Yahoo Finance Planet Fitness, Inc. (NYSE:PLNT) Q1 2024 Earnings Call Transcript
Planet Fitness, Inc. (NYSE:PLNT) Q1 2024 Earnings Call Transcript May 9, 2024
Planet Fitness, Inc. beats earnings expectations. Reported EPS is $0.53, expectations were $0.49. Planet Fitness, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Stacey Caravella, Vice President of Investor Relations. Stacey, you may begin your conference.
Stacey Caravella: Thank you, operator, and good morning, everyone. Speaking on today's call will be interim Planet Fitness Chief Executive Officer, Craig Benson; and Chief Financial Officer, Tom Fitzgerald. 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 Craig, 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 investor website along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now I will turn the call over to Craig.
Craig Benson: Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q1 earnings call. We ended the first quarter of 2024 with approximately 19.6 million members; same-store sales growth of 6.2%, primarily driven by new member growth; and nearly 18% adjusted EBITDA growth. Our system opened 25 new units and ended the quarter 2,599 Planet Fitness locations globally. Today, I'm going to address three topics, first, the headwinds that we faced in the first quarter that impacted our results; second, our decision to raise the Classic Card price; and third, the exciting announcement about our new CEO, Colleen Keating, who joins us on June 10. The increase of approximately 900,000 net new members in the first quarter was below our expectations for what has historically been our highest net growth quarter pre-pandemic.
The year began with national media headlines about the rising cases of COVID as well as RSV and other respiratory infections that may have made people hesitant to go to public places, including gyms, especially in the first half of January. In typical January, fitness or gyms are among the top search Internet items. This year, while they are still a among the top search items, both flu and savings related items were even higher. Additionally, an industry source noted that many brands in the fitness industry experienced a similar soft beginning of the year. We also had double-digit decreases in our website traffic. While we continue to see more than 80% of our joins come via online channels during the quarter, we had fewer people visiting our website to potentially join Planet Fitness.
Usage, which historically correlates with join trends, was the same on a quarterly basis year-over-year. However, it was down significantly in the first couple of weeks of January during the peak of our join season. We also believe that a contributing factor to our lower net joins in Q1 versus last year was the effectiveness of our advertising campaign. We believe that this was due in part to the messaging not resonating as broadly as we anticipated as well as our strategic decision to not include price pointed offers as part of our nationally funded portion of the advertising. We made this decision because we are conducting pricing tests in several markets to inform our pricing strategy going forward. In a study that we commissioned to assess our first quarter campaign, consideration of Planet Fitness is trending upwards and is the highest it's been in years.
However, the lack of a price point in our national funded January sale adds may have created less urgency for consumers to get off the couch and join. To a far lesser degree, the first quarter softness also derived from a reaction to an incident regarding on nondiscrimination policy. The isolated incident took place on March 11 in an Alaska gym. Media mentions relating to the incident peaked in the middle of March, which we believe contributes some of the softness we saw in joins for the balance of the month as well as some increase in cancels. This policy has been in place for more than a decade and is not dissimilar from other industry peers, including longtime brands such as the YMCA. As a result of these headwinds we faced in Q1, we are updating our 2024 guidance targets to which Tom will cover.
Now to our pricing tests; last fall, we started testing two price points for the Classic Card, a $15 and a $12.99 in about 100 stores each, both reverted back to $10 during the national sale periods and the advertising in those markets communicated a call to action with an explicit saving in monthly dues to join before the sale expires. We added an additional test in December to include the New York DMA where we kept the price at $14.99 regardless of a national sale. We continue to run these tests through the April sale. We use disciplined data-driven approach to determine the best balance between the higher dues while minimizing loss of membership. Based on our learnings, we decided to change the price of the Classic Card to $15. It drove the most significant increase to average unit volumes with the least impact to the rate of joins.
