Q2 2023 Planet Fitness Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Planet Fitness Q2 quarterly earnings call I would now like to turn the call over to Stacey Caravella, Vice President Investor Relations. Please go ahead.
Okay.
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.
Chris is traveling today and will be joining us remotely both will be available for questions. During the Q&A session. Following the prepared remarks.
Today's call is being webcast live and recorded for replay.
Before I turn the call over to Chris I'd like to remind everyone that the language on forward looking statements included in our earnings release also applies to our comments made during this call.
Our release can be found on our website investor Dot planet fitness Dot com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.
Now I'll turn the call over to Chris Thank.
Thank you Stacy and thank you everyone for joining us for the plant and this Q2 earnings calls with all that's going on in the economy today, we feel really good about the demand that we're seeing for our brand our second quarter results reinforce that our geography high quality and affordable fitness experience continues to resonate with consumers. We ended the quarter with more than $18 4 million members in eight.
7% system wide same store sales growth.
Added 26 stores, bringing our global store count to 2472.
I'm going to cover two topics today first our second quarter results that confirmed that the fundamentals of our business continue to be strong and second our continued belief in our long term growth opportunity despite near term external headwinds during.
During the second quarter, we grew net membership by more than 300000.
All generational groups surpassed their pre pandemic population penetration levels in the U S with the Gen Z continuing to lead the way in terms of membership growth at the end of June three 5% of boomers, one 6% of Gen xers and more than 9% millennials and Gen Z who are members of planet fitness.
We also launched the third year of a high school from the past on May 15th leading up to it we already had more than 400000 team has joined from last time This program.
We had more than $2 8 million High school age teen sign up to the 2023 programs. So far 70% of which are first time participants.
It is incredible to me that over the past three years. We've run. This program. We are impacting the lives of more than 6 million teens. We're focused on building lifelong brand loyalty with this generation by giving them free access during the summer. So they can develop long lasting healthy habits and experience all the benefits of fitness. This program further strengthens our appeal with the Gen Z population.
As we want to be the brand do you think of when they are ready to join a gym.
We also continue to realize the benefits of consumers prioritizing their health and wellness in the appeal of our differentiated non utility experience.
About 35% of our new joined the Q2 were previous PFS members compared to about 20% in 2019, we believe it's a great sign that former members of rejoined faster than they did pre pandemic.
We again experienced improvement in our cancel rate as it continues its year over year decline for the eighth straight quarter.
We also continue to see higher overall visits per member as well all age groups using more frequently year over year more use it should continue to bode well for our cancel rate is nonuse as the number one reason why members can't.
And lastly, we're seeing our average tenure continues to increase on both of our memberships, which we believe demonstrates the increased priority people are placing that business longer term. We believe that the <unk> platform can also support retention as well as being a differentiator versus our competition during the quarter, we saw that approximately 25% of the <unk>.
<unk>, who engage with the <unk> platform hasn't visited the physical location and more than 90 days demonstrating the value of the perks program brings to our members.
Our large diverse membership of more than $18 million continues to attract consumer favorite brands, such as Nike and Garmin.
Of which offered discounts.
Discounts in Q2 for the quarter the average redemption savings through perks was well above $10 exceeding the cost of our monthly classic card membership.
It's still a small percentage of overall membership that engages with the <unk> platform and we continue to explore ways to unlock its power.
Now I'll take a few minutes to discuss our long term store growth opportunity, where our brand differentiation combined with our size and scale advantage make it difficult for the competition to catch up.
I believe the most important factor in our sustainable growth is that our brand resonates with all generations with each new generation increasing its penetration. This drives our continued positive same store sales most of which is driven by membership growth.
Even with low cost space no competitor is offering and non intimidating geography atmosphere is continues to appeal to first timers with approximately 40% of our new joins never having belonged to a gym before we plan to invest more than a quarter of a $1 billion. This year to drive our marketing flywheel and get more people off the couch to join planet fitness.
Convenience is frequently cited as reasons for choosing a gym.
And more members will drive the need to open more stores, we need to continue to be a convenient accessible fitness options over the 80% of the population who currently do not have a gym membership.
To this end over the past 12 months, we've opened three times the number of new locations. The next 17 low cost U S competitors, combined making our store count more than 60% greater than their collective total.
But we want to expand our lead against the competition even further.
We're kicking off a studied to reevaluate what that was in total domestic store opportunity that we established at our IPO in 2015, we believe there could be higher given our ability to achieve a greater penetration of each successive generation the ability to add even more stores two area development agreements than initially thought as well as the significant industry consolidation caused by <unk>.
During which nearly 25% of bricks and mortar fitness locations permanently closed.
However, our franchisees are still facing headwinds to building new stores, many of which are secondary impacts from the pandemic issues had been talking about XE to linger and recently, our franchisees are selling the compounding effect of others, therefore headwinds, making it more challenging for our franchisees to build at the pace. We originally expected.
First the cost to build and Aegean remains 25% higher than pre COVID-19. It. We're hearing from some franchisees that is still increasing slightly.
Persistent inflation in construction costs isn't unique to planet, who were also hearing it from other growing concepts in the broader retail space.
The rapid increase in interest rates over the last 12 months, which has impacted our franchisees in particular, a few of the pay back that had more aggressive capital structures and.
And recently, we are seeing that the 16% decline in the vacancy rate, our retail space versus preceding them, making a slightly more difficult for our franchisees to find the right space in the right locations.
Lastly, although our system has learned to navigate it we have not seen any relief on the supply.
Therefore, we are bringing down our new store equipment placement outlook for 2023, and Tom will discuss our updated outlook shortly.
