Q2 2022 Planet Fitness Inc Earnings Call
Yeah.
Hello, and welcome to today's planet Fitness Q2, 2022 quarterly earnings call. My name is Jordan and I'll be coordinating your call today, if you'd like to register a question you may do so by pressing star followed by one on your telephone keypad.
I'm now going to hand, a bunch of Stacey Caravella V. P of Investor Relations to begin Stacy. Please go ahead. Thank.
Thank you operator, and good morning, everyone speaking 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 I release can be found on our website investor that planet fitness Dot com, along with any reconciliation of non-GAAP financial measures man.
And on the call with their corresponding GAAP measures.
Now I'll turn the call over to Chris.
Thank you Stacy and thank you everyone for joining us for the planet fitness Q2 earnings call.
We continue to be well positioned for disruptive growth, we're adding new members in new stores, even with near term challenges lingering COVID-19 impacts to the broader economy in the current climate around recession and inflation.
During the second quarter, we added 300000 net new members entering the quarter was $16 5 million and we grew our store base to more than 2300 locations with the addition of 34 new stores.
We believe our high quality affordable fitness experience well originally now more than ever as Americans are seeking value would feeling the rising cost of everyday items, such as food and gas. We also believe that people will begin to prioritize their health and wellness are being more cost conscious even trading down to planet from high priced gems, if they're not using the basketball court.
Take care et cetera.
During the most recent financial crisis from 2007 to 2009, we added $1 1 million members grew same store sales by double digits and nearly doubled our store count even though we were much smaller brand at that time. This gives us confidence that should the economy worsen we are well positioned to continue to grow.
Copa create a very challenging time for the industry. The majority of the health and fitness locations globally experienced some type of temporary closure due to COVID-19 with 25% of U S. Jim's permanently closed as a result, given the resiliency of our franchisees.
With our low cost economic model, we do not currently close a single store.
We surpassed our all time remember record in Q1 this year during the second quarter at three 4% of our mature stores were at or above pre COVID-19 membership levels. We continue to see consistent momentum towards full recovery the longer our stores have been opened since the temporary COVID-19 closures system, while our stores are only 6% below pre COVID-19 membership levels.
And we've added more than 330, new locations since the beginning of 2020.
We anticipate more normalized joined trends seasonality to continue for the balance of this year, we expect the percent of our mature stores that have recovered to previous levels stabilize given that mature store membership growth is typically flat in the second half of the year.
Our branch teams that resonate with younger generations at rates that surpassed prior generations as awareness of health and wellness continuously increases.
Gen Z is continued to be the fastest growing demographic group of our membership.
Our share of that generation over the age of 15, 9%, which is much greater than it was for millennials at that same age in.
In Q2, we launched high school from our pass program.
It's rebranded version of the Teen Summer Challenge program. We ran in 2019 were high school kids teens can work out for free and our stores all summer long.
We believe high school from the past is extremely timely and incredibly important given the alarming teen mental health prices coming out of the pandemic at the end of July we had more than 3 million teens enrollment program versus just $1 million. In 2019. This is more than the total paid membership of any of our high value low price competitors. It also represents a 15% penetration of <unk>.
All high school each teams in the U S between our southern perhaps participants and paying teenage members and.
And not only have they enrolled.
More than 14 million warehouse, we made the assignment process, even more seamless this year, allowing teams to register online and enabling us to capture contact info for both the team and the parent in fact, our App top most downloaded list of all apps and the apples are during this initial days following the launch even above to tuck in Instagram in June we filled in a survey.
Some of the participants and their parents and learned that for two thirds of the high schoolers. This summer represents the first time they stepped into any fitness club. This is absolutely what our brand is about getting people off the couch to start and to lead a healthier life and we're getting this to happen even earlier in their lives.
More than 80% of respondents parents reported senior teen exercise is inspiring other family members to get more physically active with a half of them said that they were had worked out with your teens at some point this summer.
Personally I'm moved by some of the notes that we received from both parents and teens.
<unk> participant wrote this experiences transform not only my mental health, but my physical oil in this gym membership has really helped me stay on track with my fitness and health journey I will absolutely be purchasing membership once it ends.
And from a parent I've seen some extremely positive growth and my son I know it comes from that quality time with friends from being physically active.
And the independents he gets from taking charge of itself.
We believe this program is the right thing to do.
We're helping teams established healthy habits. They can build upon the future. We estimate that there has been a slight negative impact on our paid membership during the quarter as some teenagers likely participate in high schools over the past, who otherwise would have paid for a membership, but we are focused on building lifelong brand loyalty with that generation.
Hampshire, where we tested this program back in 2018, we now have 20% penetration versus 15% nationwide.
This demonstrates that the more years of running this program the greater brand awareness, we're building with <unk>.
And we're just getting started with our efforts to capture Gen. Z members pre pandemic, we had 8% penetration of millennials and today that is at 9% pre pandemic, we had five 5% Gen Z.
That are over the age of 15 and today that is also a 9% we're getting an even greater share of each successive generation. It's also encouraging that after we ran 2019 as teen Summer challenge, 25% participants became members at one point, 11% of them are still members along with 5% of their parents.
In May we increased the black card membership to 24, 99% from 22 99 for all new joins the system wide rollout of the increase has so far outperformed the test results across key metrics such as acquisition rates retention average monthly dues per member and margin. In fact, we haven't seen an initial dip in our black card percentage rate as we did.
Past price increases during Q2 Black card membership penetration was 63, 5% from 62, 2% in the second quarter last year.
Yeah.
Working with our franchisees, we do to make progress with our national and local marketing agency consolidation effort.
Spike challenges along the way.
We have been looking for a new market leader for the past few months as our business has scaled over several years.
We decided to use this opportunity to restructure our marketing organization to better align with how our system operates.
