Q1 2023 Planet Fitness Inc Earnings Call

Speaker 2: Ladies and gentlemen, welcome to the Planet Fitness Q1 Quality Earnings Call. My name is Glenn and I will be the operator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on the headphone keypad.

Speaker 2: I will now hand over to your host, Stacey Caravella, to begin. Stacey, please go ahead.

Speaker 3: 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. Also joining us is Edward Himes, President and Chief Operating Officer. They will all be available for questions during the Q&A session following the prepared remarks.

Speaker 3: Today's call is being webcast live and recorded for replay.

Speaker 3: 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 the call.

Speaker 3: Our release can be found on our website, investor.planetfitness.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Speaker 3: Now, I'll turn the call over to Chris.

Speaker 4: Thank you, Stacey, and thank you everyone for joining us for Planet Fitts. This is Q1 Ernie's call.

Speaker 4: We had a strong start to 2023 as we capitalized on the tailwinds behind the consumer focus on overall health and wellness.

Speaker 4: We believe we continue to be well positioned to deliver disruptive growth with our high quality affordable fitness experience.

Speaker 4: I'm going to cover two topics today.

Speaker 4: First, Q1's member growth and the resiliency of our model in an installationary or possibly recessionary environment. And then I'll discuss our system's continued recovery from the impacts of the COVID-19 pandemic and how it supports our long-term growth opportunity.

Speaker 4: Let me address our Q1 membership growth. Our strong momentum from the end of 2022 continued into the first quarter, driving membership to more than 18.1 million, a net increase of more than 1.1 million members.

Speaker 4: This Q1 was the first time in four years that an all-important first quarter of membership growth was not interrupted by COVID. We kicked off the year with our big fitness energy campaign that addresses the post-workout positive feeling. It featured our low-E ads that continued to generate great consumer buzz.

Speaker 4: Prior to COVID, membership growth was the primary driver of our 53 straight quarters of positive Lehman'sGO meal growth.

Speaker 4: In Q1, member growth continued to be the primary driver of the 9.9% system-wide state social growth. Our membership growth demonstrates that our high quality of formal fitness experience resonates now more than ever as Americans are seeing value and feeling the rising cost of everyday items while they continue to prioritize their health and wellness.

Speaker 4: Historically, we've seen that our model is resistant to inflationary and recessionary pressures. It's proving to be true again in this current environment, validated by three key trends.

Speaker 4: The first trend is our diverse member growth. During the quarter, all age generations surpassed their pre-pandemic population penetration levels. Our sprung value in judgment-free non-atributing atmosphere also continued to drive people off the couch in Q1, as 40% of our new joins were first-time gym members.

Speaker 4: The second important trend is our rejoined rate. In Q1, about 30% of our new joins were previous members, compared to about 20% in 2019. We believe this is a really good sign to have former members rejoining faster than they have historically, despite inflationary pressures causing their income to not go as far.

Speaker 4: The third is our cancel rate, which again index below the prior year's rate in the first quarter. This marked the seventh straight quarter of year-over-year cancel rate improvement.

Speaker 4: We're also seeing that our members are more committed to fitness than they were pre-pandemic. With higher overall visits per member as all age groups are visiting more frequently in 2019, this is a good sign since non-use is the number one reason why members cancel. So more usage should continue to build well for our kids' array.

Speaker 4: Now to our continued recovery post-COVID and our long-term growth opportunity. We continue to see consistent momentum towards full recovery for longer our stores that have been open since the temporary COVID closures. At the end of Q1, more than 50% of our US stores that opened before 2019 are back to or above three-paint of admission levels.

Speaker 4: Additionally, on the 50% are at or above their pre-COVID revenue per store. Partly as a result of the price increases that we made last year.

Speaker 4: Pre-pendemic 60% of our full-year net membership gains happen in the first quarter, so uninterrupted Q1 was huge for the entire system, especially for those stores that opened during the past four years. They had yet to feel a benefit from what has historically been the highest net membership growth quarter.

Speaker 4: And most of the Black Card members of stores that opened this year and last year are paying the new Black Card price in the increased annual fee, helping to further boost new store profitability.

Speaker 4: Our growth is fueled by the strength of our collective marketing efforts.

Speaker 4: With our franchisees, we invested more than a quarter of a billion dollars last year to go after the eight percent of Americans who do not currently belong to a gym I was a significant marketing spent and able us to attract someone at the right time when they are ready to start their health and wellness journey

Speaker 4: More member growth means more dollars towards advertising funds.

Speaker 4: It's this flywheel that keeps us well ahead of our competitors with our membership more than eight times greater than the next largest U.S. high-value, low-price brand. And we have greater than 60% more stores than our next 17 low-price U.S. competitors combined.

Speaker 4: Our app and broader digital platform are real differentiated versus the competition as well. To drive even more valued world members, we are leveraging our size and diversity of our member base to partner with our major brands like Shell, Verizon, Sims Club, Chui.com, and Puma on Perk's Discounts.

Speaker 4: In March, the average redemption savings through the Perch program was more than $10, exceeding the cost of our monthly classic card membership.

Speaker 4: And while at the small percent of our members today who engage with our perks offers, we will continue to partner with brands to offer more and better discounts to benefit more of our members.