We continue to explore ways to support our franchisees as they face. These challenges like we did when we secured production on the HVAC manufacturing line.
We consider our franchisees our partners.
Given that most of our operators have been with us for more than a decade and many upwards of 20 years, they had been through various economic cycles, including the temporary COVID-19 shutdowns, they live and breathe planet fitness and have proven to be strong operators and great developers and have helped make us the leader in the industry.
Looking to the future I'm confident that we will continue to be a differentiated and disruptive forces in health and wellness space as we have done for over 30 years I believe that we have the right team in place to lead us through the next stage of growth both in the U S and globally.
We're excited that Fred one our new Vice President of International recently joined US to drive International unit growth in new and existing markets.
He will lead the strategy for our future market expansion opportunities outside the U S.
Our industry leadership position and purpose of enhancing People's lives and creating a healthier world sets us our franchisees and our shareholders up for long term success now ill turn the call over to Tom.
Thanks, Chris and good morning, everyone first I'm going to address how the headwinds Chris talked about are impacting our new store development, then I'll cover our second quarter results and lastly, our current 2023 outlook.
The cumulative effect of higher cost to build and higher interest rates has caused us to lower our outlook for equipment placements and new franchise stores to approximately 140 versus our previous expectation of approximately 160 to.
To provide better insight and clarity into our business. We are also going to provide a new store opening outlook. In addition to our standard franchise new store placement metric.
For 2023, we expect to open approximately 160, new locations, which reflects our expectations for new franchise stores and corporate store openings. This year.
This also includes the franchise stores in which we placed equipment in 2022, but opened in 2023.
While our new store returns are still strong they are not back to their pre COVID-19 levels due primarily to higher construction costs that are stubbornly remained up 25%.
Put into perspective, the amount of capex required to build six stores per year in 2019 will now only build four or five depending on the situation.
As Chris noted this isn't unique to us as many multi unit brick and mortar concepts are also experiencing inflation.
Additionally, the rapid increase in interest rates over the past year has had a cumulative impact on our franchisees' ability to invest in new store growth.
Initially franchisees didn't see the increase in rates is a significant dampener to their new store development plans. However, there are more recently feeling the lag effect of higher debt service.
Finally vacancy rates for 15% to 25000 square foot boxes are tighter down about 16% versus pre COVID-19.
At our Investor Day last year, we projected that our system would open at least 600, new stores by the end of 2025.
We believe the fundamentals of our business remains strong and therefore, the next 600 units are still achievable in the relative near term.
However, it may take more than three years for them to open depending on how long the current headwinds persist.
With the current challenging macro environment, making it increasingly difficult to predict new store development, we will reevaluate our three year target and provide an update with our 2024 guidance rather than speculate at this time.
All of my comments regarding our quarter performance will be comparing Q2, 2023 Q2 of last year unless otherwise noted.
We open 26, new stores compared to 34 last year.
Delivered same store sales growth of 8.7% in the second quarter franchisees same store sales grew 8.6% in our corporate same store sales increased 10.2%.
As a reminder of the same store sales for the Sunshine fitness stores that we acquired last February were included in our corporate same store sales for the full quarter.
Approximately three quarters of our queue to comp increase was driven by net number growth with the balance being raped growth.
Blackheart penetration was 62.4% a decrease of 110 basis points.
The decrease primarily reflects the continued strength of our Gen Z membership growth, which drove about half of the mix decrease.
For the second quarter total revenue was $286 $5 million compared to $224 $4 million the.
The increase was driven by revenue growth across all three segments the.
19, 7% increase in franchise segment revenue was primarily due to an increase in royalties National AD fund revenue and equipment placement revenue the.
The royalty increase was primarily driven by the same store sales growth royalties on annual fees and new stores.
For the second quarter, the average royalty rate was 6.5% up from six 4%.
The 12% increase in revenue in the corporate owned stores segment was primarily driven by the same store sales growth and new store openings. We also acquired four stores in Florida from one of our franchisees that were adjacent to some of our current corporate stores.
Equipment segment revenue increased 83%.
As a reminder, there was a delay and re equip sales driven by the Covid shutdowns in China that push re equip sales into the second half of 2022.
We completed 26, new store placements does Q2, which was in line with the prior year period.
For the quarter replacement equipment accounted for 79% of total equipment revenue.
We ran our typical first half of the year equipment promotion that drove strong sales and will create some timing impact for the rest of the year that I'll discuss shortly.
Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee owned stores amount of $259.5 million compared to $32.5 million.
Store operations expense, which relate to our corporate owned stores segment increased to $58 $9 million from 56 $4 million.
SG&A for the quarter was $32.6 million compared to $28 $2 million.
National advertising fund expense was $17.9 million compared to $18.9 million.
Net income was $44 $2 million adjusted net income was 57 $7 million and adjusted net income per diluted share was 65 cents.
A reconciliation of adjusted net income to GAAP net income can be found in the earnings release.
Adjusted EBITDA was $118 $9 million and adjusted EBITDA margin was 41.5% compared to $89.1 million and adjusted EBITDA margin of 39.7%.
A reconciliation of adjusted EBITDA GAAP net income can also be found in the earnings release.
By segment franchise, adjusted EBITDA was $69.4 million and adjusted EBITDA margin with 72%.
But store adjusted EBITDA was $49.2 million and adjusted EBITDA margin was 43.2%.
Equipment, adjusted EBITDA was $17.6 million and adjusted EBITDA margin was 23.8%.
Now turning to the balance sheet.