We announced this morning that we named a Chief brand Officer, Jimmy <unk>, who has been with planet fitness for 22 years, most recently, serving as our VP of National marketing.
She will lead marketing driver in national and local marketing strategy oversee our national agency of record and work collaboratively across the organization to bring our brand vision to life.
Like me Jamie started the front desk and joined the brand working at our third location.
His extensive knowledge of our brand and importantly, our member and has played a major role in defining our unique successful marketing positioning. She also has strong relationships with our franchisees.
Additionally, after careful evaluation of our marketing agency structure, we believe the best path forward to meet the needs of our systems to transition back to a prior PUC Barclays to manage our National AD Fund, we have a long term relationship with Barbara team and are confident in our proven track record.
And on the local side, our franchisees to have three agencies to choose from at this time to handle their local advertising. We believe few agencies provide greater consistency across our markets and increased data visibility, while still giving franchisees choice.
We are a brand whose growth is fueled by the strength of our collective marketing efforts. We believe that this marketing structure in the agency transition to enable us to most effectively go after the 80% of Americans, who do not currently going to a gym.
To summarize.
The trends in our business are positive our usage is back above the 90% index 2019, we continue to see that people who are working out are doing so more frequently.
Young generations and prioritizing a fitness is driving down the average age of our member and they're a strong tailwind behind the focus of overall health and wellness coming out of the pandemic.
We are confident based on past performance that we can not only survive, but thrive in a high inflation with possibly recessionary environment looking to the future I'm confident that we will continue to be a differentiator and disruptive force in the health and wellness industry and we believe that fitness is essential and our industry is a key part of today's healthcare delivery system.
Finally, before I hand, it over to Tom I'd like to address our announcement. This morning that Gordon lively President has decided to retire and will transition through the next couple of months Dover joined planet fitness in 2013, as our CFO and was instrumental in developing our finance organization preparing us to go public and then leading our IPO in 2015.
More broadly expanding our brand both domestically and globally.
We are grateful for Goldman's leadership friendship passion for our members and franchisees and significant contributions to the brand over the past nine years, we have begun a search for a new president, but you know these are big shoes to fill personally I'd like to thank everyone for helping me to lead the company and I'm forever Grateful for his guidance and support.
I'll turn the call over to Tom.
Thanks, Chris and good morning, everyone in the first half of 2022, we completed three transactions to strengthen our resilient asset light franchise business model.
First we closed the Sunshine fitness acquisition, which diversified the geographic profile of our corporate stores as well as added stores with better profit margins, while keeping our ownership level at just 10% of the total system.
Second, we refinanced and Upsized a portion of our debt and have locked in low fixed interest rates as well as paid off our variable funding note.
And finally in Q2, we executed a $44 million share repurchase at an average price of approximately $63 50.
Which underscored the strength of our balance sheet only two years after having all of our stores temporarily closed due to the pandemic.
Now I will cover our Q2 results.
All of my comments regarding our second quarter performance will be comparing Q2, 2022 Q2 of last year unless otherwise noted.
It is important to note that this is the first quarter that reflects a complete quarter of operating results from Sunshine fitness and our corporate owned store segment.
As a reminder, we completed the Sunshine deal in mid February therefore, our full year results will only reflect 10 and a half months of the financial impact from the acquisition.
We opened 34 stores compared to <unk> 24 last year.
Had positive same store sales growth of 13, 6% in the second quarter.
Franchisee same store sales grew 13, 4% and corporate same store sales increased 15, 7%.
As a reminder.
Sunshine same store sales will not be reflected in our corporate owned same store sales until February of 2023, but they will continue to be reflected in system wide same store sales.
This is consistent with how we've treated prior acquisitions.
Actually 80% of our Q2 comp increase was driven by net member growth with the balance being rate growth.
The rate growth was primarily driven by 130 basis point increase in our black card penetration to 63, 5%.
As a reminder, our black card price increase that we took in May was only for new joins.
That will slowly begin to drive the rate up going forward.
For the second quarter total revenue was $224 4 million compared to $137 3 million. The increase was primarily driven by revenue growth across all three segments.
The 13, 3% increase in franchise segment revenue was primarily due to an increase in royalties from same store sales growth new stores and stores that were opened this year that were temporarily closed last year.
As well as an increase in placement revenue.
Partially offsetting the royalty revenue increase was a decrease of approximately $3 $1 million as a result of the stores acquired in the Sunshine fitness transaction moving from the franchise segment to the corporate owned segment.
For the second quarter. The average royalty rate was six 4%, which was a nine basis point increase.
But 150% increase in revenue in our corporate owned store segment was primarily driven by the Sunshine fitness transaction as well as same store sales growth new store openings and the cycling of temporary store closures in the prior year period.
Equipment segment revenue increased 70% driven by higher equipment sales to new and existing franchise owned stores.
For the quarter replacement equipment accounted for approximately 60% of total equipment revenue.
We completed 26, new store placements in the quarter versus <unk> 19 last year.
Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee owned stores amounted to $32 5 million compared to $18 5 million.
Store operations expenses, which relate to our corporate owned store segment increased to $56 4 million from $28 4 million.
Primarily due to the additional stores from the Sunshine acquisition.
SG&A for the quarter was $28 2 million compared to $21 8 million payroll costs, primarily drove the increase with the addition of the Sunshine fitness management team as well as increased travel expense.
Included in the adjustments to EBITDA was approximately $1 million related to transaction fees and expenses incurred in connection with our acquisition of the Sunshine fitness stores as well as some additional one time fees.
National advertising fund expense was $18 9 million compared to $13 5 million net income was $25 1 million adjusted net income was $34 $5 million and adjusted net income per diluted share was <unk> 38 cents a.
