Q3 2020 Planet Fitness Inc Earnings Call
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Hercules earnings release, we ended the third quarter with approximately $14 1 million members down approximately 5% of the end of July and flat compared to last year. The biggest change in membership between the end of July in the end of September occurred in the roughly 1100 clubs. It reopened in May and June and resume their billing monthly dues and collected annual fees, we have seen a clear pattern of <unk>.
I've cancelled upon reopening in the resumption of billing.
However on a positive note we're starting to see this trend begin to normalize the longer clubs are open with a total year to day cancellations flat to prior year in the system also encouraging we are seeing a similar pattern with the usage rates as the early clubs, where 74% of a year ago levels in September and the system average was up to 67%.
In September we were excited to turn on our National marketing engine back on for an eight day national sale or first national acquisition, driven marketing since before Covid.
The results were very encouraging as consumers respond positive to our messaging, which reinforced the importance of exercise and the total the pandemic is taking on People's physical and mental health combined with our commitment to keeping members safe to sail helped accelerate our marketing flywheel and meaningfully slowly decline in membership with a number of the store is experiencing positive member growth in September.
So the approximately 500 clubs that reopened in July August September we're seeing similar attrition trends an annual billing resumed usually get a second month post reopening before beginning to stabilize after the third month. The good news is we expect it to be somewhere offset by the high growth new joins driven by our natural advertising resuming based on encouraging results of the September.
World viewership could be an all time high level.
Turning to our digital initiatives adoption of our mobile App remains at an all time high with a new joint App adoption rates more than 60% in Q3 currently nearly 30% of total membership has base has adopted a mobile app, which allows us to engage with them, while they're at home or in the gym with new features like in that messaging it.
The QR code reader for instruction, how used equipment and the chromite or check the capacity of their club in advance of going to the gym we.
We believe the crowd meters played a role in helping to balance visits during the week as have changing consumer habits, given the increased with remote work schedules.
This it will be even more beneficial during peak usage months. We also continue to be encouraged by the mobile App blackcard upgrades and member referrals, providing members with an ability to quickly upgrade to our black card membership and refer a friend to join have proven to be beneficial, particularly as app adoption continues to increase and we see a lot of opportunity in the future.
Our digital content journey continues to accelerate we are seeing strong engagement with our core business content via the app with meaningful percentage of users representing non members.
Great a large opportunity for future conversion and further validates benefits is brand recognition as a trusted source in health and wellness. As a result, we are currently in the process of testing a digital only subscription membership for 509, a month via the mobile app called plus.
We will always offer free content via our mobile App, However, Pf plus will feature more premium content developed in our partnership with ice at geared towards breaking down the barriers. So that approximately 80% of the population does not have a gym membership, including liability workouts digital fitness classes, you can do at home or in the gym, a variety of fitness trackers aggressive workout series help you advance over time.
On anymore.
We view, our Standalone digital membership as a gateway to our traditional bricks and mortar membership not a replacement for it and this provides us with an opportunity to further engage inside and outside of the gym the ability to provide even more content for an additional fee introduce prospective members to the brand.
During the testing phase, we will assess consumer feedback on content in usability to form any broader rollout plans longer term digital content could potentially strengthen our value proposition to members throughout expanded or bundled offerings potentially in adjacent categories.
On the store development front.
The nine stores opened during Q3 with 2086 stores at the end of the quarter based on the current visibility, we expect 2020, new store openings to be down roughly 50% or more compared to 2019 record levels up to 60.
Our franchisees emerged from the store closure period and have continued to gain strength as operations approach more normalized conditions across the system. The focus remains on keeping our staff member safe our stores opened to service members and now more recently rebuilt membership levels relative to the rest of the fitness industry. We believe we are a much stronger financial and strategic position evidenced by the bankruptcies and rich.
400 store closures at number of national chains, as well as feedback we've received from many franchisees about locally owned or chems in their markets that aren't reopening.