As of June 30th 2023, we had total cash cash equivalents and marketable securities of $418 $9 million compared to $472.5 million of cash and cash equivalents on December 31 2022.
Which included $62.5 million and $62.7 million, a restricted cash respectively in each period.
During the second quarter, we began investing a portion of cash on hand, and short term marketable securities to have an overall weighted average life of less than six months with various maturity dates.
We ended the second quarter with $123 million of marketable securities.
Year to date through June we use the $125 million to repurchase shares which includes $25 million in Q1, and an additional $100 million in Q2.
Total long term debt, excluding deferred financing costs was $2.0 billion as of June 30th 2023, consisting of our four <unk> a fixed rate securitized debt carries a blended interest rate of approximately 4%.
Finally to our current 2000 twenty-three outlook to reiterate we expect approximately 140 equipment placements in new franchisee locations and approximately 160 total new store openings for both franchise and corporate stores.
We continue to expect system wide same store sales growth to be in the high single digit percentage range, given our strong membership trends.
As we previously discussed we expect the same store sales growth rate to reduced across the year as we were laughing last year's weaker Q1, when omicron was surging followed by record Q2 member growth.
We now expect that real quick sales will make up approximately 60% of total equipment segment revenue.
Let me address the cadence of placements in new franchise stores and re equipped for the balance of the year.
For Q3, and Q4 placements, we expect a similar number this year to each quarter last year.
We expect that Q3 re equipped revenue will be approximately in line with Q3 last year with Q for significantly lower than last year, reflecting the timing of the COVID-19 disruptions in China earlier in 2022 as well as the strength of our re equip promotion this year.
Importantly, our franchisees continued to invest in their existing stores as evidenced by the fact that we expect our full year re equip revenue to be in line with what was originally provided and our targets.
As we are half way through the fiscal year, we have greater clarity on the balance of 2023 and now expect the following targets for growth over our 2022 performance.
Revenue growth of approximately 12%.
Full year adjusted EBITDA growth of approximately 17%.
Adjusted net income growth of approximately 30% and.
And adjusted earnings per share growth of approximately 34%.
We also now expects shares outstanding to be approximately $89 million, which is inclusive of the repurchase of nearly 1.7 million shares through June .
And we now expect our net interest expense to be in the low $70 million.
Lastly, we expect capex to be up approximately 40% and DNA up in the high teens per cent range.
In closing despite our reduced outlook for new store growth, we believe our brand differentiation in industry leadership position, our experienced and proven franchisee base, along with our asset light model and strong balance sheet set us and our shareholders up for long term sustainable growth.
I will now turn the call back to the operator to open it up for Q&A.
The Florida now open for your questions to ask questions. This time. Please press start one on your telephone keypad. If at any point you would like to withdraw Q. Please press star one again, you'll be provided the opportunity to ask one question and one further follow up question.
Will now take a moment to compile a roster.
Our first question comes from the line of John Hi, Sparkle from Guggenheim partner. Please go ahead.
Alright, Chris wanted to start with.
The openings at the franchisees, we're gonna do this year and maybe they get you sent your visibility on currently next year, I'm curious where that stands relative to their commitments.
Under the Ada is wrong, because they had built more and then they come back I think to their commitments is it still kind of around their commitments and if if if if it were to fall below that.
I'm curious sort of what happens basically said look you've got a grace period for appropriate for Awhile, you can't really force people to open some curious about that and then does that sort of confidence that.
Next year in the air after right, we should see higher right unit expansion, we don't know how much higher for higher than where we are this year.
Well actually thanks, John and Tom feel free to add to it yeah I think what we're seeing now is which was up more.
More unexpected is that more of the franchisees of using the great periods to your point got any kind of waiting to see if cost to come down next year now.
Do have.
The ability to earn a grace period back which is you know a good thing cause that means of developing stores faster again, so but again once they use them up there and they use them up and they have to start opening stores again, so that does it.
It does kind of come back to that point that you just mentioned that you want to use them up.
I was going to do it really do lose their a D. A and like to talk about once you lose the ADL evaluate that businesses is quite a bit lower than than one with runaway, but Tom you Wanna add to that.
Yeah, John I would just say to your question about the the following years what does it mean, we're not really going to comment on that at the moment as we talked about that.
And the principal reason for that is if.
If we step back we feel good about the model at a store level the ability to earn strong for wall margins you see that in our corporate store segment, how those margins are improving the flow through from this same store sales growth.
That is really quite good and.
And sustainable because a lot of the the vast majority of the top line growth as member driven and we don't see anything really standing in the way of that continuing.
But clearly you know.
Costs are higher as we've talked about they've stayed higher although you know.
Some have thought they would be be lower by now or the inflation would have moderated by now.
And it is a tighter real estate market. So I think we just wanted to take some time and let it play out monitored sort of external headwinds.
And also see how our pipeline comes together before we project further so we think it makes sense too.
Take up more thoughts take a thoughtful approach to see how that plays out and then we provide our outlook for next year. So then update how we see the following years to sort of come back to that an investor day.
Target that we put out so that's how we see it and it is it is kind of a volatile situation and part of the reason why we are providing the new store metric is to help provide some clarity they're both in terms of placements new stores and the timing of both.
Alright, <unk>, maybe just as a follow up right cause you heard about 10% corporate ownership.
Right I think you are comfortable going higher right probably.
Good amount higher than 10%, what's the thought philosophically near term and I guess more immediate for longer of stepping up your own growth.
Because obviously you have the ability to fund it maybe some others that the franchisees don't.
