue and therefore, the comp but it just speaks to the power of the brand as we go into more and more markets.
Including some of the oldest we haven't some of the highest penetrated markets. We have today and you know we feel really good about how our store performance. You know has been and feel good about what is going to do even this year.
Great. Thank you guys appreciate it.
Thank you Joe.
Our last question comes from Simeon Siegel with BMO capital markets. Your line is open.
Hi, guys any color you can share on what percent of Black card members are still grandfathered in at the lower rates and then just congrats on an ongoing SGN a leverage you. How you think about it that for the line item for next year. Thanks.
Yes, we don't break out the the.
I guess, the the layers of our pricing we give what our total black card is versus our standard classic membership.
But I mean, we still have pretty good size numbers at the 1999 membership as well.
Yeah, we've talked about in the past as to maybe there's some stickiness to that and you know overtime, yes, we'll see it because it's only been now you know nine quarters I guess since we put that pricing effect.
But we don't we don't break out that that.
What was the second part of your question.
Do you think you finished you name for next year just in a given a lot yeah. I mean, we yeah, we and we had if you remember back in Q3, we said we'd get leverage for Q4, and then full year. Yeah. I think that we will you know based on our guide.
We believe we'll continue to get some leverage this year.
Great. Thanks, guys best of luck for the year.
Thank you Richard.
This does conclude the Q and a period I'll now turn it back over to Chris Martin for any closing remarks.
Great well, thanks, everybody for joining the call today and.
It was record year for US we broke 2000 doors. So we're halfway to that without a number as well as a record a year ago brings it to 61.
Really pleased with the changes in marketing and performance there and look forward to Q1 really.
Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
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