Speaker 4: Our confidence in our 4,000-plus-month-term store growth opportunity is strengthened by our systems recovery and our historical ability to achieve a greater penetration of each successive generation. We understand that fitness can be intimidating and we continue to be hyper-focused on breaking down the barriers of all ages. We want to be the fitness brand people think are first when they are ready to start their wellness journey regardless of their age. Generational trends are also fueling the confidence about the future. Gen Zs, Emilaneos, continue to lead our joins with over 9% of each group now a member of Planet Fitness. And that's what the Gen Zs who are over the age of 15.

Speaker 4: We will continue to have Gen Z's agent to our prospect member pool that Gen Alpha is only a few years behind.

Speaker 4: To further strengthen our brains appeal, which in Z, early this week we announced the return of our high school summer pass program. We are excited to be able to run this program for the second consecutive year.

Speaker 4: It's largely similar to last year's, including the seamless online registration process. We had more than 3.5 million team participants in high school summer pass last year, along with 2.3 million parents and guardians that signed them up. At the end of the first quarter, more than 600,000 teams in their parents and guardians had joined as paying members for a conversion rate of greater than 10%.

Speaker 4: We continue to outpace our 2019 conversion rate, the last time we ran a similar program.

Speaker 4: continue to outpace our 2019 conversion rate, the last time we ran a similar program.

Speaker 4: We recently republished our 2022 Environmental Social in Governance Report, which demonstrates how we are delivering our purpose to create a more judgment-free planet, where health and wellness is within reach of all.

Speaker 4: Looking to the future, I am confident that we will continue to be a differentiated and disruptive force in the health and wellness industry as we have been for over 30 years. We believe that affordable fitness is essential, especially today, as research continues to show the other benefits of working out to overall health and wellness besides weight loss. Our purpose of enhancing people's lives in creating a healthier world,

Speaker 5: headwinds that Chris discuss and we invested in near and longer-term growth areas such as technology infrastructure and building out a small dedicated international team.

Speaker 5: Additionally, we continue to generate significant free cash flow and we repurchase $25 million of our shares. Subsequent to the quarter, we repurchase another $25 million, bringing our total number of shares repurchased to date.

Speaker 5: to approximately 625,000, bought an average price of approximately $79.50. $25.50.

Speaker 5: Now, we'll cover our first quarter results.

Speaker 5: All of my comments regarding our quarter performance will be compared to Q1 of last year unless otherwise noted. We opened 36 new stores compared to 37 last year.

Speaker 5: We delivered same store sales growth of 9.9% in the first quarter.

Speaker 5: As a reminder, same-store sales for the Sunshine Fitness franchise stores that we acquired in Q1 of last year were reflected for two-thirds of the quarter in the corporate store segment.

Speaker 5: but were in system-wide same-store sales for the entire quarter. Approximately 75% of our Q1 comp increase was driven by net member growth.

Speaker 5: system-wide same-store sales for the entire quarter. Approximately 75% of our Q1 comp increase was driven by net member growth, with the balance being rate growth.

Speaker 5: Black card penetration was 62.0% a decrease of 100 basis points.

Speaker 5: The decrease reflects that we had a highly successful January sale this year for our classic card compared to last year when our sale was negatively impacted by the Omicron strain, as well as the impact from strong Gen Z member growth including high school summer pass participants.

Speaker 5: For the first quarter total revenue was 222.2 million compared to 186.7 million. The increase was driven by revenue growth across the franchise and corporate-owned store segments partially offset by a decrease in the equipment segment. The 15.7% increase in franchise segment revenue was priced-

Speaker 5: stores moving out of the franchise segment. For the first quarter average royalty rate was 6.5% up from 6.4%.

Speaker 5: The 39% increase in revenue for corporate owned store segment was primarily driven by the Sunshine Fitness transaction.

Speaker 5: as well as same store sales growth and new store openings.

Speaker 5: Equipment Segment Revenue Decreased 22%.

Speaker 5: While news store openings were in line year over year, more of this year's openings had equipment placed in Q4 of last year.

Speaker 5: leading to lower new store equipment sales.

Speaker 5: We completed 18 new store placements compared to 33. The decrease in revenue was partially offset by higher equipment sales to existing franchisee owned stores.

Speaker 5: The courted replacement equipment accounted for approximately 58% of total equipment revenue.

Speaker 5: Our cost of revenue, which primarily relates to the cost of equipment sales to franchiseeo and stores, amounted to $19.4 million compared to $22.4 million.

Speaker 5: Store operations expenses which relate to our corporate owned store segment increased to 66.0 million from 47.5 million.

Speaker 5: Primarily due to the additional stores from Sunshine Acquisition, which were only reflected as corporate stores for approximately half of Q1 last year.

Speaker 5: S-DNA for the quarter was 27.8 million compared to 30.8 million. This decrease was primarily the result of transaction fees incurred in higher expenses related to the Sunshine acquisition.

Speaker 5: National advertising fund expense was 17.0 million compared to 14.5 million.

Speaker 5: Net income was 24.8 million, adjusted net income was 36.4 million, and adjusted net income per diluted share was 41 cents.

Speaker 5: A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was $90.2 million and adjusted EBITDA margin was 40.6% compared to $76.7 million with adjusted EBITDA margin of 41.1%.