Is that is that a thought or you're limited sort of geographically because you're gonna you're not gonna go into new markets. So it's really only fill in for Ya.
I'll I'll try dot com or add to it.
When we bought sunshine's on you can recall one of the.
One of the reasons for that purchases add a lot more runway then we gave without.
Oh legacy market, especially in the northeast so that does give us some more on way to go you know as I said, we open about 15 this year, which was about Sunshine was typically opening before we owned it. So yeah, we have the caplin, but again a real estate is tight rubbing.
Rubbing up some issues franchisees are but but you're right. If we find sites and there's a sense in us waiting to do them either right.
Okay. Thank you.
Our next question comes from the line of Randy Connick from Jeffries. Please go ahead.
Yeah, Thanks, guys and good morning, <unk> really all I guess, everyone wants to understand is just what the.
160 number is that kind of the the floor from your perspective like we don't we don't need to get specifics on the actual what we should see in the out years, but would you would you anticipate.
That that 160 is kind of like the actual floor close to the floor.
Give us your thoughts there.
Yeah, Randy it's it's kind of similar to maybe how we thought about it last quarter.
And you know.
As you know in our business by now we have a much clearer picture of what's going to happen, what's not going to happen and we did some see some deals.
So we felt we're going to go to lease just didn't materialize. So I think.
We feel good about that.
Approximately.
160, new stores across our entire system for the year.
And then the similar view on placements and it's you know with our best guess than all of our our.
Hours and the individual franchisees, who are building the stores you know how long the permitting take so.
It's things can always happen within individual store, but I think when we look at the collective.
View based on where we sit now versus where we were three months ago.
It's it's what all of our experience tells us will materialize in our pipeline in the new environment that we're in so I wouldn't say, it's a floor I wouldn't say, it's a ceiling I think it's our that's our best guess of what it will be and we're saying approximately 160, so might be a couple above and a couple of below but it's our best guess of what we think will happen.
And then just to follow up on that would you anticipate again, we know that we're going to get an updated guide in a couple of quarters for the out year, but just if we had to think about.
In the years ahead.
Would we be thinking around this number is more of a floor per year.
I guess, that's what the market is trying to figure out right. There there's no questions around the business model at all it's just people are just trying to get a handle or trying to get a sense of.
How many units are gonna be open per year over the next few years, just kind of just just getting your sense of.
Where we are versus this current guide of 160 would be very helpful.
Yeah, Chris I can start that they wanted to add but I think I think part of it too Randy is.
What's happening in the broader context of real estate.
You know, we all probably see the same kind of information were vacancy rates are and what the bills have been stripped centers in the kind of spaces, we target and they're kind of at their historic lows.
Does that accelerate now.
Going forward does that pays pick up or does it remain the same.
I think those are some of the things we want a factor in.
So we're not really <unk>.
Providing any any updates or outlook at this time, but I think if you look back and say geez, we opened quite a few stores during the worst of the pandemic and.
There was a lot more uncertainty than.
Now rates were lower but costs were were starting to climb.
And we still took down a bunch of real estate.
And we talked about even for 2022, if you look at the total real estate that was least at least the work we've done with some outside help.
I think there are only two brands, who least more total square footage than us dollar general and <unk>. So we're still we're still taken down a lot of real estate is kind of hard to we wanted to see how some of these other factors play out before we really.
Recast what we think the outlook is for new store gross but to your point the model strong the generational trends that we're seeing it's just it's a little it's a little more difficult to predict in this environment and it was pre COVID-19 and we just want to make sure we're thoughtful and.
Taken approach that as as informed as possible versus doing a quick update to it that may not be as informed as we'd like it to be we're just not going to do that.
[noise] understood. Thanks, guys.
Okay. Thank you Randy.
Our next question comes from the lineup Max Ross Langkow from T V talent. Please go ahead.
Hi, Good morning, guys. This is bradley on for Max So.
Looking at that long term 600 number can you. Please remind us how many of those are contractually obligated under the Ada versus the mix up those that might've been franchisees opening ahead of schedule.
Oklahoma.
Yeah sure thing.
Hey, Bradley so I think.
To answer your question directly what we said historically was in the K as over the next three years this being year one there was over 500.
There were over 500 100 obligations that franchisees had in there <unk>.
And then you add to that corporate stores.
And then plus any further international expansion that is not currently.
In countries, where currently not.
Excuse me and that's how we thought about the the 600.
But I think.
And to your question before.
Or the other part of your question pre Covid about 15% to 20% of the units that were built were better built ahead of schedule.
So as we said on the last call we didn't see very much of that if any happening this year, where people are building ahead of their schedule.
That may change next year and the following year, but at least that's how we see it today and to Christmas point earlier, what within that five over 500 franchise obligations. They do have the ability.
In the current year in the future years to use grace periods that they haven't used to push obligations forward.
And we're seeing more of that usage now than we had previously so that's a little bit of why we want to take some time and see how this plays out for the next few months before we recast it but that's that's the long and the short of it.
In terms of the numbers and how the grace periods could affect that both this year and in the future years.
Great. Thanks, and then my follow up is can you speak to some of the ways that you guys can continue to help out franchisees given the difficult macro backdrop at the moment and then what would your thoughts be on reopening the system to either new franchisees.
Or potentially former partners, which sold out.
Sure Max Chris Yeah. So.
The one sanchez either.
Exclusively that they had.
In some territories the solo.
[noise] units already and all the one with two existing franchisees in the system, So which is great. Thank everybody enrolled because it does use the bullish about the about the business because they see the business health trends are great.
They've already bust someone's units, we did have one and.
