Q4 2021 Planet Fitness Inc Earnings Call
[music].
Hello, and welcome to the planet Fitness fourth quarter 2021 earnings call. My name is Alex and I'll be coordinating the coach day, if you'd like to ask a question at the end of the presentation. You can press star one on your telephone keypad.
If you'd like to withdraw your question you May press Star two I will now hand over to your host Stacey Caravella head of Investor Relations for planet fitness to you Stacy.
Thank you operator, and good morning, everyone on today's call will be planet fitness, Chief Executive Officer, Chris Rondeau, and Chief Financial Officer, Tom Fitzgerald. We also have Darvin lively president of planet fitness here, who will be available for questions. During the Q&A session. Following the prepared remarks.
Today's call is being webcast live and recorded for replay.
Before I turn the call over to Chris I'd like to remind everyone that the language on forward looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our website investor Dot planet fitness Dot com along with any reconciliation of non-GAAP financial measures mentioned on the call.
And their corresponding GAAP measures.
Now I will turn the call over to Chris.
Thank you Stacy and thank you everyone for joining us for the plant that into Q4 at reasonable first I'm going to cover our fourth quarter months of results as well as January Twins, then I'll discuss why I continue to be so bullish on our leadership position.
This industry as we emerge from the pandemic that has brought to the forefront the critical importance of health and wellness.
Really proud of how our franchisee headquarter staff and club Saskatoon debate agile through this ever changing environment, which has enabled us to grow our engineering that membership nearly pre pandemic case in 2021, we added $1 7 million members ending the year with $15 2 million for.
For the seventh consecutive year, we rang in 2022 as the presenting sponsor of times square, New year's Eve celebration. It was.
Great to see times square, once again, covenant purple and yellow and to be part of that Iconix celebration as this year marks planet fitness is 30th anniversary.
However, the highly treatments will omicron variant that began to surge in late December into.
Israel January led to a softness in our January joined trend compared to pre pandemic levels. A significant portion of Americans were directly or indirectly impacted by Amazon in January which significantly disrupted their daily lives. According to the U S Census Bureau, it's estimated that approximately 40 million Americans did not work at some point during December 2019 January 10th.
Because they had COVID-19 or caring for someone with Covid.
To look after a child, who scuba daycare was close thats a staggering number we.
We saw this disruption reflected in our membership behaviors. During January you should slipped below the approximately 90% indexed to 2019, which was the same rate. We observed most of 2021 higher member usage historically corresponds with higher joint activity.
As quickly as you mccahon uncertainty again.
Did you win is January progressed, accordingly member usage rebounded and we hit our highest usage rates since the start of Covid at the end of January .
But we believe that <unk> was primarily the biggest factor in causing the softness really rejoined.
Appeared to pre pandemic levels. We also believe that our agency consolidation has some minor impact as well as we discussed at the end of 2021, we transitioned from 16 agencies handling our national and local marketing and advertising to one total citigroup.
Unexpectedly with transformation of this size and scale there have been some challenges.
While we believe that consolidation was the right next step to evolve our marketing drive efficiencies and gain greater visibility into the system I spend the performance we are extending our local agency officers to include <unk> in a very small number of our top performing local agencies.
This is similar to our equipment business as we offer our franchisees three members from which to choose.
We believe this is the right approach as we work through the traditional publishers in that long term benefits from the consolidation of agencies outweighs some near term disruption.
So while we had positive net member growth in January it was not back to pre pandemic levels. We added 400000, plus net new members in January which is over 100000 more than we added January of last year, although the consumer dynamic different from last year and 2021 people were waiting vaccine. This year people were home either quarantining.
Characteristic family members. Despite this we ended January $15 6 million members, surpassing our pre tandem's first quarter 2020 membership peak in achieving an all time membership hi.
We're not going to cover February membership growth, but we felt it was important to discuss January as most of the business seem to have experienced some type of impact from <unk> Gary.
Now, let me move onto our position as a leader in the fitness industry.
Three primary reasons that I am excited about the near term and long term future of planet fitness.
First we are investing in growing the industry is contracted.
Second Gen Z, we're the fastest growing demographic group and our 2021 membership who along with millennials prioritizing active lifestyle more so than their previous generations third a silver lining of the pandemic is that an open peoples eyes to the importance of fitness in their overall health.
On my first point, the fitness and health club industry Trade group versa recently reported that now 25% of all health at this facility in the U S are permanently close as a result of the pandemic at the end of 2021.
I am proud that not a single plant that is located close permanently due to COVID-19 in fact over the past two years, we have added more than 250, new locations with 132 and 2021 alone.
Not only are we growing but we are also making strategic investments into the future.
And we acquired Sunshine fitness, one of our largest and best performing franchisees.
The transaction and our debt refinancing and upsizing on February 10th in addition to a 112 corporate stores. We now have 114 clubs in the southeastern part of the U S.
With this acquisition, we are doubling down on the emergence of <unk> acquiring a top tier operator in the system with very strong store level four wall margins.
And diversifying our corporate stores geographic footprint in markets with a long runway for future store development.
We now own more than 200 corporate stores or approximately 10% of the total system, which is our target ownership level and it allows us to retain our asset light business model and important part of our shareholder value proposition.
Another potential long term positive for our business is encouraging trends in our membership base when looking at it by each cohort millennials continue to be the largest demographic segment of our total membership base in fact more than 8% of all millennials in the U S. A plant that is members even more encouraging is our recent growth we have seen in Gen Z members in 2021.
This generation demonstrated growth of nearly three times that of a millennial category.
Bringing our share of the Gen Z over the age of 15 in the U S to nearly 8%.