A reconciliation of adjusted net income to GAAP net income can be found in the earnings release.
Adjusted EBITDA was $89 9 million and adjusted EBITDA margin was 41% compared to $55 $6 million with adjusted EBITDA margin of 45% a reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.
Now by segment franchise, adjusted EBITDA was $54 4 million and adjusted EBITDA margin was 65, 9%.
Corporate store adjusted EBITDA was $40 4 million and adjusted EBITDA margin was 39, 8%.
Equipment, adjusted EBITDA was $10 2 million and adjusted EBITDA was 25, 2%.
Now turning to the balance sheet.
As of June 32022.
We had total cash and cash equivalents of $446 3 million compared to $603 9 million on December 31, 2021, which included $62 8 million and $58 million of restricted cash respectively in each period.
As I mentioned earlier during the quarter, we paid off our $75 million variable funding note and we used $44 million to repurchase approximately 700000 shares.
Total long term debt, excluding deferred financing costs was 2.0 billion as of June 32022, consisting of our four tranches of fixed rate securitized debt that carries a blended interest rate of approximately 4%.
Finally to our 2022 outlook, we reiterated our guidance for 2022 in our press release. This morning with the exception of updating our adjusted diluted shares outstanding guidance to $90 7 million, reflecting our second quarter share repurchase as well as our net interest expense.
To $86 million as a reminder, our view for 2022 assumes there is no material resurgence of Covid.
That causes member or supplier disruptions, whether it be a shutdowns or more stringent mandates that result in a significant change in membership behaviors.
As Chris mentioned, the marketing agency consolidation effort has been more challenging than we expected and as a result, the naphtha is incurring additional expenses that we did not anticipate.
Therefore expenses will be higher than collections. This year, a portion of which was reflected in the second quarter.
Additionally, the HVAC supply shortage has not lessened as the impact from the China Covid manufacturing shutdown lingers.
We're monitoring the situation carefully and are working with our franchisees on alternatives such as keeping in place.
And existing HVAC system in certain locations.
But the supply constraint has not eased since we reported our first quarter earnings.
Still believe that we can deliver our full year forecast even with these two developments, although they are likely to limit any upside.
Importantly, we believe that they are both near term one off issues that will not prevent us from capitalizing on our long term growth opportunities.
I'll now turn the call back to the operator to open it up for Q&A.
Thank you as a reminder, if you'd like to register for questions. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two.
I am please ensure you're on mute when speaking.
Our first question comes from Randy <unk> of Jefferies. Randy The line is yours.
Thanks, guys good morning.
First question on the Sunshine team.
I believe you mentioned I think Tom you mentioned that the comps of Sunshine, We're outperforming the core corporate owned by I think 200 or more basis points. So can you just give us some perspective on the.
The processes that Sunshine is going to be kind of.
Taking on.
Broadening out to the other corporate clubs and when you might see the the gap in comp of those corporate owned stores start to kind of narrow lots of Sunshine.
Hey, Randy Thanks.
So I think maybe a couple of things one is.
The overall corporate store segment is outperforming the franchise segment and comps primarily because our stores in the in our legacy markets, which are still what's in the corporate store same store sales were hit harder by the pandemic and hadn't had.
Experienced longer closures longer mandates just given the regionalisation of that business.
So that's a little bit why our corporate store same store sales are stronger.
As they recover faster like the rest of the system that was impacted in a similar way in those in those markets.
So in terms of the best practices better practices that that's happening.
Shane and the team have realigned some of the.
The pricing in the different promotions and the marketing pushing black card. So we're seeing that traction for sure.
And I think at the end of the day when Sunshine.
Obviously, we see it internally, we're not disclosing it externally, but they continue to be a strong performer.
Theyre, just not part of corporate stores as we sit similar to how we treated other acquisitions as I said in the script there.
Part of the total system, just not part of corporate stores.
Got it and I guess lastly.
I believe you guys are hosting a franchisee convention.
I believe next month for the first time in a couple of years.
Maybe Chris kind of give us your perspective on how important that event is to have an obviously in person and kind of some things that you've worked on in the past and past conventions. What you kind of think about as a focus point with your franchisees.
At this at this convention in terms of new areas for development et cetera, just give us some flavor on on that event.
Sure Randy is next month and it's the first time, we've been together since 2019 September 2018, so three years almost on the dot.
A lot of excitement is well north of a 1000 attendees already registered to go.
And beside my my main address here on stage and then.
Some fireside chats with Tom and the rest of the IFC franchise E Committee then it will have a breakout sessions for a couple of days. So there is a marketing breakout there'll be development breakout to be operational breakout best practices training. So there's a lot of.
It's a lot of just education and reeducation I guess I should say too that gets people back making sure everybody is running.
Tip top shape here when they are running their clubs so all of that stuff.
And then and now as you heard this morning with the announcement of Jamie <unk> Who's our Chief brand Officer, now and now her off so <unk>.
Presenting with Cheryl our Chief Digital officer.
So there was a big kind of a marketing reset here and a marketing team Thats I think much more much more in depth that it can help drive the sales. So it would be a lot going on and a lot of excitement in next year, but it comes back it's like a pep rally so they come back and excited to get back to work after all they hear and see from from us in trends in data.
Great. Thanks, guys. Good luck at the convention.
Thank you Randy.
Our next question comes from John Heimbach <unk> of Guggenheim Partners. John . Please go ahead.
So Chris to two separate marketing related questions. One if you look out over the next.
678 months.
What's the general plan right. So youll do new year's Eve, we do anything different.
Assume you'll be back at the Super Bowl do you do anything different there and then creative right has the kind of below celebrity creative I assume you'll add to that bring that back and maybe add some other people. So thats number one that thought and then secondly, when do you.
Best practice, right really diving into the local spend when does that start to make an impact.