[noise] franchisee has now re-entered the system, but.
But some of those units as well so now bringing up a complete newbie to the system. We're not opposed to that naturally you know if we if we need to feel the need to it but again to grow with our existing franchisees or next franchisee. There was a proven partner of ours. When we really look on those partners and they know the business. They know the system you know.
How to run the playbook and let's face.
It helps us grow exponentially over the last 567 years here.
So instead of the grow with him than without them. So I'd, rather try to grow with them in the future, but not that I'm not that I'm actually opposed to bring a new blue blooded.
Great. Thanks for the collar guys.
Okay.
Our next question comes from a line of Simeon Siegel from BMO capital markets. Please go ahead.
Thanks have a morning hope you have a nice summer.
Chris might be a weird question.
Morning, So it might be a weird question, but any help you can provide on details of the named previously planned openings that won't be happening. So just trying to think through within the reduction is it a specific region is it specific partners because you're you're not going to zero you solve 140, that's that's a lot of new franchisee openings uhm. So I'm just trying to think through the common denominator is between the stores that you do still.
Expect to be opened versus those that you Don and again I don't know if it's regional if it's a partner it gets contractually committed versus not just thinking out loud, but obviously this is going to be a focus for investors. So uhm any further contact.
It's probably helpful.
Sure sure. Thank you Uhm and Tom feel free to add two as well yeah I I think like what was mentioned earlier most of it now is the <unk>.
More visibility now for the rest of the remainder of the year, which three months ago, we don't have quite as much visibility, especially in the fourth quarter, which we do today and we're quite sure.
Where the franchisees, where we started using the grace period cause they generally in the past.
They're gonna do ground up which took a lot longer than a.
<unk> so they use a great group or something like that all they really were holding out.
Particular markets, where like a real estate eight plus space. So generally they're great periods are are considered like go to them. So they weren't you only use them for.
<unk> cost come down for example, or now was a little bit lack of real estate. So I think now would just seen that they just use them great periods of sea of course come down in the future and and putting them off to the next year or two so that's more what it comes down to today.
Let's see well, it's not like a lack of well, let's see some of the business that this morning, and he seemed to just send you see the business drums.
It sounds point, they budgeting, a certain amount of money and I was constantly causing the amount of the system to Ohio stores in the long term rebuilding little Rolling you know 810, or 15 stores a year, which that's like building 20th so that you know so I think it's just more like how fast they bring up the caches and again you know the system's not 100% that.
Yeah to pre Covid membership or a revenue so it's a little bit of that as well.
And submitted we're not seeing anything regionally or anything in particular other than that one franchisees franchisee that we discussed.
Where they lost some exclusivity that Chris gave an update on.
That's playing its way through won't affect this year.
Could effect next year and potentially the following year.
Great. That's very helpful guidance, and then just Tom how are you thinking about black or penetration going forward does that mid 62 per cent range is that a fair way to think about it.
I think I think we're definitely seen the impact as we've discussed from the generational shift with Jen C as being a big part of the join mix.
We think it.
So for the first time swimming.
We're seeing a little bit of softness across all the age generations year on year.
That might be a little bit of it's not so much on the Kansas side, but more on the joined side. So the biggest impact by far is the Genesee mixed within our member.
Membership base, increasing more dramatically the second pieces, a little bit of softening in the other generations. So.
It may be just a little bit of external macro environment inflationary recessionary pressure on the consumer don't know, we'll see how it plays out.
But I.
I think.
We just need a little bit more time, because we weren't seeing those kind of results. When we were testing it and we certainly didn't see it after rolling it out in May of last year, where blackheart penetration was continuing to to increase so we need.
Monitoring that and thinking about ways to boost blackheart penetration with promotional activity.
As well, but.
It was the first time, we really saw that in the quarter.
Alright, Thanks, a lot guys best of luck for the rest of you.
Okay excellent.
Our next question comes from the lineup Sharon Zack.
From William Blair. Please go ahead.
Hi, good morning.
Kind of going back to the franchising in a about profitability are there are there kind of strategies are exploring too maybe both sir that profitability or whether it's.
<unk> 19, another member chairs or.
Potentially then given back somebody add find contribution.
And you talked about before your very efficient with your AD for now just trying to think of ways that might help them feel better about the profitability of that that word translates accelerated grass.
So tell me one cry that an excellent.
Sure thing Sir Thank you for the question I think.
I think the best enhancer profitability as member growth.
And we're seeing that in our own.
Corporate stores and particularly the mature stores. So now we have a full quarter of the Sunshine.
Doors in this year and last year and we're quite pleased with the way. The same store sales growth is translating to four wall growth and margin expansion, it's pretty healthy because you know the model is.
And in that we treat ourselves like a franchise Z with a synthetic royalty. So it's more of an apples to apples comparison.
Margin expansion is quite healthy.
So that's the primary one and I think while our marketing spend has gotten gotten we've gotten some learnings I think we're we're.
Will be on a never ending quest to make that money be more efficient and drive more membership growth I think we're also.
No experiment with how do we get more credit for the value that we offer and at our promotional messaging and different things and also.
What are we as Christians said, what are we not saying to people to get them off the couch 140 million people, who live near a gym that don't.
They look pretty close to a planet fitness, but don't belong to any gym.
We think the the actions we took to increase the annual fee.
To 49 is certainly accretive to the franchisees, we're not really considering that we should reduce the the local AD spending that franchisees contribute there are still so many more people to get off the couch and the the payback on those investments is so so great.
The contract value somebody who joins us.
Is.