Speaker 5: A reconciliation of adjusted EBITDA to gap net income can also be found in the earnings relief.

Speaker 5: By segment, Franchise Adjusted EBITDA was $67.9 million and Adjusted EBITDA Margin was 73.2%.

Speaker 5: Corporate store adjusted E-beta was 34.1 million and adjusted E-beta margin was 32.2%.

Speaker 5: Equipment adjusted EBITDA was 5.6 million and adjusted EBITDA margin was 23.5%. Now turning to the balance sheet. As of March 31st, 2023, we had total cash and cash equivalence of 523 million compared to 472.5 million.

Speaker 5: on December 31, 2022, which included $62.6 million and $62.7 million of restricted cash respectively in each period. As I mentioned earlier, year-to-date through April , we used $50 million to repurchase shares which includes $25 million in Q1.

Speaker 5: and an additional 25 million in April . Total long-term debt, excluding deferred financing costs, was 2.0 billion as of March 31st, 2023.

and consisting of our four tranches of fixed rate securitized debt that carries a blended interest rate of approximately 4.0%. We completed a refinancing and upsizing of a portion of our debt when we purchased Sunshine Fitness last February . At the end of Q1 last year, our leverage ratio was 6.2 times the average of our total debt.

the end of the first quarter of 2023, it was down to 4.0 times.

We expect our net debt to LTM Adjusted EBITDA to continue to decrease for the remainder of the year.

Finally, to our 2023 outlook. As a reminder, our view assumes there is no material, resurgence of COVID, or similar unforeseen dramatic circumstances that result in a significant change in membership behaviors or impact our supply chain.

In our earnings press release this morning, we reiterated our growth targets for the year. I'd like to address our placement targets for 2023.

We continue to expect new equipment placements of approximately 116.

As a reminder, these placements are only in franchise-owned locations. Our new stores for the year will include corporate-owned stores, of which we expect to build a similar number to last year or approximately 15. Since we've provided this target in February , we haven't seen any relief from headwinds that will likely keep franchisees from building...

is likely the high end of what we expect to achieve this year.

Everything considered, in a somewhat difficult economic environment, we are encouraged by our member growth in the first quarter and the overall resiliency of our model demonstrated by our strong same store sales and profit growth.

We believe that the size and scale advantage of our brain will continue to deliver value to all of our members, franchisees, and other stakeholders. I'll now turn the call back to the operator to open it up for Q&A. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on the telephone keypad now. When preparing to ask your question, please ensure your phone is muted locally.

We have our first question comes from Randy Koneck from Jeffries. Randy, you're nice.open.

Yeah, thanks a lot and good morning everybody. I guess first what I wanted to ask maybe Chris, if you could just go back over some of the summer pass statistics, they'll be super helpful. And then I think I don't know if last year was everything digitized as it relates to the summer pass. Yeah.

last year, or is it all kind of now digitized going into this year so that A, we get more, probably more members signing up and their parents signing them up. And then second, continuing to see higher conversion coming out of this summer path later this year. I just want to get your perspective there. Yeah sure ready. Good morning.

We have, we've digitized pretty much the exact same ways of this year, just slightly different, but otherwise it's very, very much the same. And I think the benefit we have this year, as opposed to last is, as you probably remember the last time we had did it was 2019 and then COVID hit. So this is the first time we've done it consecutively, you know?

So what's gonna be interesting now is the teams that didn't age out, so the seniors are gone now, but now the new freshmen classes come in. So all of the other ages, the four grades that are still in it, they still have the app from last year. We still have the ability now to remarket to them either by email or in that messaging. So we already have a strong pipeline of leads, which we really didn't have last year because

The last time we ran it was 2019, and three years later, half of them are already gone. So it wasn't digitized. So it'll be interesting this year, year after year, that we're able to really re-market to them to grab some quick momentum in the sign-up process, which is already underway. And it kicks off for usage in the gym starting May 15th. The other thing that's a little bit different this year, which should actually help the problem—

The process even easier is the minor joint flow where the parent guardians are able to execute the parent guardian waiver or have them actually physically come into the store to do so. So that is just makes it that much more seamless.

Super helpful. And then I guess Tom, I want to just jump off one of the final statements you made about the placements, I think, 160 at the high end. Can you give us some perspective of how we should be thinking about the range of outcomes around, I guess, unit openings for the...

balance of the year. I think that's a question we get a lot from investors is how many units are they really going to open this year. I would just like to get some perspective on how you're thinking about that for the balance of the year would be super helpful. Thanks.

Yeah, sure thing, Randy. So I think some of the things that we've been talking about, as I said a few minutes ago, are still there. And certainly the interest rates, the interest rates, cumulative, we have had an increasing impact on franchisees. So it's...

It's been a headwind, you know, it's amazing to think you were, you know, so far is almost 5%.

Last time I looked in a year ago, it was less than 50 bits. So it's been a big move.

And I think so that as we've talked to franchisees here about their development plans we just see and I think we said this a little bit last time the combination of all those factors that I mentioned

have us to where franchisees are just really not building ahead of their schedules on new store development. Where they did, you know, quite a bit of that in the past pre-COVID. So, that's why we said, you know, we think.