Is that still.
Far out on the horizon.
Sometimes deep into 'twenty three.
Yes, thanks, John for the questions.
Yes, so the new year's Eve is still on Q after being made as we speak so that things are going in the same way.
You won't see anything different than you've normally seen in the last.
Six seven years here Sue both still up in the air we haven't committed to that just yet.
But we'll see the same normal cadence. So you know the big January sales, we always see coming into new year's.
Also the normal cadence this year second half as far as marketing for October and so on so nothing there should you really changed much and I think one thing to note with the high school summer passes and you probably remember us talking.
Previous calls is where we've seen 25% of 2019 Teen Summer Challenge Kids had joined at one point.
Today, 11% of those teens from 2019 are still members and 5% of the parents so with over 3 million teens. This this year.
Naturally we're going to have a much more probably aggressive marketing campaign to get a lot of them to join.
And also you probably recall this year, we actually use our app to sign a lot of these people up on the website. So we have a lot more data and way to contact both.
Teens and parents, so hopefully get them to convert into a paying membership going forward. It's also to be interesting. We have like I said, 25% of those teams joined since 2019, 11% of members today, but that was also six months later pandemic hit so there's a lot of disruption in that normal probably joined cycle. So it could be really interesting what we see from the 3 million teens and their payer.
<unk>.
That's one of the marketing probably play that we never really had before.
The rest of this year and beyond so.
It could be exciting.
As best practices.
Already starting somewhat even from January when we first started to see the data that we hadn't really seen before from the <unk> spend.
But it's really a learning tune and learn in tune and learn and tuned so it's going to be.
And evolution that probably really never changes.
And you know even if you think about today the amount of Gen Z that are joining in how we target them.
When you go back pre pandemic.
We only have 5% penetration of <unk> now we're at 9%. So that's a that's generation here that we probably have to think maybe a little differently than than just strictly TV and network as opposed to streaming and tick talk for example, so but it's going to be always an evolution of learn and then fine tune and tweak.
Sale the sale, but now that we're capturing the data. This is the this is the benefit of it.
And one last thing when you when you think about monetizing your membership.
Ryan I think we've talked about this before right in terms of Black card partners.
Is there a level here of membership as a $20 million right or do you think you're there now.
And I know you've done a few things but.
Broader way.
To bring on more partners and create more out of the box value.
Yes, I mean, I think we're starting to see with Cheryl has helped.
Digital officer, I think with the perks page in the button on the web site on the App.
The traction we've gotten from that and the data recapturing so that we can show true click throughs and.
Conversion for other partners that I think we're now on the cusp now starting to not only get the discounts would actually even drive maybe some revenue from those discounts.
Finally from from from.
From share revenue or whatever the commission so.
I think we're just getting there right now, but the partnerships and people that are one to work with US now since there is actually a way to improve data has been.
Later is different than it was two or three years ago, when we talked about perks.
Okay. Thank you.
Thanks, John Thanks, John .
Our next question comes from Brian <unk> of Morgan Stanley Brian . Please go ahead.
Yeah, Good morning, guys.
Maybe just a quick one to start how many corporate stores that you opened in the second quarter and.
Do you expect maybe somewhat of a similar pace to the second half or are you holding back on some of those just to help franchisees kind of get the proper equipment to some extent.
Yeah, Hey, Brian It's Tom we opened four.
And I think we've.
We've talked about this before I think you can expect.
<unk>.
We'll kind of be.
We'll try to keep pace with the system in terms of our penetration at 10%.
Different years, it may be plus or minus that but.
So not speaking of quarters per se, but as you think about this year in coming years Thats kind of how we think about it.
Okay, great. Thanks.
On the high school summer, perhaps what do you think made it. So successful this year or was there anything you did differently just in terms of marketing it or you know maybe it's kind of a digital story, but what do you think kind of explain some of that success.
Yes.
First thing I'd, probably point to is just since you have in 2019, which hard to believe as three years ago now that.
The pace of what we've seen.
<unk> join in mostly the older Gen Z as their counterparts that are in that early 'twenty stage. The oldest ANZ is about 'twenty three 'twenty four but the rate of which had been joining sense. Since the pandemic has been running about 150% over normal. So I think there the younger counterparts to high school teams are following their footsteps.
I think that drove a lot of the.
Volume as well, but I think the ease of ease of signing up where before.
It wasn't digital really had to come in to the cloud the parent had to come with them. They have to sign the paperwork and the waivers and someone where this was all done digitally through the App and website where.
Parents, and the Kid had a sign up get their emails and packages.
More streamlined I think that probably helped.
Ease of ease of ease environment sign ups. So those two things besides that nothing really that large.
So it wasn't like we did a big media push it was mostly just saw free press it again, but.
But I think I think coming out of Covid and what we've seen from the older. Gen Z is just there.
Their propensity to join I think with mental health and physical health I think theyre just at a.
A different place than they were in 2019, what drove the volume, but it's been a little over 3 million logged over 14 million workouts, it's been it's quite amazing actually.
Okay, great. Thank you.
Thank you.
Yeah.
Our next question comes from Max <unk> of Cowen <unk> Company. Please go ahead.
Great. Thanks, a lot guys and congrats Dr Van <unk>.
Oregon on the retirement.
So first can you just talk to you a franchisee sentiment and enthusiasm to our open gems as we have seen interest rates tick up here, the macro slowing and input costs start increasing so do you think that there could be any sort of a temporary slowdown besides the HVAC issues or anything else.
This is Jordan.
And we're pushing for.
As we've talked about in the past our franchisees pre COVID-19.
<unk> all developing.
Schedule.
And we were in the 200 plus openings there for.
Three years or so.
I'd say the.
As we came out of Covid no store closures.
The momentum getting.