Many orders of magnitude greater than the cost of acquiring that number. So we we think just more time and.
But we're certainly not closed minded to the ideas, but we think overall the model is strong and more more member growth will really drive that margin improvement.
So Chris I don't know if there's anything else you want to.
Yeah, I think the only that it's like just reiterate.
The conference noises San Francisco, the corporate stores is that we generally spend a little bit more than the 9% growth required from franchisees in some franchisees do as welfare.
Not all franchisees are all back to pre Covid revenue, where membership some are quite a bit ahead of where that is so.
It's just time and in some ways you can buy time by just spending more marketing dollars to get more people off the couch and get people to join in.
<unk> just like pre Covid is majority member growth, which means it's working and it's doing exactly what it should and and I think it depends itself, we don't want to cheapen, the brand or the or the experience to the member and and being in a 10 dollar membership club forever essentially at this point.
Have been women value.
Concentrated forever as far as how do we build things better by silky value and and we don't want to really cheapen the brand, but we're always looking at ways to.
Cost if we don't ruin the member experience ever.
And then the Saturday night.
Sorry, Sir and maybe one other thing I would add is.
As you know over the years, we basically I've had three price tears in our business to $10. We've had a 15 dollar option that people can offer and then the blackheart option.
And.
We continued to price and testing so.
We're looking at ways and and <unk>.
One of the tests to <unk>.
Capture more.
More.
Of that $15 price during the non promotional periods, but still be a 10 dollar price during the sale period. So we're continuing to.
Those kinds of things.
As well as some other things across our markets to as I was referring to before to try to get more credit for the value that we do offer.
Ultimately make our sales more impactful, it's all with the intent to drive more member growth.
Which is the name of the game for us so.
It is a multifaceted thing and we're continuing to experiment with things.
And take the take what works for the rest of the system.
So hopefully that helps out a little more color.
Yeah, and and I know that.
Kind of talked about the uncertainty with the U S franchise for us, but I think that's 600 target also included accelerating international expansion.
How much of that 600 was overseas and is that still intact or as <unk> as you asked development.
Yeah. Thank you Sir he didn't give any guidance on almost along with the international but you know we were going from doing it.
Maybe one a year or one every two years, you know as far as a new country and and now are are hopefully looking to do with at least two to three maybe a year going forward. So.
About you know cause you wouldn't will also need to be found it today.
Least you ever really get it rolling and probably.
Contribute to 2025 at this point.
Okay. Thank you.
Thanks for sharing.
Our next question comes from the line in Johnson comp from Bird. Please go ahead.
Yeah, Hi, Thank you good morning.
Bit of a follow up question, but I wanted to just ask maybe a little more directly if you have insight Tom I'm thinking about unit economics. You cited strong levels are qualitatively, but can you be any more specific just how are you thinking about average franchise. The cash on cash returns. When you think of the 23rd 2023 or 2024 class.
What I have to pre pandemic levels.
Yes, John it's a good point and.
So I think what we feel really good about is.
As you've heard of the stores that were open even in 2019.
Didn't really have two successive three successive strong first quarters.
So the Rams the ramps of those stores built in those years were 80, 85% of what we would typically see pre COVID-19 <unk>.
What we're seeing this year is the stores that are open. This year are much closer to the 2019 ramps, which is really good to see.
Which certainly helps some of that.
Cash on cash and how fast they get to maturity and where they get too and so on so.
Clearly, it's extended by the increased cost to build and it's very situational dependent we look at our own store. So we really can't speak for the system, but the new stores that we look at and either.
Approve or don't and for our corporate clubs. We still think the returns are strong the expected maturity for wall margins are still very strong.
It's just harder for us to speak to individual franchisees, but it goes back to the four wall aspects of the model or are very strong the increased cost to build.
And equipment is a little more expensive so when they have to re equip that's more that's going to hurt the overall returns from where they were pre COVID-19 and maybe the cash on cash.
Metrics or extend it a little bit further in terms of the payback period, but still attractive and we still have quite a bit of we've got a transaction in our system now from somebody from the outside an experienced operator that we may have mentioned last time it it's.
Near closing.
It's still attracted to people externally I think it's just a bit of an adjustment period for people who are in the system and used to the old returns and smarting from having to pay 25% more for things that they didn't have to so.
But overall, we feel good about the four wall margins, but periods of.
Payback in cash on cash returns are extended and somewhat lower but the other good news is you know the storage built this year and Pryor here.
Here since we took the price up on.
On Blackheart last May all those new stores are taking the new members on Blackheart at 24, 99, and everyone's paying the higher annual fee, which.
With our mass depending on the mix of Black card is going to add three to 400 basis points to what it would have been from a four wall standpoint. So.
Back to Sharon's question, you know trying to do things that improve the overall economics.
For our system and.
Along with it answer, but hopefully I answer to your question.
Yeah, that's really helpful.
I think John the one thing I'd add to it as you probably recall I mentioned the last call is that it becomes pointless first first quarters is so important to us and the three year ramp is where a lot of the little girl comes from.
Three quarters of come back to back to back where the stores it opened up in 2019.
And gang Covid you know that this is like this past quarter was the first real one that had fully right. So you know I mentioned in my last call that stores that were already mature pre COVID-19 and already experienced at three a ramp pre COVID-19. Those stores on average are all ahead of their pre COVID-19 membership revenue on average so if the stores it opened like just.
Cobra during COVID-19 that they're just not experienced a net at three a ramp because of the first quarter has just been so so wacky.
Yeah. Thank thank you both of them crispy, if I could just ask a follow up on.