Which is notable as only half setup that generation are old enough to join our Jones.
And not only are we capturing more of a younger generations, but we're also bringing back an increasing number of former members as they recommit to a healthier lifestyle. Our rejoin rate in 2021 was approximately 30% compared to 28% who pre pandemic.
In fact, <unk> recently reported that among those because of their memberships with big box chains assay. They are planning to return to the next six to 12 months.
Affordability to welcoming Leslie Similarly atmosphere are key criteria to what they are seeking in a gym exactly what we offer and what differentiates us from the rest of the industry.
Finally, the pandemic accelerated trend of increased interest in health and wellness that was already underway our consumer messaging in 2022, we will focus on the field good feeling youll get after a good workout in the mental health benefits of exercise provides that extends beyond just the physical benefits. The CDC reports that even one workout can reduce.
Depression, and anxiety to improve your sleep.
This messaging wasn't our first ever Super Bowl advertising in our 30 year history, which highlighted that fitness is about more than just the entity and your waistline it feeds.
<unk> along with other stars like William Shatner.
Despite the near term negative impact.
We believe there is tremendous untapped opportunity for our brand long term to get people off the couch with approximately $140 million non gym members living within 10 miles of an existing plant or visits.
It's too early to tell if the unseasonable joined pattern that we experienced in 2021 will continue this year.
We have learned to be nimble and agile operating in a volatile environment. It appears that we are slowly entering a new phase of the pandemic.
Our stores are back open COVID-19 restrictions are lifted mass mandates are ending and most important to our business. Our member usage is rebounding and membership levels have reached an all time high.
We revolutionized the gym industry, nearly 30 years ago with three key points of differentiation.
Our welcoming friendly judgement free environment, Ken first time gym goers, a variety of high quality branded cardio and strength.
And our affordable membership options, we remain committed to delivering these to our members. This Canadian fuel with our phenomenal growth over the past three decades and it enabled us to grow even during a devastating pandemic as we look to the future. We believe our purpose of enhancing people's lives and creating a healthier world sets us and our franchisees up for long term success I'll now turn the call over.
Tom.
Thanks, Chris and good morning, everyone as Chris referenced, we're making strategic investments for the future against a backdrop of industry contraction.
We recently completed the acquisition of one of our best performing franchisees as well as the successful refinancing and upsizing of our debt we.
We raised $900 million under our existing securitized debt facility in an oversubscribed deal that consisted of a five year $425 million tranche and a 10 year $475 million tranche and resulted in a lower overall weighted average interest rate for our total debt with the net.
Proceeds we repaid one chance of outstanding credit transaction cost under the reserve accounts associated with the debt and use a portion for the acquisition costs. We also issued additional equity as part of the acquisition funding.
The success of the refinancing and the closing of the acquisition signify the continued strengthening of our balance sheet. Most importantly, there is a testament to how well our business has rebounded since the height of the pandemic.
Now I will cover our Q4 financial results and will address our operational and financial outlook for 2022.
All of my comments regarding our fourth quarter performance will be comparing the fourth quarter of 2021 to Q4 of 2020.
We opened 62, new stores during the quarter, bringing our full year total to 132 as Chris noted earlier.
We have positive same store sales growth in the fourth quarter with system wide same store sales increase of 12, 3%.
Franchise same store sales grew 12, 4% and our corporate same store sales increased 10, 1%.
Approximately 75% of our Q4 comp increase was driven by net member growth the balance being rate growth.
The rate growth was driven by 210 basis point increase in our black card penetration to 62, 6%.
Q4, total revenue increased $49 9 million or 37, 3% to $183 6 million from $133 $8 million.
The increase was driven by revenue growth across all three segments. The increase in franchise segment revenue was due in part to new stores and stores that were opened this year that were temporarily closed last year same store sales growth.
Replacement revenue in franchise and other fees.
For the fourth quarter, the average royalty rate was six 4% up from six 3%.
The increase in revenue and our corporate owned store segment was driven by new store openings same store sales growth and the cycling of temporary store closures in the prior year period.
Equipment segment revenue increases were driven by higher equipment sales to new and existing franchisee owned stores.
For the quarter replacement equipment accounted for 45% of total equipment revenue.
We completed 63, new store placements in the quarter versus <unk> 45 last year.
Our total cost of revenue was primarily relates to the direct cost of equipment sales to franchisee owned stores amounted to 47 4 million compared to $25 3 million.
Store operations expenses, which relate to our corporate owned stores segment were $28 6 million compared to $25 6 million the.
The increase was primarily attributable to expenses associated with the new stores, we opened since last October .
SG&A for the quarter was $27 3 million compared to $17 $4 million the.
The increase was driven by higher payroll expense due primarily to increased incentive and stock based compensation as well as some increased travel expenses.
National advertising fund expense was $17 6 million compared to $15 million.
Adjusted EBITDA was 63.0 million compared to $51 1 billion.
By segment franchise, adjusted EBITDA was $49 6 million.
Corporate store adjusted EBITDA was $15 million in equipment, adjusted EBITDA was $14 $3 million.
Net income was $6 3 million.
This reflects a $17 5 million reserve against our investment in <unk> that we made in March of 2021.
We were required to assess the value of our investments as of December 31, 2021, and we will continue to assess it quarterly.
Adjusted net income was $22 $5 million and adjusted net income per diluted share was 26.
Now turning to the balance sheet.
As of December 31, 2021, we had total cash cash equivalents and restricted cash of $603 9 million <unk>.
Compared to $515 8 million on December 31, 2020.
This was comprised of cash and cash equivalents of $545 9 million compared to $439 5 million.