The one 60 outlook that we have is likely on the high end, so we still think our corporate store growth this year will be pretty close to last year, roughly 14, 15.

So that would take our total store openings if you combine those two to approximately 175 and you know Well as the year goes on obviously we'll we'll have a firmer view of the franchisee store openings in our own corporate stores, but that's that's the best we can call based on how we see it but we didn't want folks really You know thinking there might be upside to that because we don't see it

much beyond the 160. And can I ask just to finalize and my last question to clarify. Is your

I thought on the what the willing to be you know on 175 on the high end but we're just so we know kind of what the minimum might be well Yeah, no, we we we feel The 160 numbers the appropriate number. We really don't range that number

on 175 on the high end, but just so we know kind of what the minimum might be on the low end. Yeah, no, we feel the 160 number is the appropriate number. We really don't range that number.

But that's our view. It has been our view and we're sticking to it. We just don't see the range going above that. We've all of the numbers on online eyelid.

Understood. Thanks so much. Thanks for the help, guys. Thank you. Thank you. The next question comes from Simeon Seagal from BMO Capital Markets. Simeon, your line is now open. Thanks everyone. Good morning. So.

So, guys, given you keep setting the new member records, just any help to how we should think about member growth trajectory next quarter and over the year. And then I'm sorry if I missed it. Did you say this slightly lower black card penetration was a function of More new members signing up at 10 or was it existing black card trading down? And then realistically, I think you're still nicely above pre pandemic Period penetration, so just any fault on where black card penetration looks for the rest of the year. Thanks.

Sure, sure, I think that's Chris. On the black card piece, the most of those two things they're really driving. One is the real successful 10 dollars hill we had in January this year. And last year's 10 dollars hill. Actually, at Omacron, it was a little bit tampered down. The other big piece, which is a good thing in a lot of ways, is.

It's the younger Gen Zs, so the high school summer past teens, the great performers of them converting and joining the teenage high school age teens, they joined it very low black heart percentages. So although the later Gen Zs, called the 20 years plus to 25, those have a great black heart percentage. So it's so young.

But as you know, 60% of our net growth for the year is in the first quarter. April , May tend to be decent months, but the tail end of the year really summer and the rest is more treading water time. You know the new store does add some growth to it, but mature stores really don't add a lot of members or any that matter during the rest of the year.

That is very helpful. Thanks, Chris. And then just congrats on having over 50% of clubs above the pre-pandemic memberships. Out of curiosity, why do you think the remainder don't? Do you think there's something post-pandemic structural? Do you think it's just a question of time? Just kind of thinking through from your perspective where you think that average settles in.

Sure, I'll start and Tom and everyone will be able to add to it. I'd say it's mostly just timing. It's different states were closed, different periods of time, different states had different restrictions whether it's even though they were open for a while, they actually had still distance and mask requirements for many months or a year later. So it's more just the timing coming out of it. The longer we go down the road, the more time that goes by, the more...

members they sell and the more clubs that fall into the into the good bucket you know. And the good thing with the black card increase last year and now they will feed at the revenue as I mentioned on my pre pre pre record of March is that they that I'll pay for the membership which is which is very news. Yeah and some maybe it's Tom just to just to build on that I think consistent with what we've seen all along.

the gap to the on an average on a on an average store basis for stores that were built prior to 2019, which is really what we're looking at here.

The gap to their pre-COVID membership peak has continued to narrow. And the stores that are above are not just generally above by a couple percent, they're above pretty good. So, to Chris' point, we see it just as a matter of time. But if you look at, kind of almost, you know, sort of imagine a map of the country, the stores in the states, they're not...

that are not fully back or lagging are ones where all of the COVID stuff was just more politicized. And I think that has had a just a lingering effect. It's not that there's a new competitor in the in the in that area.

It's more just the the the the the the trough was deeper so the climb out of the trough is taking longer

Thanks so much guys. Best of luck for the rest of the year.

All right, thanks so much guys. That's a lot for the rest of the year. Yeah, thanks. Thank you. Thank you.

We have our next question comes from Max Rachanko from Cohen. Max, your line is now open.

Hey guys, thanks a lot for taking my question. So first, can you speak to your franchise health? How are those conversations going? And then separately, just any updates on the situation with the franchisee that lost its exclusivity rights and if other franchisees have stepped up.

Hey, Max, it's Tom. I'll start. I think maybe just to talk more broadly about things and we talked about interest rates here a little bit.

But you know, as I said, 5% today less than a point about a year ago. You know, that definitely has had an impact on some franchisees more than others. And I think, you know, the main story here is the model is still very profitable. Many stores with membership in EFTs being at or above pre-COVID levels. We see this in our own stores.