The increase will be effective this summer only for new members. We continue to test different promotional strategies, as I believe a good portion of our focus on innovation includes exploring pricing and amenities. To that end, we'll be starting Black Card price tests around the time the system migrates to the new Classic Card price. Tom will address more specifics on the role of the Classic Card price increase. Finally, we announced in April that Colleen Keating will be joining us as CEO next month. Our appointment follows a thorough extensive search process conducted by the Board and we could not be more thrilled to welcome her to Planet Fitness. She brings over three decades of experience across hospitality and real estate as well as expertise in operations, franchise and brand management and leading consumer-facing organizations.
She is excited to join an industry leader that had significant runway for even further growth, both domestically and internationally, and she's ever to get started. I will work closely with Colleen and the management team to ensure a seamless transition. Now for a quick update on our CFO search. The search is well underway. We have interviewed and are considering a number of promising candidates. Colleen will become involved with the process once she officially starts us in June. Finally, last week, I had the opportunity to address our franchisee community at their annual conference in New Orleans. We had great conversations around new initiatives including building clubs for smaller markets, which we kicked off a few months ago. We also discussed how we're ahead of schedule to reduce new unit and remodel build costs by at least 10% before the end of the year.
Other aspects of the new growth model were part of the discussions which led to a real sense of excitement about a greater return on their investment and our long-term store growth opportunity. I am grateful to have had the opportunity to serve as interim CEO, especially during a period in which we put in place a number of initiatives that we believe will support the company's long-term growth trajectory. I also look forward to returning to my role as a Board member and a franchisee with an even greater appreciation that I have gained for the Planet Fitness brand, our members, our franchisees, our leadership team and our shareholders. Now I'll turn it over to Tom.
Thomas Fitzgerald: Thanks, Craig. Before I get to our first quarter results, I'd like to cover our upcoming Classic Card price increase as well as our plans to explore refinancing a portion of our debt this year. As we said previously, we've been working on a number of initiatives to further improve our already strong store economics and new store returns. Our new franchisee growth model that we unveiled in Q3 of last year is primarily focused on reducing the capital requirements for opening and operating a Planet Fitness franchise location. For the past several months, we have had three different groups of stores testing three different prices for our Classic Card membership. Based on those test results, we have decided to increase the price from $10 to $15 to further enhance the average unit volumes for our stores.
Our Classic Card membership has been priced at $10 since 1998, which based on inflation would be about $20 in today's dollars. As Craig noted, the price increase will go into effect this summer, only new members who joined after it goes into effect will pay $15 for a monthly membership fee. Current Classic Card members will continue to pay $10 for the duration of their membership. It will take some time for the benefit of the price change to expand our store level margins as the price increase will only be on new Classic Card memberships. Additionally, more than 60% of our members join as Black Card member. Now to our debt. We have a tranche of debt of approximately $600 million that comes due in September of 2025, which we anticipate refinancing in the middle of this year, subject to overall market conditions.
Based on forecasted interest rates, we believe our overall weighted average interest rate for all of our debt would still be below 5% when we refinance that tranche. Now to our first quarter results and our revised 2024 outlook. All of my comments regarding our quarter performance will be comparing Q1 2024 to Q1 of last year, unless otherwise noted. We opened 25 new stores compared to 36. We delivered system-wide same-store sales growth of 6.2% in the first quarter. Franchisee same-store sales growth increased 6.3% and corporate same-store sales increased 6.2%. Approximately 70% of our Q1 comp increase was driven by net member growth with the balance being rate growth. Black Card penetration was 62.1%, an increase of 10 basis points. For the first quarter, total revenue was $248.0 million compared to $222.2 million.
The increase was driven by revenue growth across the franchise and corporate-owned segments. The 12.2% increase in franchise segment revenue was primarily due to increases in royalties, new stores and ad fund revenue. For the first quarter, the average royalty rate was 6.6%, up from 6.5%. The 15.6% increase in revenue in the corporate-owned store segment was primarily driven by the same-store sales growth as well as new and acquired stores. Equipment segment revenue decreased 8.6%. The decrease was primarily driven by lower revenue from equipment sales to new and existing franchisee-owned stores, which was driven by fewer new store placements as well as the shift to more strength equipment versus cardio. As we noted last quarter, the shift in the equipment mix brings down overall sales on a per store basis.