Members back in the clubs and then getting the membership growth back in place.
The enthusiasm to open stores.
And these wells are still as bullish as in what we're doing about the brand.
The return on the investment.
It can get.
Internally, we Tom cruise myself thought about and we've said this in the past that.
That 4000 potential number of clubs, we feel even more comparable today than we did say three years ago.
About the ability to continue to bring the brand to more and more markets.
<unk> closer to.
80% of population.
Don't have a gym membership.
That said this year in particular.
Late last year on the issue of the whole.
Supply chain constraints.
<unk> certainly been something that has had an impact on our business.
We feel pretty good about where we're at on the equipment side to be able to open new clubs.
The HVA issue has continued to be a.
The issue that we deal with quite frankly in our day to day week to week.
With the shutdown of.
And China, some of the plants and just being able to maneuver around that.
All of this certainly came in to the consideration that we had.
We gave the guidance that Tom spoke about.
I'd say one last comment I'd make is in terms of just the overall retail environment.
With respect to.
Our franchisees their development teams.
All of our landlords across the U S.
Yes.
Most likely because we were a great.
Polymer pre COVID-19.
The economics of the model and the traffic we drove to the Somos et cetera et cetera.
EMEA alone, where we're at today with landlords, realizing we didnt close a single store, we've paid back all to read that.
Got deferred during COVID-19.
We're still one of the most attractive.
On a market to Alcoa.
Ron.
Haven't really moved a lot.
What we saw on those loads of certainly.
But I'm willing to pay more tenant improvement dollars to get.
To get us into a space.
But in terms of the franchisees wanting to get back into that pace.
Where we were pre Covid, we certainly think we can get there.
We don't have any doubts that we.
We want to do it.
That's that's very helpful. And then as a follow up what is your expectation for when the mature gyms will reach pre pandemic membership levels.
Obviously sort of we discussed being flattish for back half of the year, but is <unk> 23, the right bogey to think about thanks a lot.
Yeah, Hey, Matt its Tom.
Good question.
We think.
It's tough to really put a timeframe on when all of the store all of the mature stores will be back to their pre COVID-19 membership levels I think it's very encouraging to see that it's continuing to tick up.
With each passing quarter clearly what happened with omicron in.
In Q1 that we discussed previously.
Kirk didn't help so we believe that.
This January this Q1, hopefully will be more of a typical.
Strong Q1 for US again, we don't see anything competitively thats a threat on the horizon Thats going to change anything it's just a matter of time and how long.
Our continued investment in marketing.
It drives the members off the truck drives our target off the couch to join.
So it's really hard to say when that will be but we are encouraged by the continued excuse me continued progress and look forward to a strong Q1 to boot.
<unk>.
Our next question comes from Sharon Zackfia of William Blair Sharon. Please go ahead.
I'm curious, whether you're seeing any kind of change in usage patterns or join us.
Normal seasonality and some of the areas, where we've seen kind of some pandemic flare ups I know others have mentioned.
Southern California, and the northeast as maybe being a bit more challenged recently from a COVID-19 perspective, I'm curious what you're seeing there and then secondarily, if I'm doing the math right. It.
Seems like replacement equipment is still kind of well below the trend line that you saw pre pandemic I'm calculating maybe 30% below even though you've got more clubs in the first half of this year or in 2019 can you talk about what's going on in replacement equipment and our franchisees.
For a lot longer or excuse me is there something else going on there will be some sort of catch up at some point.
Sure Sharon, it's Chris I'll take over the first part of that question, Yes, we aren't seeing anything.
Geographically, our or anything of our express country based on.
Any of the small flare ups during like that anywhere.
All of those are acting very similar to each other they are not even like pre pandemic. We haven't really had any regions as act very differently. So I missing anything there.
I think a lot of that with a 30 almost 35% of the clubs are at pre pandemic, just more I think Tom's point matter of time.
And actually most of the stores I mean, the average clubs closed six months, but some closed clubs were closed two months and somewhere here. So a lot of it's just timing and how long that had been already opened like again if people clubs in Florida for example, they've been open for <unk>.
Well the two years at this point, where other parts of the country have been really a year. So it's just a matter of time at the end of the day, but we're not seeing anything change or or act differently from a membership joined trend just the only one really just the gen Z to joining well above normal at this point.
The other generations arent.
Yeah, Hey, Sean its Tom on the on the <unk> piece.
I think theres a couple of things one is the lockdowns in China.
Primarily Shanghai, but certainly the other provinces.
Hurt our manufactures of equipment.
We don't see it as a full year risk in fact, theres a lot of inventory stateside once once those provinces reopen or.
Our primary vendor matrix essentially ran us full out rent our equipment full out so it did cause a little bit of a timing shift on some re equips from Q2 to Q3.
But it doesn't it doesn't impact the year from everything we can see.
Great.
Let's start on the back.
Thank you Sir pursue.
Our next question comes from Jonathan Komp of bed Jonathan. Please go ahead.
Yes, I think a bit of a modeling question Tom Im just curious as you look to the back half any any shaping.
Cadence that you think is important from from new openings or equipment or even if you could quantify that.
Comment you made about some of that.
The investments we're making.
Yes, John I think in Dortmund may add some to this I think is pretty typical of the backend for new store openings is weighted more heavily.
And that may be.
Particularly on the <unk> side as I, just mentioned, maybe also a little bit more back end.
Heavy just given the disruptions in China in Q2.
In terms of NAFTA.
What we're reflecting is a year to date GAAP in the P&L is essentially half of what our expected full year shortfall will be plus or minus.
So hopefully that helps answer your questions.
Yes, that's really helpful. Thank you and then just a broader question on capital allocation.
I was curious to see that the buyback activity restarts. So just wanted to get your perspective on sort of the rationale there and then how we should think going forward.