And 58% and $76 3 million of restricted cash respectively in each period.
After the impact of the debt financing in February 2022.
Total long term securitized debt, excluding deferred financing costs was $2 1 billion, consisting of our core tranches of debt and $75 million of variable funding notes.
Now to our 2022.
Our view for 2022 assumes there is no material resurgence of Covid that causes member disruptions, whether it be of shutdowns of more stringent mandates.
That resulted in a significant change in membership behaviors.
I'll start by discussing the Sunshine fitness acquisition and acquired a franchisee impacts all three of our segments.
First within the franchise segment royalties go down as we no longer receive royalty and other fees such as franchise fees web join fees and equipment placement fees from the acquired stores.
Second in the equipment segment, we no longer receive equivalent sales and margin as the stores are now part of our corporate store portfolio.
Finally, the corporate owned store segment benefits from the increased four wall profit of the newly acquired stores.
The primary drivers for this acquisition was gaining the team that operated one of the best performing franchise networks.
So the SG&A expenses in the corporate stores segment will increase accordingly.
We also expect both our capex and depreciation and amortization to approximately double in 2021 with the additional stores and new store development added to our portfolio.
One other item to note is that we've completed the Sunshine transaction in mid February .
So it will not have a full 12 months of impact towards 2022 results.
Now to our outlook for this year, which includes the impact from the acquisition and the refinancing.
We expect new equipment placements of approximately 170.
As a reminder, these placements are only and franchise owned locations.
This number would have included placements and new Sunshine fitness stores, but we'll not going forward.
We expect that half of our equipment segment revenue will come from Reeves.
We expect system wide same store sales to be in the low double digit percentage rates and for our full year revenue to grow in the mid 50% range over 2021.
We expect that our full year adjusted EBITDA will grow in the high 50% range and for our net interest expense to be approximately $89 million in.
And adjusted net income to increase in the low 90% range over 2021.
And we expect adjusted earnings per share to growth in the mid 80% range using shares outstanding of $91 1 million, which is inclusive of the issuance of equity as part of the Sunshine transaction.
And with that I'll turn it over to the operator for Q&A.
Thank you we will now proceed with the Q&A.
I'd like to ask a question you compressed star one on your telephone keypad.
I would like to withdraw your question you compress it starts.
And show you Amit locally when asking your question.
First question for today comes from Simeon Siegel of BMO.
Your line is now open.
Thanks, Hi, everyone. Good morning.
Good morning, Chris can you talk.
The conversations with your franchisees, how they've gone since the acquisition announcement any color you can offer there.
Maybe Tom anything further you could talk about the credit loss and any impact how you're viewing digital offering and then just lastly in your just thoughts on wages, how should we thing about wage inflation as we're going forward. Thanks, a lot guys.
Sure.
The franchisees were actually really.
Encouraging encouraged by it I think it showed.
With their own either owned by private equity or maybe a future deal they might do that the fact that the franchise or was I am excited about the brand and much to double down on this on this boom. They were that it was really <unk>.
<unk> had a good a good a good light light to the business.
Also it being a free first franchisee ever in the system. They were number one believe it or not so.
It was kind of a full circle.
They are very much encourage is still founder led that business, even though it was private equity held but founder led so they were very encouraging encouraging in congratulating that franchisee themselves and that.
That franchisees shame mckinnis networks for corporate along with their management team to run our corporate stores. So it was all good I think it just shows that us corporately.
Cited with the business going forward.
Yes, I mean, its Tom thanks for the questions.
Think in terms of the <unk> credit loss.
The short story is there was some press in January .
That you may have seen where they are.
The first and largest sponsor was suing them and they've made some.
Some statements about the effect that they had hired the firm that I've had it higher.
Someone to help them with their financing was lazard as well as the bankruptcy attorney so that prompted us to talk to them review their financials review their outlook and ultimately engage outside parties to help us with.
With the valuation of how to think about it the probabilities of outcomes and all of that math ended up with the write down that we are the.
The valuation sort of adjustment for that.
In terms of inflation.
We've talked about this before but we are we are lucky that our in store model is very very much has a low labor content. Typically there is 12 to 15 folks on the payroll.
And while wages have gone up.
If you think about it as a percentage of sales and what the inflationary pressures may bring compared to the same store sales growth, which we are now you can see how it's accelerated from.
Now that we're sort of back.
More than a more typical high single digit low double digit range of same store sales growth. The majority of that being member growth. We believe that we will.
Help.
Store store four wall margins expand despite the labor pressure. So it's not it's not great, but it ultimately hurts us less and it hurts others with a higher labor content.
And ultimately doesn't prevent margins from expanding as our same store sales get back on their historical patterns.
Great. Thanks, a lot guys best of luck in your head.
Thank you.
Thank you next question.
John comes from John <unk> of Guggenheim John Your line is now open.
So guys I wanted to start with marketing on two thoughts maybe Chris talk about how you think the local marketing.
Disruption transition.
It hurts you in January right in terms of maybe what the franchisees were not doing or not spending on on.
On local if that was there.
And then part of that long term right you do the Super Bowl Youre getting bigger youre thoughts on national versus local right the composition of that.
And how that changes I guess towards more national over the next couple of years.
Yeah sure. Thanks, John Yeah, the local advertising by the franchisees.
I think with the migration over to publishers, which still I think the the eliminating from from the 16. We currently add formerly add to the one was the right move although I think quite be undertaking with our size and scope of our marketing machine as I always talk about it it was more of an undertaking than anyone anticipated, which is why we're going to bring in.
Do more to help.