We completed 14 new store placements this quarter compared to 18 last year. For the quarter, replacement equipment accounted for 59% of total equipment revenue compared to 58%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $19.0 million compared to $19.4 million. Store operation expenses, which relate to our corporate-owned store segment, increased to $74.4 million from $66.0 million due primarily to new stores opened or acquired. SG&A for the quarter was $29.2 million compared to $27.8 million. Adjusted SG&A was $27.3 million. This includes a $1.6 million adjustment for severance-related expenses incurred in connection with the reduction in force that we mentioned on our last earnings call as well as a $0.3 million adjustment for CEO transition-related expenses.
National advertising fund expense was $19.8 million compared to $17.0 million. Net income was $35.0 million. Adjusted net income was $47.3 million and adjusted net income per diluted share was $0.53 per share. Adjusted EBITDA was $106.3 million, and adjusted EBITDA margin was 42.9% compared to $90.2 million with adjusted EBITDA margin of 40.6%. By segment, franchise adjusted EBITDA was $76.1 million, and adjusted EBITDA margin was 73.2%. Corporate store adjusted EBITDA was $42.4 million, and adjusted EBITDA margin was 34.6%. Equipment adjusted EBITDA was $4.8 million, and adjusted EBITDA margin was 22.2%. Now turning to the balance sheet, as of March 31, 2024, we had total cash, cash equivalents and marketable securities of $486.4 million compared to $447.9 million on December 31, 2023, which included $46.2 million and $46.3 million of restricted cash, respectively, in each period.
In Q1 2024, we used $20.0 million to repurchase slightly more than 300,000 shares. Total long-term debt, excluding deferred financing costs, was approximately $2.0 billion as of March 31, 2024, consisting of our four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. Finally, moving on to our updated 2024 outlook, which we provided in our press release this morning, we're providing wider ranges for the targets that we are updating given the current choppy environment in which we're operating. We continue to expect between 140 and 150 new stores, which includes both franchise and corporate locations. We also continue to expect between 120 and 130 equipment placements in new franchise stores. For the full year, we continue to expect that reequipped sales will make up approximately high 60% of total equipment segment revenue.
We also continue to expect that this year will look more similar to 2023 in terms of the quarterly cadence for those sales as it was a more typical year versus the prior three that were impacted by COVID. As I noted earlier, the shift to more strength equipment versus cardio will bring down overall sales on a per-store basis. During Q1, we continued to refine the mix that will result in slightly lower sales per store. We are maintaining our equipment segment profit dollars, so therefore, margin rate will increase. We now expect system-wide same-store sales growth to be between 3% and 5%. Previously, we expected between 5% to 6% growth. This reduction is driven by the factors that Craig noted earlier. All of the following targets are updated to reflect the changes I just mentioned and represent growth over fiscal 2023 results.
We now expect full year revenue to grow in the 4% to 6% range. Full year adjusted EBITDA will grow in the 7% to 9% range. Adjusted net income to increase in the 6% to 8% range, and adjusted earnings per diluted share to grow in the 7% to 9% range. We continue to expect shares outstanding to be approximately $88 million, which is inclusive of the repurchase of one million shares over the course of the year, the amount we shared back at our Investor Day in November of 2022. And we continue to expect our net interest expense to be approximately $70 million, which assumes we refinanced the tranche I mentioned earlier at 6.5%. We will update any applicable guidance targets, if necessary, pending the completion of the anticipated refinancing transaction later this year.
Lastly, we continue to expect CapEx to be up approximately 25% and D&A to be up between 11% to 12%. Now despite a challenging start to the year, we believe that the changes we have made as part of our new franchisee growth model, along with the upcoming price increase, improve our store economics and enhance our differentiated brand and market-leading position. We continue to be a highly attractive franchise system that generates strong and stable free cash flow for long-term sustainable growth and increased shareholder value. I'll now turn the call back to the operator to open it up for Q&A.
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