We expect this trend will continue in overtime potentially result in mainland Jim goes looking for new place to work out and we believe our unrivaled value proposition will ensure we continue our trend of gaining market share.
While the near term operating environment is likely to remain volatile it pressure, our near term revenue and profitability I'm confident in the long run one specific is behind us benefits will be able to significantly widen our competitive moat for several reasons.
First the strength of our franchisees, which has been underscored by how well we have navigated through personal situation second we are well positioned to capitalize on industry consolidation that has already taken place and likely to continue third the real estate market will be even more attractive in terms of available prime locations and lower rank costs and enhancing similar incentives.
For our system because not many brands, we'll be adding hundreds of locations in the coming years and fourth the encouraging early results in the opportunity. We're seeing as a result of the Excelerate digital content strategy focusing on the needs of first time, the karajan goers.
And finally, the demand an uptick in usage were seeing as a result of the marketing efforts reinforcing the overall increase focus on health and wellness. This will further enhance the tailwinds of the category and we feel our value proposition is second to none.
Ill now turn the call over to Tom.
Thanks, Chris and good afternoon, everyone as Chris mentioned, approximately 95% of our store base has now opened with approximately 500 stores reopening during the third quarter.
In terms of development 29, new stores opened during Q3 compared to 41, new stores added in the year ago period.
Our primary focus over the last several months has been on reopening stores and more recently re launching our national marketing efforts.
And as previously communicated all development requirements have been given a 12 month extension.
As you'll hear in a moment the change in equipment sales to new and existing stores was the biggest driver of our top line decline.
For the third quarter total revenue was $105.4 million compared to $166.8 million in the prior year period.
As a reminder, the vast majority of our stores drafted monthly membership dues back in March and then close shortly thereafter.
Therefore, those numbers that were drafted had a 30 day credit to utilize once their home store reopens.
Q3 includes the recognition of $7.3 million in previously deferred revenue related to monthly membership dues collected in March before stores closed.
This is broken down into $3.9 million from franchise royalty $2.2 million from corporate owned store monthly dues and $1.2 million from NASA contributions.
Now before I get into the specifics of same store sales I'll spend a minute on our same store sales definition.
When stores are closed and don't draft monthly membership dues or don't execute a full draft. Upon reopening because members have credits to utilize from prior periods. They are not included in our comparable store.
For some context, we reported 53 quarters of positive same store sales before cobot hit in March and shut down all of our stores.
The average of our same store sales growth over those 53 quarters was 12.0% and averaged 9.6% for 2018 and 2019.
Our model and historically strong same store sales results depend on the ability to continually grow net membership levels across our store base month over month and quarter over quarter.
Additionally, in our recurring revenue model, our same store sales performance at any point in time is a function of what's happened to our membership levels over the trailing 12 months.
When our store shutdown due to Covance, we were unable to grow net membership levels in our stores and as Chris discussed we have seen higher attrition in the first couple of months post the store reopening as the initial billing of monthly and annual membership dues results in elevated cancellations before starting to normalize after the third month.
As we have moved farther away from our first monthly and annual billing event for many of our reopened stores and resumed marketing our brand and our national sale in September we saw sequential improvement in underlying joint and cancel trends as Q3 progressed.
However, overall membership growth remains negative and importantly for the same store sales calculation of the change in membership levels or growth rate was worse this year than in the prior year period.
As a result of these dynamics, we have seen same store sales growth slow and turned negative.
Of the 1600 five stores that had at least one full draft in Q3 1416 of those stores were in the comp base.
These stores had a same store sales decrease of 5.6% with franchise stores declining 5.6%.
And corporate stores down 6.6%.
The 5.6% same store sales decrease was driven by a 6.7% decline in build memberships, partially offset by a 1.1% increase in average rates due.
Due to both higher black card penetration and higher blackcard pricing compared to the prior year period.
Note that although the monthly decline in membership levels improved sequentially in each month of Q3 because growth rates remain below that of the prior year period. This led to a worsening same store sales trends through the quarter.