As that transition I think the important thing really is the first time ever in January was the first time really we had to clear insight on exactly not only what we're spending on but actually the mix. How many <unk> were bought what's the channels on television what channels on cable TV What radio stations you go down the list. So I think the data.
That's a super important which is what will require all three or so.
The smaller size of the agency as we bring in to make sure. We continue to capture that so that's the good news I think it was just trying to coordinate everything get all our AD place, sometimes latent buying causes higher prices or lack of inventory to buy so I think some of that probably played a part.
It's hard because of the <unk> in the first couple weeks of January how much is really portrayed to each U I think workouts.
I work it was always kind of.
Proceeds first before joins <unk>, meaning the higher the work out some more joins we get.
And as I mentioned in my opening remarks.
Our work out towards the end of January the highest we've seen since our original shutdown in may in March of 'twenty. So.
As evident from our lack of workouts in the first part of January the Omicron, probably had a much larger impact in the advertising that for sure.
I think the Super Bowl was it was a great spot we've got tons of good credit from it. We went from one of the top 10 commercials for the Super Bowl this year for a first year ever.
I think those big things are important for our brand and important for the industry, where no. One else has our size and scope to really do this right now with 25% of the gym shutdown in the U S.
Our motives larger and our size and scale advantages, even better so I think more things like this where the Super Bowl New year's Eve will have to continue to look at other things like that.
To quantify which is which is the right place to spend and where do we put more money or more commercials, but I couldnt be more happy to see both commercial and other play we got and we.
Actually had if it was perfect timing because it played out right in the middle of our February International sales. So it was it was good for us.
And then maybe as a follow up right. So do you think.
No how much franchisees have spent locally.
I know there was a target.
What are they actually spending that you think they were spending that and then and then secondly, you talked about Gen Z. So.
Can we get back to teen Summer challenge this year and if so how big.
How big an event do you want that to be.
Yeah. Good question, yes.
Yes, we don't I don't see there is much variation or lack of spend necessarily I think it's more where are they spending it and how are they spending it.
Theres always nobody I really had best practices. So some believer somebody does it leave that more network TV is better than cable or FM radio is dead and it really is so.
All of that data, we can capture the rest of the disease going forward because you got to learn by an afternoon by quite frankly, because we really didn't have the insight to it so wed have markets throughout the country that will over perform others.
But no real data that prove what was the reason behind it. So that's probably the big part the teen Summer challenge like if you go back you've always been a big fan of as we are too and we had almost 1 million tons in 2019 in that summer activate those 5% of all Gen Z of age that joined within three months free.
A free summer membership so.
And then through Covid with all that's going on we Didnt reactivate it and I think we're seeing.
<unk> disease are coming into our gyms and working out now is really astonishing in great, but I think with <unk>.
It'll health you can see somebody reports with the Gen Z the affiliate when there's more than others.
They are gravitating.
Gravitating towards fitness to hopefully deal with some of that.
So yes, we're definitely weighing the options now and preparing to hopefully launch that more to come on it but I.
Hopefully, we get to launch it and I think you'll probably be even a bigger if you're able to do I think the bigger launch than <unk>.
119 year.
Thank you.
Thanks, John .
Thank you.
Next question comes from Alex Perry of Bank of America.
Your line is now open.
Hi, Thanks for taking my question.
Could you, maybe just give us a bit more color on sort of how you would expect member sign ups to trend.
One <unk> this year versus prior years do you think that there will be a bit of a seasonality shift given omicron in January and maybe remind us how much January usually represents as a percent of <unk> memberships and then theyre just off of that are you thinking of doing sort of additional.
Promotions that sort of.
Hum sign ups through sort of February and March.
Sure. Thanks, Alex This is Chris break currently we don't plan on changing our normal cadence of a national sales throughout the year. So that's pretty much the same as its been for historically over the years as far as like at our April sale. So long in July so on rest of the year.
Yes, as you probably recall last year was very unseasonably, our second quarter was bigger than our first quarter and that never happens.
First quarter historically accounts for about 60% of the entire year's net joins.
And January but 40% of net julie's, which last year was completely upside down.
So more to come and we'll see it's hard to really predict right now what's going to happen, but as I mentioned like the workhouse definitely on a first line before joins in the end of January we had the highest number workouts we have seen since the original shutdowns. So.
That's a huge sign for us.
The.
And I think the important thing is our cancellations are actually better than than January of 'twenty. So even pre COVID-19 . So I think people are realizing that with the different things. We've seen there are just temporary and eventually you get back to work it out and get backed out door. So the fact, our cancellations didn't spike people realize it's a temporary pause on workouts until you feel comfortable go back out.
So that's a rather.
Another good sign for us.
Okay.
That's incredibly helpful. And then maybe just a question on the club openings through the year. So what would drive upside to sort of that 170 franchise number that you've laid out on the franchise side and then maybe just a little more color on how you expect the corporate store portfolio to evolve.
Given the sudden Sunshine deal.
Bigger opportunity there given the white space from Sunshine. Thanks.
Sure Alex This is Don I'll take that.
One of the things that we said throughout.
The latter half of <unk>.
2021 was that we expected to see an acceleration of our growth given that most of our clubs open and then we ended the year now we have all of our clubs open.
We certainly saw a franchisee activity.
Out there in the field and there are areas that they have.
Starting to submit sites.
We opened 132 last year.
Got it too.
So the 170 this year.
That 170 placements would not include Sunshine, because thats now internally, we don't recognize revenue on placements. So that number would have been a bit higher.
<unk> was a stand alone franchisee clear.
Clearly there was pipeline in that territory that they owned they had not fully built.
Built out there.
There are various area development agreements at the head.
At the time that deal was being marketed.