Have a sizable cash balance and locked it off the cash flow generation.
Yes.
Yes, I think it's.
There's obviously a lot of market volatility going on.
Earlier and.
Frankly, we thought it drove the stock too low so we've put in a <unk> 501.
<unk>.
While we could to.
So essentially buyback and frankly stay at or below what we bought back before you.
Youll remember, but just for everybody else in a couple of years prior to the Panther.
Excuse me, we bought back about 800 million shares.
I think the average price was $67.
Almost 12 million shares so that we thought that's been our typical way of returning cash to shareholders. We had we were sitting on a lot of cash.
And thought.
And discussions with our board as we've talked about that it was a prudent move to take down roughly a quarter of our outstanding authorization.
The board authorized 500, we took down 300 with an ASR back in 19 in early 'twenty.
And.
Had $200 million remaining so we put that in place and we also just looking at rising rates. The great news is our debt.
As you know is fixed.
Fixed rate its not.
L plus or so for plus so but the <unk> the variable funding note for $75 million that we had drawn back in.
In 2020 was not that's a floating rate.
We just thought it made sense to pay.
Pay that off.
Due to the share repurchase.
And we like where we sit with our cash still a very strong balance sheet, we want to be conservative and prudent.
As we're facing here.
Inflationary period, and potentially recession, we just want to make sure that.
We have sufficient cash should should anything.
Cause any kind of disruption so we kind of like where are we where we are and we thought it was a it was a prudent thing to do given what had happened to the stock price.
Yeah, that's great. Thanks for the color.
You bet.
Our next question comes from John <unk> of Jpmorgan, John Please go ahead.
Hi, Thank you a couple of if I may.
First remind us of what the reason was for NASS expenses to be higher than revenue I thought kind of a whole point of the nap is that you know that.
You would basically offset each other and I will continue on that.
The split that you guys have 2% national 7% local I mean at least in terms of restaurants is highly unusual in fact I think it's unique.
In terms of the percentage of advertising.
That's a system spends but also a very heavy allocation of national to local as local is generally seen as much less efficient than national So I guess, where are we on that 9% being the right level I mean is there.
The opportunity to maybe allocate some of that 9% someplace else and how far along the path are we in terms of maybe rethinking some of that two to seven split that you have historically had in the possible.
Another question after.
Hey, John It's Tom first of all I'll get to your <unk> question I may have misstated something there.
Prior to the pandemic bought back $800 million worth of <unk>.
Stock 12 million shares average about 67 just to make sure.
Everybody has.
So in terms of nap.
I think prior to Covid, we absolutely wanted to make sure what we spent what we collected.
And that's what we did.
Clearly COVID-19 caused a disruption in 2020 was the first period as you know all the reasons.
Sure.
Spent more than we collected to really jumpstart the marketing after a period of temporary store closures.
And then 2021 as well as 2020 twos are different we're still in the pandemic as we all know.
And it has continued to cause some some disruptions.
Including the softer January so our collections were not ultimately where we thought they would be but also the agency change has caused some incremental expenses that we didn't expect to pay.
And we thought taking the long view that it was the right thing to do to.
Incur the expenses.
<unk>.
Arose, but also to make sure we fund the national sales that we want to fund, but also too.
Appropriately transition to the new agency.
Back to the former agency Barkley so.
Our intent is once this thing is in the rearview mirror absolutely the collections.
We intend to match the collections to the.
Spend unless there's some unusual circumstance, but.
I think still being in the pandemic going through an agency transition that clearly had its challenges as Chris articulated.
We thought playing the long game. It was the right thing to do because we got to we got to move forward still invest to drive membership and no matter what.
The <unk>.
<unk> heard us talk about the lifetime value of a.
Of a membership.
Far exceeds the cost even even with some temporary overspends in their efforts.
It's orders of magnitude difference between the two.
I think the split John you know I think maybe again anytime we as I've mentioned in the past I think once we get through this hopefully final transition here.
And begin to use best practices.
I said earlier fine tune in.
Seal up the sale and quarter after quarter.
And I guess two things one is 9% the right number and then what should the split really be to be more effective and as we get better at spending then we can make those calls but.
But you're right I think longer term more in that probably does make some sense, but again, it's hard to I think they call until we get.
Data is typically something tomorrow or even next year it could be something that those 24 months of a plus that we've got to really figure out exactly how we how it will play out.
Okay.
And it is interesting to see a brand that.
You have an attractive experienced an offering for the baby boomers, all the way down to Gen Z and you know and those aren't necessarily consumer cohorts that kind of like you are able to use the brand kind of.
In the same way at the same time, and so I guess am I overthinking that.
You guys may have some challenges in terms of being attractive to both I mean, both that whatever the 18 year old in the 60 year old.
As the brand by definition shifts to a different generation do you think it makes sense to change something I don't know what that will necessarily be but change something about the N. Gen consumer experience to make yourself, even more attractive to that younger consumer over time in other words, how do you envision the.
In gym planet fitness experience changing.
Sure Yes.
One thing is too is the boomer population in our clubs is only about 13% of our base. So it's not a huge.
Part of our membership.
But for somebody living on a fixed income or what have you and we have tons of cardio you're not walking down the street and you can be in the air conditioning and a safe place I mean, that's why I think boomers come to us a lot.
And always have but but again, it's a small part of our base I think a little bit to your question on Gen. Z is I think the one thing that.
Somewhat anecdotal, but I think a little bit from some of our manufacturers that.
The younger generations, we're not seeing them use probably cardio like the older generations do meaning they're not getting on a treadmill for 45 minutes is much like the Houston more functional training John So there are more using the kettlebells in the functional areas, which we setup a functional areas in our clubs about five years ago six years ago. There is no doubt that there's a shift there.