As such our system wide same store sales growth worsened across the quarter.
And was down high single digits in the month of September.
As I previously mentioned since our same store sales trends are based on what has happened.
To our membership levels over the prior 12 months in order for same store sales growth to improve the growth in membership levels in our comp stores must exceed the member growth in the same period in the prior year.
Moving onto a review of our segments revenue results franchise segment revenue was $59.8 million compared to $66.7 million in the prior year period.
A decrease of 10.4%, let me break down the components first royalty revenue, which consists of royalties on monthly membership dues and annual membership fees was $43.1 million compared to $46.0 million in the same quarter of last year.
The $43.1 million of revenue includes $6.1 million attributable to ketchup billing of annual membership fees and 3.9 million of deferred revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened during the call.
Sure.
The average royalty rate for the third quarter for the stores that drafted was 6.2% equal to the same period last year.
Next our franchise and other fees of $2.6 million compared to $3.2 million in the prior year period. These.
These are fees received from online new member sign ups. The recognition of fees paid to us from franchise agreements area development agreements and the transfer of existing stores and fees received from processing dues.
Revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened in Q3.
Turning to our equipment segment revenue decreased $42.0 million or 78% to $17.3 million.
From $59 $4 million.
The decrease was driven by both lower new store equipment I mentioned earlier in the call along with lower replacement equipment sales to existing franchisee owned stores.
Replacement equipment sales in Q3, or two $7 million compared to 42 $5 million in Q3 last year.
And the third quarter, we had 28 news new store equipment placements, which was down 18 from the prior year period.
Beginning in queue to we launched a 15% discount offer on all equipment orders to support our new store development and replacement orders.
This software applies to all equipment purchased and placed by the end of 2020.
Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amount of $215.3 million compared to $46 $2 million a year ago, a decrease of 66, 9%.
In line with the revenue decrease as previously discussed.
Store operation expenses, which are associated with our corporate owned stores decreased.
221, $4 million compared to $22.3 million a year ago. The slight decrease was primarily driven by cost saving measures duty stores store closures, including lower payroll marketing and operating expenses.
Partially offset by higher occupancy expenses associated with nine new stores opened and 12 stores acquired since the end of the third quarter of last year.
SG&A for the quarter was $18 3 million compared to $29 million a year ago.
The decrease was primarily driven by reductions in variable compensation decreased travel and lower equipment placement expenses.
National advertising fund expense was $22 million compared to 12 $7 million and the prior year period.
The increase in expense for the quarter was the result of overall higher full year forecasted nap expenses, which resulted in an adjustment in Q3 to reflect the proper rateable year to date expense.
Just that EBITDA, which is defined as net income before interest taxes, depreciation and amortization adjusted for the impact of certain non-cash and other items that are not considered in the evaluation of ongoing operating performance.
Was $32.0 million compared to 65 $7 million and the prior year period.
Included in this quarter's adjusted EBITDA was approximately seven 3 million related to the recognition of deferred revenue previously discussed.
A reconciliation of adjusted EBITDA the gap net income or loss can be found in the earnings release by segment franchise. Adjusted EBITDA was 31 6 million corporate store adjusted EBITDA was six 7 million and equipment adjusted EBITDA was $2.3 million.
It just did net income was one 6 million and adjusted net income per diluted share was two cents a share a decrease of 34 cents per diluted share.
One last point on the piano before I talk about the balance sheet as Chris mentioned, we resumed our national marketing efforts in September with our National sale, our first step towards expanding membership since before the pandemic hits.
The results were very encouraging and we decided to make an incremental investment in national advertising of $10 million from October through December.
As a result of this incremental investment a nap and the projected naff revenues for the year on a full year basis naff will be a net expense to our P&L.
However, we believe that the incremental advertising investment was the right long term decision for the business given the encouraging results of our September sale and the competitive dislocation occurring within our industry.