We looked at the white space they had in their required development under their existing.
<unk> at the time and believe that there were incremental sites to be built you may recall out so we've talked about in the past that virtually every time.
Re review an area development agreement, we tend to add more sites to it just because the more we opened it seems like the more of a can open. So that's just one factor to keep.
Keep in mind, but I think the crux to your question is that.
The franchisee sentiment.
Has continued to get more positive and positive as we've kind of gotten into the state of where now there's fewer cases.
Obviously, there were some peaks in that back end late last year and even into early January but it's starting to subside.
When you think about it we didn't have a single store closure.
During <unk>.
During COVID-19 and when when we open back up.
The member base was still there.
The economics of the model, although that has been impacted zone with a bit fewer members.
Tom talked about earlier slide impact from wage increases et cetera, but net net.
When you look at the four wall economics of our model is still superior to about any kind of other.
Four wall box.
You can invest in so our private equity guys that own the businesses are extremely positive we still have other private equity guys are trying to get in.
And so.
We feel really good about it.
We'll have more obviously more info as we get throughout the year.
But we've said that we will get back into that 200, plus range is just a matter of of twin manav.
Perfect. That's really helpful best of luck going forward.
Thank you thanks, Alex.
Thank you our next.
Next question comes from John <unk> of Jpmorgan, John Your line is now open.
Thank you very much.
I was also on the 170 <unk>.
Spencer I guess franchise unit development being an approximate of that.
There was at least some conversations or some thought at various points in 'twenty one 'twenty.
'twenty two given your current run rate for 'twenty, one development that 'twenty two development would actually be above.
Or at least in line with the 200 plus type type of run rate that you are on basically 2019 and before so I just wanted to see if.
If there were any constraints.
On the franchise side that we should be sensitive to especially as we think about $23 24 are they still rebuilding balance sheets.
At Star.
Staffing that they might be concerned about even though there are only our 12 to 15 employees.
Jim is the things like.
Omicron or is it permitting construction the other types of delays that we're hearing about broadly in the marketplace. If you could talk about what may be transitory.
Specific to 'twenty two in terms of perhaps constraining that.
Development versus what may be more structural.
Okay.
Tom and I will tag team. This I'll, let him address kind of the financing side of it from the franchisee perspective.
But I'll make just a couple of comments to the first part of your question.
I think that.
That.
The rebuild of the pipeline, which we've talked about kind of Q3 Q4 clearly started because.
We got into we ended up with a good number of openings in the back half.
'twenty one.
And.
There is certainly a.
There is not a lack of willingness to get out there and build sites there was probably a bit of.
I don't know if hesitation or at work or negotiation, maybe is another word to add into that.
Could there be a impact of sort.
Softness in the real estate development markets that could benefit you when you signed a 10 year lease.
So I think a lot of us going into this was there's going to be a lot of closures across real estate landscape et cetera, et cetera, and there certainly has been but maybe not 20000 square foot boxes.
I think you've said you've heard us say and it really hasn't changed much a bit softness in some markets some of the really strong.
Power centers, where we would like to get into probably not much.
A bit more on the Ti tenant improvement allowance dollars, which obviously helps on the overall ROI.
But I would say, we're seeing an acceleration from where we were six months ago upsides being submitted and.
So.
From a run rate perspective.
I think we'll be there sometime this year.
Barring any other issues with COVID-19 impacts.
But it just takes a bit of time to kind of get up into that run rate I guess is the way I'd say it but we're feeling really good about the number of franchisees that are out there looking at sites submitting sites and Hep side some of the existing pipeline right now.
You may recall, just one more comment I'll make is we are.
Really good insights into say the next call it three months or so because those are sites that are.
In construction or permitting or coming out of permitting and big bid out with gcs et cetera. When you get into the next three months other allies and leases being negotiated and then past that you don't have a lot of insight yet some sites call. It September October November December we don't have a lot of insight into that.
As yet, but we will as we get further into the year and I think that's how we will as you will recall, we've kind of done. This every year, we get more insights we give more updates as to where do we see is coming but Tom can kind of address the constraint or no constraint on the franchisee financial side.
Hey, John I think the.
The system is obviously.
Gotten better and better with each subsequent quarter financially and as you know we've raised our outlook for 2021, new store growth across the year and still beat it so.
I think all of that is very good signs. So I think it's really more a function of what Durbin said.
Not so much on the financials.
Financial side of franchisees and their ability to.
Get the capital to invest I think I think they are doing quite well are there some that were harder hit than from the pandemic based on where their stores were yes, but I think in the main it continues to strengthen and I think the best way to.
To demonstrate that as the new store growth and how it improved across the year.
From the standpoint of supply chain and other factors there were some.
Issues in Q4 with the ships backing up in.
On equipment, it really didn't hurt us, but it caused a lot of jostling, an extra effort on our behalf and our main vendors for equipment behalf.
But now thats really quite different our largest vendor actually has.
More inventory than our demand. So the lead times are down considerably from where they were in Q4. So all of that is very positive.
So we think its all with Durbin said, it's just a matter of time and the momentum continuing to build so that we go from the low one hundreds to the mid one hundreds the higher one hundreds and ultimately 200, yes, John that 170 as I said earlier would have been higher.
With with Sunshine being a franchisee.
It's a bit higher than that.
At this time.
Can you just I guess from.
The benefit of all of US could you quote that number I mean, where are they going to open five or five or 10 stores that would have otherwise been there or would you prefer not to.
Yes, I don't think we will from the perspective of the same thing or the rest of the group because.