So it's just a matter of I think.
Slowly and carefully transitioning as we watch trends.
So we are definitely still.
Getting gen Z to gravitate towards US and then general for eventually so.
But right now I think where we're doing the right thing and functional areas definitely busy they could be expanded I think in time. If this trend continues.
And as the Boomer population.
Tends to be a smaller part of our base over over years.
I got it thank you.
Thanks, John .
Our next question comes from Simeon Siegel of BMO capital. Please go ahead.
Hi, This is <unk> on for Simeon Thanks for taking our question.
I'm, just hoping you could give a little color on digital you mentioned kind of high school summer Paris benefiting from.
Sign up from online and being able to not have to do that entirely in store I'm just curious how youre thinking about innovations on the digital side within the clubs.
What are you thinking about investments there.
Yes. It is.
A few different buckets and I think one thing that most people first thing digital first that comes to mind is.
The digital workouts and.
And exercise, which is a part of the App for sure and always will be.
And people have to they want as Holly how do we better use the equipment in the club.
And and acclimate themselves at a club easier without having to either get a trainer or to go find somebody to show them something we've put QR codes.
It was all the equipment, where people will use the app to scan the QR code on equipment with a quick 15 to 30 seconds of jewelry on how to use the equipment.
<unk> work out that you can do in club they follow through the App and then we are out of clubs you can work out at home with you can't make it to the club or if you're traveling what have you. So so that's the digital component piece of it but I think probably the bigger part of the digital component is more of the.
How do you improve customer experience and remove friction.
And why that is but think about pre pandemic you couldnt even join in on our App and today, it's about 2025% of our joined or in our App and that didn't exist pre COVID-19.
People now pay or pay their balances in the app.
And a big portion of our balances bounce payments system wide are done through the app, which that didn't exist. Even this time last year. So a lot of us reducing friction to help improve customer experience the crowd meter and go on and on now the perks Buddy teams to expand with more and more benefits. There. We did the shell gasoline one last November and that continues to run their very happy I think it's upwards of one.
Most.
Most corporate 2 million gallons of gas at this point that members have redeemed.
Crocs partnership, which was a gen Z favorite.
<unk> actually was extremely happy with three months numbers they didn't win in a discount there. So so I think it says how do we give benefit how do we improve customer experience and not just look at it as a fitness only component of digital.
But we will continue to evolve it as we as we learn more and and the beauty of it is we can crack on with trends in all the data that comes and supports around that were previously. This we really didn't have much too much to do and on top of that one thing I always talk about where you are in there.
This industry.
Unless somebody walks through the front door, we really didn't have a way to engage our member outside our four walls, so unless somebody walk through our door, we gave him Hello, and goodbye and kept the clean club they never really got to experience or touch planet and now we can reach out and touch them. When they are not in the club, which I think is important.
Got you appreciate that.
You guys don't comment on current but I'm just kind of curious.
Our current thinking about kind of.
Sometimes in the past when you kind of gave all that great color earlier.
How do current kind of compare within black card versus kind of the classic membership.
Was there any notable differences within there and kind of how do you think that would maybe trend this time around it.
Oh refreshing our economic downturn.
Yes, I can't recall vacuum <unk> nine on top of my head, but I mean, even recent trends we've seen that even through user of COVID-19 that the black card members are canceling slower than the wildcard as crazy as it sounds and even more recently with our black Black card increase in pricing.
That our black card acquisition is actually going up which is kind of counterintuitive to what you would expect so.
I think that's great to see.
Great appreciate the color.
Thank you thanks Karen.
Our next question comes from Alex <unk> of Bank of America. Alex. Please go ahead.
Hi, Thanks for taking my questions I would like to Echo my congrats on your retirement through urban.
Just first I wanted to circle back to some questions earlier could you give us some more color on how youre thinking about conversion for summer past participants and their family members. How could this year be different would you still sort of expect that 25% conversion rate.
And then maybe just remind us on sort of the timing of that and then what is that participating participation rate of the $3 3 million from her past participants band are you seeing similar levels of usage from them as you saw in sort of 2019. Thank you.
Yes.
I think this is Chris.
Yes, I think the so when I say, 25% of the <unk>.
2019 High school from a past kids.
And at one point from 2019, so today and today, 11% are still current members.
5% of their parents are still current members so.
And remember that you know that that has COVID-19 and shut down the middle of that so I would imagine if you were to take these these teens and you fast forward next three years without any kind of shutdown lockdown you have to imagine it would be higher and I think on top of that is the trend that we saw in the last couple of years here. After COVID-19 that the older. Gen Z population is joining.
<unk> talked about this earlier the older. Gen Z population is joining much higher than they were pre COVID-19. So I'd imagine.
These high school teams, which are Gen Z will probably have a same same kind of trend. So I can't I think 25% I would say on the lower side of conservative.
And then on top of that we have a lot more ways of contacting and reaching out between emails of both parents and kids and they all have the app to get into the club right check in so we are in that messaging now that we've been in that message. All these kids to get them to hopefully joined in the future as well, whether it's whether it's right in September or it's.
Have the App on the phone and its next February so I think just being able to reach out and talk to them a heck of a lot easier and more efficient than we definitely adding the path I think are the two big things that will help us on a conversion standpoint their usage with that they've logged over 14 million workouts, but.
But their usage is pretty much say believe it or not it's actually pretty much the same as a normal <unk>.
<unk> posted it gets not their usage patterns arent really necessarily any more or less than our typical member that we would normally have I'd say their day part usage is slightly different actually we start is as more and more of the country to get out of school because ice consumer pass launched in mid May and some of the country a lot of good portion of the country like the northeast.
It's still in school till the end of June .