The margins are still pretty terrific because the flow through is still the flow through of $0.84 of every new member dollar and dues that are coming in is dropping to the bottom line. But I think the pressure on cash, if you will, to invest is greater, given that now debt service is higher for some of the franchisees, especially some of the PE-back franchisees. Now we haven't heard of...

and we see the financial information there. These aren't covenant issues. They're really more...

there now enough cash to service the debt and then invest the capex that's needed in our system. And so you know we don't disclose the level of debt in our system but you'd probably get pretty close if you took the total number of stores assumed in AUV.

you know what the four wall margins generally are. Take a little bit off for their G&A for any given franchisee and you'll get, you know, you'll have a sense of where our total system EBITDA would be. Assume a level of leverage that's fairly modest and you end up with a pretty sizable level of debt. So at, you know, 4% higher interest rates now.

generally that and three million dollars for a new store you end up with a decent number of stores that are where the cash used to be there to fund it and that's why we say they're probably we don't see folks being ahead of their obligation so I know that's a bit of a long-winded answer but I think here's what's really important they know our franchisees know that the first priority for capex is to take care of the existing stores you have to read

which will have value or lose their ADA and that will have an outsized impact on their value and their multiple when they choose to exit because the pipeline will not be there. So, you know, we think that different PE firms may make different decisions, but

At the end of the day, if we pull the ADA, we have still a waiting list of former franchisees who want to get back in, whether they're in the franchise either we talked about last time where they, it's a definitely different situation or in these cases, which we haven't found yet, but if they come up, they'll be able to buy the ADA, which is actually much more attractive to them because then they can develop the entire area.

all the capital to invest and service the debt and if they can't then they have a decision to make and so do we. So that's how we see it and you know it we'll see how it plays out. But hopefully that helps provide a sort of a broader picture of how we see things. No Tom that's incredibly helpful.

Oh, go ahead.

No, sorry, I forgot your second question, Max. The franchisee that we talked about, our agreement with them is finalized. We're not disclosing the terms, but now we have contacted some of those franchisees who are on the waiting list, as I mentioned, to say.

here are some of the territories that you can go explore to find new store opportunities. And so we're having those discussions and there's a lag there as we mentioned last time. Some may know the markets that are available, some may not, so they have to do some spadework there.

That is now the documents that we're waiting to sign are now signed. The agreements are finalized and we're moving forward with the plan. This is Edward, I'd say that also in addition to that, what Tom said, we've signed the agreement, but given we're several months into the year, expecting new store development from that. Primarily to lead into 2024. And beyond.

Got it guys, that's very helpful. Tom, quick follow up to that and then I have another pretty quick separate question. How likely are you at this point to reopen the franchise to former franchisees? Is that something that you're really leaning towards or do you think that there's potentially still enough?

you know, I'd say manage with a much more modest capital structure. So they have more dry powder, more flexibility there, so they may be interested. So I think

As you know, and we've had just a lot of interest from outside the system, inside the system, former franchisees, so we don't think it'll be a question of

Interest, it's just a matter of timing and letting things play out. I'd also add that we're open on the international side as well.

Yeah, okay, now that's helpful. And just quickly, can you comment on how much the Halo partnership helped contribute to member growth in 1Q? And then are you now looking to replace that with something similar, potentially in the connected business space?

Yeah, this March sale didn't quite perform as good membership wise as the November sale did. I didn't say it was a huge driver necessarily, but it was unfortunate how it turned out. Thankfully, we're pleased that Amazon has chosen to do the right thing, I guess.

and make good and give everybody an $80 Amazon gift card for those who subscribe to it. So their Amazon halos will all work till the end of July , July 31st. So they'll receive those gift cards to use on their website. So it's good news that they've made good for the customer. And we've also done the right thing where it was a commitment membership. We're going to waive the commitment for these members so that, you know, come July if they so choose that it's

They're not pleased with the outcome, that they're not tied into a contract for 12 months. So it's the right thing to do for the customer and that's the direction we're taking there. But we don't generally feel a huge impact here. And as far as your question about teaming up with another one, as always it's an opportunity to stick if things come along and seem like it makes sense. But not run into the next option though.

Got it. Okay, guys. Thanks a lot. Best regards. Sure, Max. Thanks. Thanks.

Got it. Okay, guys. Thanks a lot. Best regards. Sure, Max. Thanks, Max. Thank you.

With our next question comes from Chris Oco from Styphal. Chris, your line is now open. Thanks. First I had a follow-up question to an earlier one. I know you've deferred the majority of the development obligations for that one large franchisee, but have you needed to do that for any other groups? Thank you.

No, we have not rewritten area development agreements to restage them for anyone else. Okay, perfect. And then I had a question about the equipment, the guidance that the equipment placements will likely be, like you said, towards the lower end of the 160 units this year.

I'm just curious, does this affect the company's goal of averaging 200 annual unit openings over the next three years? Yeah, Chris, just to, I may have misheard you, but the one sixty what we're saying is the high, you know, we don't, we see that as the high end of the range that, not the low end of the range, but, you know, I think as we sit here today, we talked, may have talked about this last time.

as I mentioned, combined with new stores for corporate, which we think will be pretty close to last year, 14, 15. You know, that gets us to about 175 new stores this year. So 25 off the straight average, if you will. And I think at investor day, we said we didn't see ourselves, back in November , we didn't see ourselves hitting the 200 this year, which was reflected in our outlook.

when the equipment margin company store margin were both down quite a bit year over year can you just give a little bit of explanation for the year over year change yeah sure thing Chris so the equipment margin last year

we had a big, a pretty sizable rebate from our primary manufacturer and our contract year runs mid-year to mid-year. So it's all, once we break through a price tier, the rebate is on all the equipment we've purchased since July 1st. So it ends up being a fairly sizable number that gets reflected.