If I were to ask Sunshine back in December when they put their budget together exactly what they would have built and we don't always do that we try to get a decent number and thats kind of how we come up to the 170, but everybody kind of holds a little bit lack sometimes and then sometimes they get more and sometimes they get less.
But.
The kind of the full number that they might have built on a standalone basis is probably different than what it would've been back in December or so.
Okay.
Just want to revisit one certainly in restaurants permitting delays are very very common.
Is that the case.
Permitting a restaurant I think it's probably harder than that or a definitely harder than permitting a gym like yours. So could you comment on potential permit delays that maybe.
Kind of taking some units out to future quarters.
How is overall.
Construction GC type of availability to work on your style projects.
Yes, I think that permitting has no doubt taken taking longer now.
It's not quite as bad as it was back in June July or something like that.
The issue, California is always very difficult to take six months or longer.
Whereas.
Other locations may be it could be done in three months or something like that but.
I think we're at.
We're probably at kind of an apples to apples basis, with where we were kind of in Q3 or so now I mean, it's it hasn't gotten a lot better, but it's not getting worse, it's market by market.
But it's probably just the new world, we have to live in with where.
<unk> pre COVID-19 , there were probably more inspectors and more staff and municipality offices to to be able to work with you can you can walk in and sit down and.
Work out a permit and come back and sat down and get it finalized now a lot of it is pure online because they have less people and they just use as an <unk>.
Way to kind of shift I think the way they do business because a lot of those people start working from home.
As far as the GC side, we're not seeing too much.
<unk> on that.
There's guys out there.
We've used repetitively in these markets.
We're generally building, where we already have stores until we have a good network guys.
Kind of in that area trade skills, when you get on further down the chain.
It gets a little bit harder.
At times.
We were seeing inflationary cost cycle number.
Back 12, plus months ago, and even into the spring last year.
Thats come way back down from where it was.
But there's clearly been some inflationary cost on the total size of the build but at least it's not quite as bad as it was $9 $10 12 months ago.
Thank you.
Thanks, John .
Yes.
Thank you next.
Next question comes from Brian Harper of Morgan Stanley Brian Your line is now open.
Yes.
Good morning, guys.
Maybe just to follow up on a couple of things.
The address for more directly than kind of a new unit returns new unit economics.
Are those kind of back to where they were even you've given good detail on this before but are they back to where they were pre COVID-19 are you seeing some of these things like construction cost are or equipment costs.
Pressuring that perhaps you talked you mentioned kind of real estate cost and tenant improvement allowance I'm just kind of.
Tying that together and trying to think about kind of new unit returns.
Yes.
Brian It's Tom I'll take that one so I think in terms of.
Some of the factors you mentioned are they higher yes are.
Are they changing like things like the equipment cost.
Sure.
We're now seeing some inflation there were prior it was really pretty de minimis, but it's still.
Whether it's that or.
The cost to build for some of the costs that they incur locally are they higher or higher than they were is it uniform not exactly.
Does it take a decision too.
As we talk to franchisees, which you do all the time.
Is it changing a decision to build a store to hold or wait no.
As we look at the store performance, we're not quite back to where we were.
Pre COVID-19 in terms of new stores ramping, but it's pretty close it's 85% so.
Where we would've expected them to be for the 2021 openings. So it is not and franchisees just see that is working our way through all the things we've been working our way through Covid related nothing hampering the longer term and I think when you look back.
Look back to think back to.
Pre COVID-19 , we had so many quarters of strong.
Same store sales performance.
Given the last few years high single digit low double digit all of those factors you could argue with us.
An industry, that's now 20%, 25% fewer units each successive generation being having a higher degree.
More inclination to workout and joined fitness clubs boomers too.
X to millennials disease.
Everybody just seems all the momentum moving in the right direction. Both in the short term and the long term. So these decisions are long and theyre not theyre not as I said, taking a a.
The decision to build two one that sets pause or.
Don't build.
Okay.
Yes.
The short answer the returns are still terrific.
Okay.
Maybe just a second question on the corporate unit margins. So obviously those are the kind of change this year as you fold in all of the new units. So is there any way to think about kind of how much those will change and also you were still kind of in the process of recovering margin on your.
Listing corporate stores.
Do you think that will happen this year or will that take a little bit longer.
Yes, I think it will talk about the system, maybe more generally here. So the good news is as Chris mentioned, our membership levels are above their pre Covid peak now.
But we have more stores a couple of hundred more stores than we did then so membership on a per store basis has not quite recovered again, we think thats a matter of time.
If it will I think we'll get back to those levels and then some.
On the corporate store side, if you think about that metric, it's more depressed than the than the rest of the system just based on the geography, we operate in the northeast was hit harder in terms of the.
The membership change, but it's building back.
So and we've talked about.
It's just going to take a little bit longer for those stores to rebound clearly the mix of stores now with Sunshine and the mix and the geographies they operate in and the margins that they had.
Being quite a bit better than the.
The existing corporate store portfolio margin up.
The weighted average quite.
Significantly so all of this is just a matter of working our way through and ultimately, bringing some of those better best practices from the Sunshine group, which was among our top performing franchisees.
To the existing portfolio to accelerate those those membership rebounds in the margin improvement.
Thank you guys.
Thank you.
Thank you.
Next question comes from Sharon Zackfia, William Blair Sharon Your line is now open.
Hi, Good morning, I guess two questions first.
Pretty impressive black card penetration improvements over the past year can you talk about what might be a more compelling. The members now than it was kind of in prior years to drive that penetration and what that is telling you about your pricing power and then secondarily just given the acquisition how does that at all.
The impact of potential timing.
And a resumption of returning.
Our capital to shareholders.
Sure Shannon This is Chris I will handle the black card and then hand, it off to Tom we're going to handle that.