And we saw usage shift from the after school evenings like most most of their older generations coming out of work and then they started bumping up forward into the day parts of the day, where they werent they.
In school and longer.
Perfect. That's really helpful. And then just a follow up here could you just give us a little more color on how that business performed in prior economic downturns are you already seeing any benefits of trade down with new joins coming from some higher priced clubs and then would you expect a similar level as that.
Card penetration or would you expect more joined that come from that sort of entry level price point. Thanks.
Yeah, but we haven't seen any real data that shows that is coming from trade downs, yet, perhaps through some sort of survey or some sort of to try to capture that part of it I think just the the retention trend on the Black card membership and then the more recent trends, we're seeing on the black card price and the acquisition of <unk>.
<unk> cards leads me to believe that I don't think is going to be a white card only option because black cars too expensive or that I think we probably would've saw that through the last couple of two or three years and then the more recent price increase we're not seeing that.
Perfect. That's really helpful best of luck going forward.
Thanks Alan.
Our next question comes from Chris <unk> of Stifel. Chris. Please go ahead.
Thanks, Good morning, guys.
Chris it's been well publicized that roughly 25% of Jim's permanently close since the start of the pandemic, but it seems that those operating still haven't been able to get back to that pre COVID-19 average store membership level. So I guess the question is what has your research indicated as a reason these members haven't returned to gyms.
And when opportunities.
Do you think you have to bring them back and then I had a follow up.
Sure, Matt I think the one good thing that I've seen since coming out of Covid and we reopened our stores as our rejoin rate.
<unk> is higher than it's ever been historically over decades, so I rejoin rate so about 30% of our joins our rejoins the second quarter was about 33% of our rejoined so people are coming back to Jim's at a faster rate or more volume than they have ever had in the past. So that's a good thing I think it takes has taken them a lot longer to break the couch.
And they were told to go home and sit down and not work out and.
And now they've got to come back and it's just a.
Which is a slow process to get them to convince them to get off the couch and enjoying again, but.
And even though the the Gen Z the way above what we've seen.
Prior years on a joining ratio, where millennials and boomers Gen exited aren't quite back to where they should be at the same token I think is important to note that our penetration of those generations are also increasing so.
With Gen Z and millennials are above where they were at at the closed period. So there are no penetration is higher and its just the gen xers and boomers theyre going the right direction, but there's still going to take some time to get back to where we were pre COVID-19. So I think it is just time and back to Tom mentioned, a little earlier, but it's not a matter of if it's just kind of just that sounds like we're going to have with windows, you're going to have a <unk>.
<unk> stick recovery in everyone's decided one months I'll get off the couch and make fitness.
A new a new hobby. So I think unfortunate takes a little bit of time, and we're just going to have to keep marketing our way out of this but there's nothing I think points to the fact that it's not going to get there. If you go pre COVID-19, we had over 13 years of positive comps, averaging 12% over those 13 years.
And most of its member growth so outside of Covid. There was nothing that would stop that trend.
So now it's just kind of picking up where we left off and get the momentum back.
Okay and then my second question relates to development do you have any visibility as to how long the HVAC and other equipment issues will continue to remain a challenge in terms of just lengthening project timelines and then can you give us any sense of the 23 pipeline and your confidence level that you can accelerate development next year.
<unk>.
Yes, maybe I'll start that on the exact growth.
<unk>.
I think Juan Pablo molecules.
We throughout the year.
We've worked through closely.
Franchise rules.
So very strong growth.
We've never really required.
Core loan growth core southern lights.
The AC system overall.
There are other problems at this point.
Although as we go along.
Some of these supply chain constraints one caller.
Hum.
The franchise or solve the corporate solved.
We'll try to work more with some of the Google walls.
The work will.
Almost.
Consolidating some of those types of.
Purchases so.
The booger.
Suppliers they had.
Maybe a bigger piece of the business.
Now and potentially on forward.
With that said, though these guys are constrained too.
It may be that only certain.
Couple of parts to what they needed to fulfill them on par.
Our system from <unk>.
Super cycle, because most of them and everything else is here. So there are obviously, they're working work falls on the supply chain with Google at one thing.
On the cost.
Crew Cobra.
Generally we would never do with Google product co.
Existing.
<unk> system.
Sure.
So it would be that we're taking over currently store.
And.
Either product.
No.
Congo's law.
On the old system for our new club.
Doing more and more radical day, just the Boston Com.
Rob.
Instead of a crime to open the brand, where we plan our brand with our brand the roads.
You'll see system.
We're able to open some of those will some existing systems are there alone.
Down the road when the supply chain constraints ease up a bit.
Palm to be able to move some replacement slower. So I think the short answer is it's still somewhat of a day by day, but.
Hi.
Further we get along the more we're able to see.
Moving on the supply chain moving along it's just basically us and everybody else also no one's caught up yet.
In terms of our vendors.
We're not all in the U S.
Sure.
Wherever our customers are well, Tom you want to go or not.
No I think you've covered it well.
Okay. Thanks, guys.
Thank you.
Back to Chris for closing remarks.
Great well, thank you everybody for joining us today it could be pleased with.
The second quarter, how it ended up and adding more members per store here in coming out of I don't know the pandemic in fighting our way back so pretty happy with that and really pleased with how high school somewhat pass has gone I mean, it's truly truly amazing to see this many.
Teens getting off the couch using our stores here in more than three times of 2019 shows how the younger generations are really gravitating towards health and wellness. So it's just a great tailwind to to have now and in the future and our ways of being able to convert them to memberships longer term. So it's a great great place to be than then to not have a younger generation that gravitates towards <unk>.
And so it feels really great and look forward to being with our franchisees next month. The first time in three years CMO face to face talks from strategy to our future and tuck execution. So I look forward to that.
Who hardly.
Have a great day, absolutely. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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