And we didn't hit that tier here this year. So that's it on the equipment side. On the corporate sales side, I'd say a couple things. One is we had sunshine in last year, as you know, for the back half of the quarter. So the

the higher local marketing spend that we do in our corporate clubs and our franchisees do in January was not reflected in that margin last year and it ends up being a pretty important impact. And that's the primary around that. The secondary is the timing of our April sale this year.

started at the end of March, so it caused some of the expenses from that sale to hit in Q1 this year where that wasn't the case last year. So the long and short of it is marketing, but there's two components of it there, Chris.

Okay, any colleagues you can provide in terms of what we should expect going forward and should it be fairly comparable year over year going forward?

Are there any other remand? Yeah, we really don't provide that kind of outlook, but I think if you spool it all up across the segments to what we were guiding in terms of top line growth and adjusted yield growth, I think we end up in a pretty good place, but we don't provide that kind of detail.

or any other way we really don't provide the yeah we really don't provide that kind of outlook but I think if you spool it all up across the segments to what we what we were guiding and in in terms of top line growth and adjust the dog growth I think we end up in a pretty good place but we don't provide that kind of detail on our outlook. Fair enough.

Thanks guys. Okay. Thank you very much. Thank you, Chris. Thank you. We have our next question. It comes from Jonathan Calm from Baird. Jonathan, your line is now open. Yeah. Hi. Thank you. Good morning. Just maybe a bit of a follow-up, Tom. Can you give any more color as you look at the openings throughout 2023 here? How many thoughts on waiting evoked?

So probably closer to the historical spread across the quarters there, plus or minus. And we really don't provide the specifics on the stages of our pipeline. But, you know, obviously that goes into all of our internal discussions and

and franchisee discussions to ultimately get to where we got to, which is to affirm the 160, but to say it's likely the high end of the range.

Okay, and maybe I'll just one fall. Not to be too specific, but just so we don't end up.

I think you had 29 new openings on the franchise side last year.

Yeah, would you expect to be kind of nearer a little below that this year for Q2 and then more back waiting and just trying to clarify your comments around the waiting? Um, Yeah, I think I think we'll probably be closer to that number in Q2.

That's really helpful. And then maybe Chris, I'd love to hear your thoughts. Just broader question around, you know, since the last quarterly update had seen some more rules from the FTC around potential subscription rule changes that are coming for the whole industry and any subscription business. But any thoughts just on how planet.

is viewing those potential changes and any reaction that you'd have for the business? Sure John , yeah. I'd say on the click to cancel piece, we have it now running in several states. And one California has now been in place since even before COVID, believe it or not. So, as we've remarked in the past, we do see an initial...

couple, two, three handful of months increase in cancels, but then it level sets to a normal state that doesn't happen. So the good news is it doesn't seem to really be in effect right now. So most recent state would be Tennessee, I think it is. So we're still monitoring that one. That one just started December 31st or 28th or something like that. So that was still too early to tell, but I was still fleshing out, but we haven't seen that big impact there and I think

rejoin rate, right? So high rejoin rates, it's 3% higher than it was pre-COVID. So I think, you know, easy in, easy out, especially for a first time customer, you know, that's one of the things they're thinking about the first. Forget about the price, they want to know how to get out of the thing, you know? I think on the auto renewal piece, that one there is still too early to figure out how they're going to work it or.

So the specificity regarding whether it, how it applies. I mean, some they say it's around only membership on commitment. Is it every year? Is it, it's just a lot there going on. So it's hard to really comment on how that one will turn out to play out if it happens.

Yeah, great. That's helpful. Thanks for the color. Cool. Thanks, Dr. Thank you. We have our next question comes from Rahu Kuptapadi from JP Morgan. Rahu, your life's not open.

Hey guys, thanks for taking my question. Chris, you talked about lower cancellation rates for the seventh trade quarter. Can you just discuss the value of your perks program and how the ramping perks is improving the retention rates for your current members?

And going forward, do you have a good plan to kind of monetize this, like the data, like how this membership data is captured in your current platform? Sure, yes. I'd say the only thing we can see right now is still too few members to really...

see if it's what's leveraging the lower cancellations right now. But of the ones that are using it, we still see the same thing we commented last time is 25% of the redemptions are from members that haven't used the club in over 90 days. So that's the good news, because our hypothesis is that we can provide value outside the four walls whether you're using the store or not a little bit.

as I mentioned on my call, is the more recent redemption people that used it was over 10 bucks, which is Bureau of Classic Art membership. We just gained a month of membership. So that's our goal. And I think the bigger we get and the more data we capture, the better and more partners that we're attracting at this point, as you've seen. Two or three years ago, we had very, very few, and now we have quite a few but beaten down the door.

And ever since COVID has started to wean away here and people getting back to normal life, feel that working out and working out more than they had pre-COVID. So that has to be helping the retention piece probably more than anything at this point. That's it for the thank you.