The capital question.
Yes.
Penetration of about 62, 5% up 200 basis points over last year.
Definitely reciprocity is still even today is the number one use function and there was some conversation during even all of last year quite frankly about what the new whole new work from home is reciprocity is still a big sell in it still happens to be the number one use function.
And each year, we open more stores and even during Covid has so that continues to be a more and more bigger.
Bigger value over time, and we'll always continue to be a bigger value as we get to 3000 or 4000 stores. So that one is definitely the big push and will continue.
And as I mentioned, we do have.
We always test through things like the meditation pods with testing right now in about five stores. We have the test we have about 100 stores now, which unlocks the digital component of premium content in the App for 100 stores, you're going to run that through the first quarter and probably more to report on it at the end of the first quarter on how that result is.
Maybe we're still excited about digital content is still.
Part of it is for sure and as we've mentioned in the past.
What we're really seeing people do with digital as he has changed quite a bit from from pre COVID-19 in the workout part as Julie just a small piece of it.
It is important for a small piece in the QR codes and equipment that people could teach them how to use it is important but just the joining function today about almost 70% of our joins a digitally and pre COVID-19 that was about 35% so and how they pay their balances on their membership is in the app and how they check up the crowd we during the App how they refer a friend in the App now I mean, all of that functionality didn't exist pre COVID-19 .
<unk>.
Ill move the needle here on collections, keeping billing and keeping customers happy engaged so that's definitely a plus.
I continue to see the black card.
Can you penetrate the bigger question I think Sharon's frankly that decision is there. Another buckets you wouldn't have black card longer term just from the penetration do we write this up to a $62 60 364 raise the rate a little bit maybe comes back slightly in and write it up again as we open more stores.
Yes sure.
By the way to Chris's point onto digital I, just wanted to come back to something somebody had mentioned that I didn't cover.
So the I said.
Sure.
The allowance we took against that's really based on the financial picture that we see.
There and all the modeling we had to do as I mentioned, it doesn't affect our strategic partnership and their ability to produce content as we see it. So it's really it's more on the financial side not on the operational side.
And we've had a lot of conversations with their with their team here in the last couple of weeks about where they sit.
In terms of the corporate store acquisitions.
We've said before we were not in any hurry to make any any.
Key capital capital allocation policy decisions based on what was going on with the variant.
As we saw the opportunity with Sunshine frankly, we didn't see a better place to invest our money. So we did it.
And the good news is we still have a lot of cash on the balance sheet.
When.
Because we only essentially wrote a check for a little over 100 million to acquire them.
As we think about where the where the industry is.
We think it is a it is a historic time of disruption Chris has talked about the fact that industry consolidation.
It has probably accelerated by several years in weeding out the.
The smaller folks.
And when you look at what's happening outside of the traditional brick and mortar operators. It's also very disruptive time of incredible dislocation valuations are changing dramatically. So frankly, we like the optionality to see how this unfolds.
If there is in fact there.
Our strategic move to make we have the flexibility to do it.
And if there's not then we won't.
If there is not one that's attractive, but we don't have anything planned, but we think having the optionality. Let this all play out a little bit further to see how it shakes out and then ultimately figure out what the best capital allocation strategy is going forward.
Does that mean, we resumed share repurchases. We think so it's just we're not sure when that starts we'd rather see some of these things unfold give ourselves the flexibility to potentially react to them.
Before we make any decisions.
Thanks.
Thank you.
Next question comes from Jonathan Komp of Bad Jonathan Your line is now open.
Yes. Thank you hopefully you can hear me.
First question just on the again the front stores could you share.
Okay.
On the corporate stores could you just share how many openings you are planning in the guidance for 'twenty two and then how should how should we think about the growth rate going forward for the combined corporate business now.
On the store side.
Hey, John we haven't historically, so first of all we're moving away from store openings to placements again, we did that only temporarily.
During the sort of hydrocodone in 2020 , one so we want to get back to placements, which to <unk> point earlier excludes the.
The corporate stores announced Sunshine and I apologize if I forget the second part of your question there.
Sorry, Yes, I was just asking specifically on the company store openings I think you typically have.
Talk to sort of a rough number that you expect to open per year, but.
Is that is that something youre not going to do going forward.
Yes, John .
Typically opened in somewhere in the six to eight range or something like that corporately.
<unk>.
Around most of our stores are kind of in the northeast.
Pennsylvania on North.
But what we have what we're not doing in this release is kind of combining what the Sunshine number would be we can talk more as we get throughout the year in terms of kind of total capital to be spent.
And store development, but when you think about it.
A lot of our Capex is in replacement of equipment and other things not just in new stores itself, but we have not disclosed that number for this year.
Okay understood and then Tom maybe a broader question on the 'twenty two guidance the revenue and the EBITDA ranges you gave could you just share.
What's coming from the organic business and what the contribution from Sunshine is so we can as we think through the modeling.
Yes, John .
We didn't want to do is kind of get into.
The specifics there I think there's a lot of moving parts.
As we talked about during the call where I talked about during the call with equipment moving.
The equipment margin and revenue goes away the royalty web join fees all of those things go away.
What I would say is we have factored in the tenant and a half months that we will have sunshine in our business.
For this year.
Fully reflected in the guidance.
And I.
I think that's all we want to get into at this point in terms of breaking it out because otherwise it just becomes a big reconciliation game that I don't think we want to get into.
Yes, maybe just one last statement on this John is that.
I think Tom in his prepared remarks talked about how capex for the year to be kind of double what it was in the prior year, so that could be one way to think about it I think.