Pricing and you know, obviously pricing nice lover for New unit economics, I'm just curious.
From franchisees are they onward with.
You know keeping price.
A white car price, where it is and prioritizing volume and just thinking about you all the information around you certainly how their non Jim concepts that are value you have.
Prices over the last year or two and you know even a 15 dollar a month spread between white and black card is pretty wide. These days so.
Any any updated thoughts on $10 a month remaining the floor forever and if if it is are you concerned about competitive pressures or just send me thinking thank you.
Yeah. Thanks, John I would say I think the tongue is it really a point with their 15 dollar middle tier membership Clifford offered in the past and it's currently called three tier. So 10 to 15 at 24 90, 910, and 15 is essentially the same membership is away cart, but it's [noise] would have a commitment 50 would have no commitment or they can't have a.
Bigger enrollment fee than the 15, so people can.
Paying for them to get a cheaper membership monthly choose to make that kind of investment right. So I think it's a little bit more maybe discipline around that pricing structure. So that hopefully we can during off sealed periods drive a little higher average ticket with the 15th which is still a great a great deal for white card membership any way right, but I think the and your beauty with our with our.
Business is that the amount of people without gym memberships. For example, we don't we're not always trying to steal customers from competitors and we need to get as much from.
I remember as we can because there's no more to go get off the couch, which with this business in this industry.
Sang to 80% of the U S population doesn't have a gym membership.
For us, it's always built market share and for every $10 membership I have I remember I habits. Another.
20, or 30 or 40 dollar membership my competition doesn't have so.
And I I believe truly threatened to do an in with the judgment rezoning getting people off the couch and getting them healthy and begin almost 40 per cent of our members of first time gym members.
I still think it's it's really the right thing to do to drive volume, but you know you some of the pricing structure. They talked about to strike some average ticket over over the course of the year.
If that's something that could benefit 2024, alrighty and then that was my last question. Thank you.
Yeah, and then it gets something where we're looking at now where where we always have it out there, but I think we're getting more discipline now maybe it was how to use it during off sale periods to draw some average tickets so quick.
Because they take sometimes it too.
Influenced split the 20.9, but but again every every additional member with an extra couple of Bucks here. It does help.
Okay.
Our next question comes from the line of Joe Alto Bellow from Raymond James. Please go ahead.
Good morning. This is Marty <unk> most of my questions have been answered, but I just wanted to bring it a little bit.
Faced by the share repurchases will remain at the years, considering how many you've done credit score.
Yeah Martin Thanks for the question.
So we are as you may know, what our Investor day, we committed to over the three year period. This being your one that we would purchase a minimum of 1 million shares a year just so.
People could count on a consistent level of.
Repurchases.
And so.
We're well above that for this year.
And.
So we're not necessarily.
Guiding on what we're going to do for the rest of the year, but.
We'll see how things play out the good news is we have plenty of cash but.
We thought it was appropriate given what was happening with the stock price to to move.
To buy more on the early side of it and above what we above that minimum. So we feel good about where we are and we feel good about our ability to to.
To take action, if we think it makes sense.
Or sit out the rest of the year would just have to see how things play out.
Understood. Thank you.
Of course.
Pardon.
Our next question comes from the line of Rahho crossed to Polly from J P. Morgan. Please go ahead.
Hey, guys.
Thanks for taking my question, Chris can you elaborate further on your comment around the white spaces from the retail available at this time point you said it it's becoming electric difficult. The franchises is it because they are unable to meet the returns threats shortage Ah given competition I wouldn't really be a reason right. So.
I'm just curious if you have any more comments that dialogue and also it it would be great. If you can give us a sense of what's the total time from identifying the site to store opening.
Lots of safety Covid.
Sure Central and tons of your dad, too as well I would say the on the on the real estate availability.
More.
It's not it's not as much inventory out there to go negotiate so it's not that they're not the right deal says just lack of available space to get it now.
Be on situations does help us some but.
More that would be better beneficial uses less inventory today than it was pretty cool but.
The timeline today, I say to negotiate leases and gets to her open.
Detailed but it was about all that.
Five six months or so so if they get two or three.
Muscles negotiate the least once you sign the lease it would take you about three or four months to get it open.
With what's going on you negotiate the lease once you find the location, which is you know the.
The bigger issue find location first negotiate the least negotiating leases about the same timeline.
And then the construction issues.
He was about the plan on which the you know the.
I've gotten better for sure I'm planning that ahead of time before they'd send at least in an order the HCA C for that location today because of the the 30 or 40 week lead time on H D C. They actually.
You have to go to H B C before they even know where they're going to put it so which is a little bit a little bit odd naturally.
And I guess, the other thing too with the municipalities even a permanent for example, even though it seems like it was quite a long time ago municipalities.
D C.
The building inspectors for example.
You know, they're still work from home or they're just not as much they're not around as much as getting these permits assigned to C. E. O's typically of Occupancies issued so it's just everything's just takes longer than it did did you get free conflicts. So now it's you know I'd say Donald Thomas probably Milligan 1912, lunchtime I'm untimely probably 912th.
I think from when you first see the site and near point, there are situations, where certain jurisdictions, it's much longer either on the permitting side or even.
The local.
I guess, the local requirements of what needs to be done locally versus through the G. C.
Understood on just on following up here on the dock finalize it cashflow conversion I think you guys talked about some live outside on Ah iPhone contribution on other things earlier I just I'm just curious on one of the items like I was going through on after it is is the mandated.
The more to spend.