Thank you. We have our next question comes from John Heimbaukel from Guggenheim Partners. John , your line is now open. Hey guys, so Chris, I want to start with the perks, right? So philosophically, how are you attacking that?

in terms of how many offers you want to put on there doing it seasonally. Some of this does appear to have a time component to it. You have a couple that are for Black Card only. Do you do more of that to try to get people to upgrade to the Black Card? So what's the philosophy on that? Do you think, is that, if we're going to get to a 65 or 67?

a couple of years, we opened up the 400 stores or so. So when you're in a market with three stores, now you're in a market with 15 stores. I mean, that value is intense. So that definitely has been the driver over the years. But that doesn't mean I've been able to capture data, what perks drive, what generation, interest.

I mentioned Crocs was a great one, Shell Gas was a great one, Freeform from Verizon has been a great one. As we continue to find out what are the hot buttons that get people to track the discounts and track their attention, the ones we'll constantly refine and get better at. It will be interesting as we grow and capture data.

that they're, they're the everyday items, right? That they are failing, especially in today's world, where inflationary issues are out there and people's wallets don't go as far, and where their partner, you know, in the club and out of the club for many reasons, I think it can only help in just providing more value to the member and help drive the business. And the other side of it, I think, as time goes, and we're actually starting to get more in the pay-to-play world here. Now we're sapping data to prove that we're driving.

So more to come in that, but I think that'll be another endeavor here, but going down as the larger these member-based growth is in the data we capture to help sell the opportunity. And maybe for Tom, right? If you think about corporate profitability, I think you touched on it a little bit. So there is a seasonal aspect to that because of promotional spend.

you know, it sounds like it's pretty meaningful. Is that correct? And then when you think about on a go forward basis, right, because there's labor cost is higher, although it's not labor intense, but cost to operate is a little higher than inflating than it used to be. Is there still an idea of profitability in that, profit margins in that segment can improve over time.

and legacy can get to sunshine levels. Is that still fair? Right? I'm gonna go forward basis.

John , that's a yes and a no. So I think the yes part of that is they will continue to improve over time and, you know, I think, and certainly across this year, you know, I think we are often benchmarking back to 2019 and I think we feel.

will feel good about the progress we make in our corporate store margins and our overall margins, you know, back to those levels. While it's very different, you know, to your point with wages have gone up and so on and so forth. I don't, we don't and have never said that we see that the gap between Sunshine stores that we've acquired, their margin and the margin of our legacy stores would close. We thought there's a way to

bring some of those better best practices, which we're clearly seeing from the Sunshine team that is now part of our team, particularly in marketing and operations, and some of those practices that led Sunshine to be among the top three same store sales drivers.

in our system prior to COVID. Those have definitely helped in why you see some of the outsized performance in corporate store, same store sales, versus the system where historically that was the opposite.

But I think John the structural differences between the markets where the legacy markets are mostly in the Northeast and the Sunshine markets are mostly in the Southeast. Wages per hour are structurally different rents per foot generally are structurally different like for like centers, you know, in terms of traffic and quality.

you know, improvement for sure, accelerated improvement versus had we not made the acquisition, but closing the gap, we've never thought that that would be the case. Okay, thank you very much. You bet.

Thank you. We have our next question, comes from Rowan Chan from Evercore ISI. Rowan, your night's now open.

Hey, good morning. I just have a follow up to the last couple questions on perks. So you've given some numbers in the last year around both your shell gasoline and your Crocs partnerships. If I'm doing the math right, it implies the engagement level is still sort of in that very low single digit range. So first, can you give us some benchmarking or range of what percentage of your member base?

knows about and is taking advantage of Purse today? And second, has that changed in the last year? So have things like the new app or some of these new partnerships you've engaged in the last couple years, how does this move the needle?

So we haven't disclosed the percentage of members that are using it, but it definitely has gone up, as well as the people who have the app in general. Today, we're up to 80% of our members have the app, and the new member app adoption is about almost 90% at this point. So what it comes down to is the more members that have it in their hands and checking in the club, the more times they see the perk. And I think it really comes down to the engagement with things, education, that they know what's there.

and a half, we didn't really have it. So it's reeducation of the opportunity that's there. So the new members are easy because we can tell them point of sale that we have this opportunity to save money. So it's really just the learnings, I think, is what's gonna drive more adoption of using it and engagement. So that's what we continue to focus on.

Great, thanks. And can you remind us of the financial mechanics of some of these partnerships? You know, they're different models. What's the flow through you? There's more of a, you know, actually more focused on the marketing side.

Yeah, they're all a little different, but generally they're discounted after they're having a price for the most part and there are some to join Imbuggas earlier question. There are some some that are strictly black card some are black cards get a bigger discount than the glass card membership and some are just the same regardless of both, but I think you'll see more that differentiation in the month of year's ed.

There's obviously a seasonal sequential step down in placements from Q4 to Q1, but why was it so pronounced this year? What drove that pull forward and that shift in timing this time around?

Yeah. Hey, Joe, it's Tom. I'll start that. So I think we historically have a number of stores that.

just due to timing or permitting or what have you, that the franchisee and us thought would open at the end of December but spill over into January . And they generally get the equipment placed, there may just be some hang up to why they can't open. So you know the placement there

is recognized in the fourth quarter in that case, but the store opens in Q1. And we typically have a certain number of those stores every year. It's plus or minus a little bit. This past year was just a much bigger number. And I think part of that was some of the supply chain delays that pushed openings further and further.

whether that was the Shanghai shutdowns and what have you. So that's why it was such a sort of an outsized number this year in terms of that carryover between placements and, or gap really between placements and openings.

the Shanghai shutdowns and what have you. So, you know, that's why it was such a sort of an outsized number this year in terms of that carry over between placements and, or gap really, between placements and openings that spill into this year.