The other point is that the franchise Sunshine in it I've said it had about 100 stores.
So they don't they don't typically open 10% to 15% of growth in one year.
But when we get obviously quarter by quarter, we'll be talking about water actual capital was four.
For each of the quarter and then how many corporate stores. We opened what are we growing the fleet itself, but one way to think about it as kind of the.
Double of the Capex in the prior year with that being a good chunk of that being in and replacement equipment as I said earlier versus new Capex for store development, obviously in that number other things on the HQ said, whether it's investments in other things as well.
Okay understood. Thank you.
Okay. Thank you. Thank you.
Thank you our final question for today comes from Chris <unk> from Stifel. Chris Your line is now open.
Good morning, guys. This is Patrick on for Chris had a brief phone issues, whilst our redundant question forgive me, but I wanted to ask you about the Sunshine Sunshine's management team and how they've driven the results. They have in their store portfolio and just can you elaborate a little bit more on specifically how they achieve those results.
And how theyre going to replicate that margin in the store portfolio and just the timeline generally you expect them to be able to do that.
Sure This is Chris.
Start off and then Tom Mccormick can adequately.
Yes, they are always there.
Have a great track record, it's still founder led like I said they've been here from day. One is the first grandchild. So the founder there that card business.
He is still managing that as a CEO who came onboard here with his management team, which has built over the years their same store sales trends have always been great. There operational excellence has always been great. They are a great CMO in place great Cielo is in place and there could just definitely well oiled machine.
One thing on the margin and I think they can influence our corporate stores, but also their margins. They also operate in the south and lower lower rent lower rent areas right. It does lower rents sometimes the payroll cost is slightly lower than here in the northeast right. So some of the margin is strictly just that but I do believe there are operational excellence, taking care of our corporate store fleet.
Our existing corporate hopefully will be great influence there and also I think to add to that is is now also the influence we had a little bit of a hybrid approach right. Chris we are.
Our VP of corporate stores was was tapping into our development Department here at the corporate office and our Ops Department in our marketing Department here that services the franchisees as well so here now with the franchisee as well oiled infrastructure, there thats not running our store fleet and allows our our main office crew here to focus 100% of their time and energy.
E on servicing the franchisees directly right. So it's kind of elegant solution to both sides here, who runs our corporate stores.
Stronger and also allows our franchisees better service. So I think that's a.
A big plus for us.
Yes.
Great and then I was just curious as well on the Black card membership I wanted to follow up on that I know you were testing the rollout of Pf plus and if there was any update there in terms of driving a higher subscription rate.
As you roll that in and just more broadly given some of the inflationary pressures just across the board for consumers do you think this point outside of anything you get from an increase in penetration, but the actual rate that you're charging on the black card membership is this a moment that you would look to increase that if you were to roll in digital for Pf plus or do you think you've got.
An advantage here, where you can widen your gap to the industry by kind of holding that that membership rate constant.
Yes, I think that the.
I think backup for a white.
White card right the $10 price point, because we always we could ask on firstly looking to raise that and I think the fact that we can we can advertise 10 Bucks a month and which is just the price point cancel anytime $10 a month at a price point that.
Really gives access to anyone and everyone out there that can give fitness to try so but the fact that people come in and they walk out 62% of <unk> pain.
More than double as just an unbelievable modeling and I think the black card is probably where we see the pricing flexibility or elasticity, where the more perks and benefits we add to it the more value and to the earlier question, we talked about with Black card and reciprocity every year. We opened 100 plus units 200, plus units, that's a bigger a bigger benefit right. So I think thats always on.
Our back pocket.
Wells testing, whether it's digital or we tested and meditation pods and adding more value. There. So I think that will definitely be the pricing power that we access in the 100 stores with the Pf plus for 2499 today, so $2 more than the current price.
We're also testing that without digital just to see if we can get it without even the digital component to it so more to come on that will probably have more to talk about at the end of the first quarter as we run through the joins here that joined cycle here in first quarter, but.
I think we've seen black card penetration as we've raised price over the last probably handful of years here. We've raised it and we continue to still to eat that up a little bit 100, 200 basis points, a year, which is which is great. I think we will continue to see that as we add more value to it and I think the one other thing I would add to it with the with the digital World is the perks button in the App, which we.
It really had no place for all our purchase that we offer our members and now with the data we're capturing.
From the number of click throughs through that perks button is allows us to now go to more bigger companies out there that really open their eyes right. You figure, we do roughly 8 million workouts, a week and we have about 65 or so percent of our members have the app, but 80% of all new joined get the App and they use that to check into the club so a lot of eyeballs.
That App every week right. So we.
We have the shell gasoline, which is a more recent one along with noon.
And good or sunglasses.
Shell gas that is one of the best integrations have gone so far and it's almost 1 million gallons of gas it had been redeemed by by by our members were discounts.
So that kind of a black card perk, we can add as different discounts, particularly vendors based on membership types too so.
Constantly look to add value not necessarily I think to Toms point, our margins are very strong I think we can weather. This inflation here with same store sales growth.
And only really raise price if we add value.
Great. Thanks, guys.
Welcome. Thanks.
Thank you we have no further questions. So I'll hand back to Chris Rondeau for any closing remarks.
Great. Thank you everyone for joining us this morning.
It's been an exciting fourth quarter for us and look forward to seeing how the first quarter unfolds here is as I mentioned the work out there picking up here at the end of January highest we've seen since the original shut down and as I mentioned that joins pollo. So I think with less clubs here in the industry.
The single club and I think our future continues to be brighter as we come on the other side of this so look forward to our first quarter call. Thank you.
Okay.
Thank you for joining today's call you may now disconnect.