Now, let me turn to the balance sheet as of September 30th 2020, We had 501 $6 million in total cash with.
With cash and cash equivalents of $419 7 million compared to 423 6 million on June 30th 2020.
And Additionally, we ended the quarter with $81.9 million, a restricted cash compared to 86 $4 million at the end of Q too.
Ah based on the current situation and our focus on preserving liquidity, we announced in March that we were halting all share repurchase activity for the time being.
Given the uncertainty surrounding the evolving nature of the pandemic, we're continuing to refrain from providing guidance.
While the near term is difficult to predict we believe that we are well positioned financially and strategically compared to the rest of the industry to capitalize on the many value creating opportunities. We believe will emerge over the long term as a result of the pin debit.
I'll now turn the call back to the operator for questions.
Thank you and good.
Thank you Chris.
Remember, one kind of well pause for just a moment when the complexity Wellington.
Ken Starr number one.
Hi.
Your first question comes the line of any kind of Jefferies. Your line is open.
Thanks, a lot and good evening everybody.
Can you hear me you can hear me yesterday already asked thank you.
Often.
So I guess that the most important metric that everyone wants to key in on is the membership trends. So if I do the math.
From June to September.
It's like the membership roles went down by about 1.1 million members and then in the last 30 days.
Finally, where we're marketing here will fill in the pond back up so it's it's a lot of that at the same time the older cohorts, you're exactly right to the older cohorts. The may openings, especially and then now June which are open for a few months.
Cancellation of the beginning to come back to more normalised rates. So.
You got the plus side of driving remember growth and then the slowing of especially the older cohort stores cancellations of swelling in it.
And also remind you like we had a portion of those last few few hundred clubs. It opened up which I think you mentioned, where the first annual fee for them was October 1st and another one was June 1st on November 1st excuse me. So we still have some of those cleaning out of those pent-up Kansas from the more recent openings openings, but a much smaller section of clubs compared to the 1100 that were <unk>.
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Leon So you're exactly right with all those numbers and how the marketing now is starting to.
To get people in the door to join because the units were kind of clothes and there was no marketing. So are you then saying that the cancels are kind of normalizing and now the you are seeing some notable acceleration and joins such that.
Over the coming few months or whatever it takes we should start to see.
That cancel number or that membership overall membership number reach a just a <unk>.
Stable as stable point of no longer going downwards, as how should we see that there's two different vectors going over the next few months, yes, yes, I think I think the acceleration adjoins it maybe another way is maybe getting the joins it'd be on part of last year, we had all these.
What about the way forward.
We have plenty of uncontrollable variables and there are more searches how do you think that will intersect with your marketing spending program in new joiner behavior going forward. It was it was you know more challenging over the summer when it first happened. Thanks.
<unk>. Thank you Oliver just Chris I think real quick on the on the on the research as to which is one thing is interesting with the joint little bit to Randy's question and your question is that.
Additional sales campaigns.
And how did September performed versus pre coded.
How did October perform versus September if you know and.
And then lastly, when you when you think conceptually about 2021.
We didnt, we've never really had a September national sales. So we add didnt have too much to go off of on the October sales was pretty comparable to last year and we usually measured on a baseline of the previous week to figure out how to lift was.
So we are pleased with both of those results from both sales, which is why we decided to.
August September clubs. It again reached <unk>, they're they're billing cycles, an annual fees, which is which was has been the trigger since the very beginning and the trend is holding holding the same even with the newer clubs opening.
Okay.
I'll just shift gears on the digital content, how how are you going to.
Well I guess I'm wondering about the economics of a digital only membership with a franchise space like are you sharing some of those economics with the franchisees I mean, how does that I know, it's a test, but how does that kind of.
Slow through the P&L on how to the franchisees feel about it.
Sure Yeah, Yeah, it's early stages and would work with our.
Independent franchise Council on the old program.
Do you think theres some.
Separation and how Jim there being viewed versus your other enclosed.
Interactions or any thoughts there.
Yes, we've had.