So we're predicting that would be more normalized, you know, back to historical levels here this year at the end of the year. So it was just, but you know, that number definitely creates that gap that you're sort of seeing in Q1. And not so much a factor for the subsequent quarters until we get to the big Q4 again.

sometimes even a larger number pre-COVID on a smaller base.

You guys hoping for something better, I guess, is what I'm asking in the quarter. Yeah, I think, Joe, maybe I'll start that one. I think, you know, we don't really get into the quarterly view of our business. And I think what I would say is the same store sales growth continues to be 75% member growth. We affirmed our same store sales outlook of high single digits.

Okay, I hope that helps. Yep, it does. Thank you.

Thank you. We have our next question comes from Sharon Sekfee from William Blair. Sharon, your life is now open. Hi, good morning. You know, we on the outside have a really hard time kind of projecting equipment, revenue. So in the second quarter specifically, are you expecting that to grow year-to-year? I think some color there would be helpful.

And then secondarily, as the membership skews younger, can you talk about any changes you're doing within the clubs, whether it's the kind of equipment, you know, the clubs are going to have or change to, or anything else that needs to happen in the clubs to appeal to that kind of younger demographic? Sure. Sharon, this is Grace. I'll try with the equipment side.

four or five months, retooling new builds and remodels to slim down the cardio slightly. So if a club had 120 pieces it's probably as a 100 now and designated more of that square footage to weights and functional training areas. We did a study beginning to last year I think it was that when we looked at club member visits compared to minutes on cardio.

and the minutes on cardio were down about 17 to 20%. Although tredmyls remained pretty similar, but it was all the other cardio came down. So, but the visits of the store visits were the same so they were on the floor themselves, working out with weights and functional training was seen.

areas grow in our stores, which is good. And it's a little less expensive than cardio and power and everything else that runs them. So that's the only thing we've seen really in the club that that has changed. Frequency-wise is up over all generations, so it's not that it's the younger generation that's working out more than the boomers, for example. It's actually, I think the boomers work out quite the more, believe it or not.

So, so nothing else yet. Will the equipment change, I think, in the club is what has changed? Yeah, and Sharon, back to your question on timing. And I think a little bit of what I was saying to Joe's question there, the Q4 to Q1 pieces is a little trickier and was more outsized or exacerbated this year for the supply chain reasons. I think for Q2 of this year, and we normally don't provide this kind of

I'll come some Alex Perry from Bank of America. Alex, your line's not open.

Hi, thanks for taking my questions. I just wanted to ask about any change to the international strategy, especially now that you're investing in a dedicated team. Does that mean you're planning on sort of accelerating international growth? And what would be the timing of opening up new markets? Thanks.

Yeah, thanks for the question. This is Edward. You know, actually, we're really just getting started on the international growth plans. I mean, obviously we have a presence and. In several countries in Canada, Australia, Mexico. Panama and in 2022, we also announced that we signed an agreement to expand into New Zealand as well.

You know, with regards to strategy, you know, in the past it was more of a reactive approach. Meaning if someone contacted us and they wanted to open up in a certain market, we would consider it. I think today we're more in the process of actually building out a designated team to really focus on accelerating our growth outside of the US.

There hasn't really been an international market that we've entered in that we haven't actually been successful in. So we've been really pleased with how our judgment-free environment and our affordable membership model really has been resonating in our global markets.

And actually in terms of access, you know, in Mexico, for example, you know, membership penetration rate is really low, you know, maybe around 33%. So people want to work out, they just might not have the access to the gym that's affordable. And so...

We provide that and we're going after that market and you know, we'll continue to grow outside of our existing markets as well I think when we're looking at forecasting we're not where you don't really forecast We're not going to provide you know the details to to where we're Moving to but you know Europe is interesting You know there's there's already incumbents in that space in the H. D. L. T. space but Really I think we have a differentiator and just like we do here in the US in terms of having that judgment free environment

And I think our low price definition is a good one when comparing it to those competitors there. And then Asia also doesn't have actually a significant income and competitor. So it's a near opportunity that we're also looking at. Perfect. That's incredibly helpful. And then I just want to.

Yeah, I think one thing I'd say first would be the data we've captured this past year on when they are.

I guess the peaks and valleys of when they're pending the join as paying members. So that's when we'll be focusing on targeting the most with the offers and incentives to hop on board. And I think the other one there is the fact that when they do join that the parent doesn't have to come in with them again to sign them up for their paying membership. So.

that's helpful. Best of luck going forward.

Great, thank you. Thanks, Alex. Thank you, Alex.

The.

We have no further questions on the line.

Thank you, operator. Once again, thank you for dialing in. Appreciate you getting on the phone today and listening to the key one earnings call. Although you've heard some headwinds from the increased cost of construction and interest rates, I think the most important thing to me and the focus I have is that the fact that remember growth is.

trend, right, is that the members are loving us and to work out and work out more. So that's all great news. And as that sustains, that should overcome any kind of inflation and interest that we have to deal with over time. So thanks, everyone. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

..