Any color you can put a light that I think the document talks about having 250000 to a million dollars. Every five years is there any discretionary component here that can be flexible on your end, but just to reduce the capital intensity on the franchise system as more off the system will it be up for a model for the next five to 10.
New years.
So I'm gonna take care of them.
Sure thing yeah. Thanks, a lot so I think.
Typically what happens is and Ah.
Lifecycle of a store.
Ah now if they are built after five years, there's a cardio re equip after seven years, there's a strength re equip then typically at the end of the 10 years, there's a remodel requirement now in some cases folks will want to relocate and get a better location because that's just the right thing to do we do some of that in our corporate stores.
Or alternatively, it is a good location and want to stay in it.
Then there's a remodel of requirements. So it's not so much in the.
Maybe the language and the F D a little bit more general so to speak in terms of that.
But that's typically what happens what I'm, describing and we are looking at ways to.
To make that remodel.
Less capital intensive we clearly want the store to come up to our our current standards in ways that our customer remember facing.
Because it's going to be it's going to be that way for the next 10 years right. So.
We're always looking at ways to to try to lessen that burden, but it is an important thing to do particularly some of the older stores that may not have had quite a quite.
Quite as robust of a black cards by area and making a.
An investment and that will enhance the black card percentage and that's very accretive. So it is a little bit of a case by case basis and some of the stores that are coming up or have come up or some of the older vintages older vintage which.
There is a bit more spend where the newer vintages, there would be less of a spin when they come up under 10 years.
So I hope that helps.
Understood that clearly helpful. Thanks, a lot for that Dom on just like one last thing could.
Could be a stretch, but I'm very curious if you guys were I was thinking about like co investing scientize is saying new stores are actually open mind or anything is that.
Are there any discussion I thought he was there any thought about it at any time, even if not now in the future.
Yeah, I wouldn't think that Oh go ahead of time.
Yeah, I don't think yeah, I wouldn't I wouldn't think that I would say it's off I wouldn't say I never said no, but I don't I don't really see you know with our corporate sort portfolio and our management team in place running corporate stores I don't know necessarily that it would be anything that.
That we would do but.
A lot of them now have some of the private equity groups in an alarming. So large now it's not necessarily that they're lacking capital to do the development not like onesie, Twosies and a lot of situations where.
Capital financing for example.
Understood.
For answering my questions Skype.
So of course central.
Our final question comes from the line of Chris So call from Stifel. Please go ahead.
Yeah. Thanks for taking my question cause I I had a follow up question on the stores that opened in 2019.
Even those gyms have seen low membership levels because they haven't enjoyed that January period until this year I guess is the company doing anything to help those gyms built membership or at least improve the profitability.
Yeah, I know [laughter] as I mentioned I mean, it's really seems where seals is the fastest way to get there you know and it's and it's you can market your way out of it or Oregon, My spending a little bit more 9% you know in Tom's point, a little bit early a few of them and the cost per joint <unk>.
Love years apart so it's.
So it's just a matter of time really to get there I mean as far as anything else I mean.
You know, there's always you low royalty deal reduced equipment margin and so on and so forth but.
But at the end of the day, it's not fixing the the issue was asking nation and our eyes, and which is really just getting the membership back to where it used to be and get a get a head to where it used to be you know and and there was nothing new <unk> quarters of positive comps from Covid.
Everyone was <unk> that was just going to continue with Covid never happened and now we're back on the same socio gain wagon real quick over so it really is this time and.
Every every member of the breakeven is but he 4% growth right to the bottom line.
Really.
It's past all you're really paying a royalty and add dogs on that incremental member. So it's it's really just a matter of time to get there.
Those numbers.
Okay Chris.
Sorry, Chris just if I could add one thing you know even on our own corporate stores, we have some of those stores that you're describing and.
We are spending above the 7% minimum for the year.
Some of that money is going to those stores that we want to you know sort of boost with additional marketing spends too to get them cranked up.
Because they didn't have those periods.
Now we'd want it probably skew more of that.
During the the key period in Q1, but having some more pressure throughout the year also makes sense to us.
So we think franchisees may want to make the same decision because it is so accretive to invest the incremental dollars to drive the member growth.
Yeah, I'll start that one.
This may add I think we've looked at some things Chris but.
Go across a.
3 million, two and a half $3 million billed.
And the number of units that are opening per year, it's hard for us to do anything meaningful that would dramatically affect that initial investment I mean, that's I think that's the long and the short of it right. It's.
And again the once the stores open the margins in the four wall economics are very compelling. It's just that initial investment of being higher there is there is a little bit we could do but we don't think it would necessarily turn a decision to.
So it will continue evaluate that and think about it but that's that's how we've.
That's how we've analyzed it and come to the conclusion, thus far.
Thank you.
Mmm.
Oh, and now like to turn the call over to Chris Rondo for closing remarks.
Thank you everybody for joining us today, and and she'll dialing and I think you mentioned on on my opening remarks, I'm still extremely excited with the.
Fundamentals of the business remember growth the memo girls in all generations, the improvement and cancel the rates for eastern quarters in a row on both like Martin Blackbird, even regardless of the price increase.
And I think the unfortunate the the purchase we failing on on construction costs.
Unfortunately, it is but it is also not plant specific and it's not even industry specific specific and I'm just happy that our mode is continuing to grow relatively everybody else's and don't see ness slowing down even though it's not back to that 200 plus units a year.
160 openings still a pretty pretty solid number it's roughly 3 million square feet of real estate, we're still developing even on that please.
External pressure so it's but then like I'm really happy with dialed in and thank you and before the next call. Thank you.
Thank you ladies and gentlemen, just does conclude today's call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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